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'This time is different' deja vu
By Wu Jiayin |
November 21, 2009, Saturday
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Print Edition
Print Edition
LOW interest rates, together with a loosening of controls, are largely blamed for the US housing bubble which burst in 2007 and led to the global financial crisis.
But as the country's stock markets rebounded somehow, many Americans believe the worst time is over.
However, past experience indicates that a "this time is different" syndrome often leads to more financial catastrophes, economics professors Carmen M. Reinhart and Kenneth S. Rogoff warn in their enlightening book "This Time is Different."
Having studied mountains of economic data during the past eight centuries, the authors insightfully point out the highly repetitive nature of financial crises resulted from a dangerous mix of hubris, euphoria and amnesia.
"More money has been lost because of four words than at the point of a gun. Those words are 'this time is different'," they note.
Of course, the situation does differ in each case. Still, the authors have managed to summarize some common warning signals from the numerous past economic crises, among which is a housing boom. The others include capital inflows, a wave of financial innovation and financial liberalization.
Indeed, all the four signals were existent before the 20th century's "Big Five" crashes in developed economies: Spain in 1977, Norway in 1987, Finland and Sweden in 1991, and Japan in 1992.
There might be little need to mention that the signals were most evident before the US financial crisis in 2008.
In the US, the ratio of household debt to GDP hit 80 percent in 1993, rose to 120 percent in 2003 and rocketed to 130 percent in 2006, according to the authors.
Meanwhile, the US current account deficit reached its peak at US$850-875 billion in 2006, accounting for over 6 percent of US GDP that year, www.ifeng.com reported on November 16.
As to financial innovation and financial liberation, the US has always been taking the lead in the area.
Despite the signals, the "this time is different" syndrome was in full swing in the US until the housing bubble broke.
As the authors observe, "no matter how different the latest financial frenzy or crisis always appears, there are usually remarkable similarities with past experience from other countries and from history."
Yet, once and again, "this time is different" misleads countries to believe that "financial crises are things that happen to other people in other countries at other times," they add.
There's a similar syndrome in China nowadays, especially in the real estate market. If China's housing prices continue to grow beyond people's ability to buy, the burst of the bubbles in the market is only a matter of time, just as what China's stock market experienced last year.
But as the country's stock markets rebounded somehow, many Americans believe the worst time is over.
However, past experience indicates that a "this time is different" syndrome often leads to more financial catastrophes, economics professors Carmen M. Reinhart and Kenneth S. Rogoff warn in their enlightening book "This Time is Different."
Having studied mountains of economic data during the past eight centuries, the authors insightfully point out the highly repetitive nature of financial crises resulted from a dangerous mix of hubris, euphoria and amnesia.
"More money has been lost because of four words than at the point of a gun. Those words are 'this time is different'," they note.
Of course, the situation does differ in each case. Still, the authors have managed to summarize some common warning signals from the numerous past economic crises, among which is a housing boom. The others include capital inflows, a wave of financial innovation and financial liberalization.
Indeed, all the four signals were existent before the 20th century's "Big Five" crashes in developed economies: Spain in 1977, Norway in 1987, Finland and Sweden in 1991, and Japan in 1992.
There might be little need to mention that the signals were most evident before the US financial crisis in 2008.
In the US, the ratio of household debt to GDP hit 80 percent in 1993, rose to 120 percent in 2003 and rocketed to 130 percent in 2006, according to the authors.
Meanwhile, the US current account deficit reached its peak at US$850-875 billion in 2006, accounting for over 6 percent of US GDP that year, www.ifeng.com reported on November 16.
As to financial innovation and financial liberation, the US has always been taking the lead in the area.
Despite the signals, the "this time is different" syndrome was in full swing in the US until the housing bubble broke.
As the authors observe, "no matter how different the latest financial frenzy or crisis always appears, there are usually remarkable similarities with past experience from other countries and from history."
Yet, once and again, "this time is different" misleads countries to believe that "financial crises are things that happen to other people in other countries at other times," they add.
There's a similar syndrome in China nowadays, especially in the real estate market. If China's housing prices continue to grow beyond people's ability to buy, the burst of the bubbles in the market is only a matter of time, just as what China's stock market experienced last year.
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