PDA

View Full Version : "Eight hundred years of financial folly"



Rajiv
09-30-08, 01:36 PM
"Eight hundred years of financial folly" (http://www.nakedcapitalism.com/2008/04/eight-hundred-years-of-financial-folly.html)


Carmen Reinhart has provided a synopsis of a paper (http://www.nber.org/papers/w13882.pdf) she did with Kenneth Rogoff looking at financial crises over a longer time frame than most analyses, which have limited themselves to recent history (the economist's version of the drunk looking under the street light for his keys because that's where the light is good, as opposed to that is where he lost them).

Note that this is the second work along this line of thought; the Reinhart/Rogoff team also wrote a sobering paper on post-war financial crises, "Is the 2007 US Sub-Prime Financial Crisis so Different? An International Historical Comparison. (http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf)" If you haven't read it yet, you must do so, immediately. The Reinhart/Rogoff paper is elegant; it identifies 18 postwar banking crises in advanced economies and identifies a subset of 5 big nasty ones for separate comparison, then looks at the two data sets versus the state of affairs in the US so far.

Although the new paper is descriptive, the implications are not pretty for the US. Recurrent financial crises are the norm; it seems that countries get drunk regularly on too much capital inflows, go bust, sober up, and fall off the wagon again. In fairness, individual countries aren't necessarily recidivists, but the financiers and policymakers, who ought to know better, instead rationalize that each time that current circumstances differ from the not-too-distant past.

Although the entire article is below, let me highlight these sections:

Serial default on external debt—that is, repeated sovereign default—is the norm throughout nearly every region in the world, including Asia and Europe.

Our dataset also confirms the prevailing view among economists that global economic factors, including commodity prices and centre country interest rates, play a major role in precipitating sovereign debt crises.....

Another regularity found in the literature on modern financial crises is that countries experiencing large capital inflows are at high risk of having a debt crisis. Default is likely to be accompanied by a currency crash and a spurt of inflation.
Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically. (italics hers)....
The idea that the US would default on its debt seems inconceivable. Nevertheless, we are in the same position as Thailand and Indonesia, circa 1996, except we have the reserve currency and nukes. It will be interesting to see how those two assets influence the end game.
.
.
.
.
.
.
.
.

Note: I have corrected the link to the paper in the quote above. Their original link did not go to the paper.

Contemptuous
09-30-08, 03:59 PM
It would appear that a persistently strong USD (extending for years into this a deflationary global economic environment) would represent a pure paradox to the above article's assertions.

That persistently strong dollar is what two (expensive) forecasts I read have been insisting we are headed. I have all along found this prognostication absurd - but for months now have not been able to shake the nagging feeling that they were going to trump all the more plausible scenarios of a collapsing USD with their absurdity. And it is still absurd, as this quote evidences.

QUOTE: Serial default on external debt—that is, repeated sovereign default—is the norm throughout nearly every region in the world, including Asia and Europe.

Rajiv
09-30-08, 04:15 PM
The link to a shortened version of the paper is below
Eight hundred years of financial folly (http://www.voxeu.org/index.php?q=node/1067)

The link I have in my initial post is to the 125 page paper (thesis?)