Enough abstract economics theory. It’s time for cases. Is Bidenomics different? It fixed the Covid downturn and the Putin inflation. Price gouging is down. Wages are up, employment is up, the oppressed are catching up. What could go wrong? Republicans, yes, of course. But what else?
Will the banks screw up? Will the Fed screw up? Will the IMF or the World Bank screw up?
Will there be an asset bubble of some sort? Will debt, or the balance of payments, or previous deregulation trip us up again? The correct answer is We don’t know. Anybody who tells you it can’t happen here is delusional. The most important causal factor in such disasters is the widespread certainty that it is impossible because we fixed everything that brought about the earlier ones, or just because This Time is Different.
Every disastrous case of human economic and financial insanity where we have data, included pretending that we knew how to prevent it or that it was Someone Else’s Problem, someone that the rulers needn’t care about. Adam Smith discussed some such disasters. Keynes taught us something about how to recover, but not how to prevent recessions and other disasters. Frederick Soddy regarded money itself as the problem, as grossly misunderstood and misused by economists, politicians, bankers, and the public. It is not too much to say that Soddy treated money in all of its existing forms as organized theft by kings and bankers, a non-stop set of crimes against humanity growing out of the original protection rackets that we call civilization.
But now what? This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff, catalogs and analyzes hundreds of such incidents going back to the earliest usable records of their causes and consequences, in 13th century Italy. We have a treasure trove of useful data here, suggestions for important further research, and a number of important conclusions about what goes wrong—especially the certainty that you know something that turns out not to be the case.
But beyond measures that fail over and over again, we only have untested suggestions and vague generalizations about actual prevention, stacked against the lure of trillions in ill-gotten gains.
We know the kinds of crisis, of which the book lists hundreds of instances.
- Hyperinflations, from 25%/yr to quintillions
- Currency crashes from exchange rate pressures
- Government debt default
- Stock market crashes
- Bursting of asset bubbles, from Dutch tulip mania to the subprime mortgage crisis
- Banking crises, with massive runs on banks and numerous failures
and the technical factors involved in financial disasters.
- Debt intolerance
- Crisis history
- Debasement of currencies
- Allowing banks to create money, by issuing currency or lending at some multiple of their reserves
- Intentional inflation
- Asset bubbles
- Debt crises
- Contagion from other countries that cuts off access to capital
- Bogus economic theories
- Financial “liberalization” and deregulation
- The existence of multiple market equilibria
- Government attempts to control the value of money
- Secrecy
- Over-leveraging in government, finance, and business
- Far too clever financial instruments and organizations
But at the heart of all of them is the This-Time-is-Different syndrome.
the firmly held belief that financial crises are things that happen to other people in other countries at other times.
Prescriptions
These analyses, plus voluminous data, occupy nearly the whole book. So what about solutions? They are hinted at in discussions of what not to do throughout the book, but addressed directly only in Part VI, What Have We Learned?
There is nothing new except what is forgotten.
Rose Bertin, to Marie Antoinette
The only thing that we learn from history is that we learn nothing from history.
Hegel
- We need lots more historical data and analysis.
- We need lots more current data on governments and such neglected topics as housing prices.
- We should create international institutions for setting and enforcing reporting standards, and regulating every aspect of currencies, trade, capital flows, and much more, without political interference.
- Every country needs a wide range of policies and institutions to counter trillion-dollar temptations.
Now I will add some further measures that Reinhart and Rogoff don’t get into.
- Universal Basic Income
- Medicare for All
- Indexing the Social Security contributions limit.
- Fixing immigration law so that essential workers can enter the US as needed, and become citizens
- An Unbalanced Budget Amendment to enforce building reserves and bust bubbles during booms, and invest during recessions
- Abandoning Starve the Beast tax cuts for the rich, and ending systemic racism, misogyny, and so on
- Soddy’s plan to set every worker and business to full production, regulated by market demand for their products, not financial and political fantasy.
- Ending poverty and oppression worldwide.
Now, for any and all of the above, think about what could still go wrong if we all decide it can’t.
Pretend it’s rocket science, where NASA and other engineers have to think about every possible way the hardware and software could go wrong, and how you could build systems to prevent them or recover from them.
Let me assure you that rocket science is much easier than economics and finance mixed with politics. Even so, a lunar lander recently ended up upside down on the Moon.
Further Reading
- “The Second Great Contraction”, by Kenneth Rogoff
- Reinhart, Carmen, and Vincent Reinhart. "The Crisis Next Time: What We Should Have Learned from 2008." Foreign Affairs 97.6 (November/December 2018): 84–97.
- Reinhart, Carmen M., Vincent Reinhart, Christoph Trebesch. "Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815–2015." The American Economic Review 106.5 (May 2016): 574–580.
- Reinhart, Carmen M., and Christoph Trebesch. "Sovereign Debt Relief and Its Aftermath." Journal of the European Economic Association 14.1 (February 2016): 215–251.
- Reinhart, Carmen M., and Christoph Trebesch. "The International Monetary Fund: 70 Years of Reinvention." The Journal of Economic Perspectives 30.1 (January 2016): 3–27[17]
- Kenneth Rogoff, and Carmen Reinhart. (2010) "Growth in a Time of Debt." American Economic Review 100.2: 573–578.
- Graciela Kaminsky and Carmen Reinhart. (1999). "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems". American Economic Review, 473–500.
