What can we do?

Carmen Reinhart and Kenneth Rugoff

Book Review and Commentary

“This time is different,” is the litany of the gamblers, otherwise known as:

• Chieftains of banks too large to fail,
• CEOs of large decaying industries,
• Congressmen and congresswomen only in it as a stepping-stone to K Street.

But there is nothing really different. Human nature is still as self serving as it ever was. We are after all, the product of our genes, shaped by survival in the jungle and savanna, and our subsequent nurturing. We Americans in particular are reared in ways designed to feather our own nest at the expense of others. This is the ultimate expression of a Market Economy. That heritage runs so deep, most of us are simply unaware of it. In other words, we have a national hang-up.

The conditions that created the great depression were rationalized away, or worse, simply forgotten, as a new bubble arose driven by Wall Street traders and bankers exemplifies the subject of “This Time is Different” by Reinhart and Rugoff. These two are preeminent economic historians, probably the best of our times. Their ability to synthesize a common theme from factual data spanning centuries is as gratifying as it is astonishing. Moreover, they report the supporting data. As accomplished economists, they know the turf on both the micro and macro scales.

Casino banks resulted from the relaxation in bank oversight that began in the late 20 Century, culminating when Bill Clinton signed the bill allowing Commercial and Investment to Merge their products. These acts re-deeded the field made fertile with the help of both political parties in Congress and now the Supreme Court as well. The latter just substantially released corporations from spending restrictions—giving them a political power from the board rooms thousand of times that of the average Jane and Joe citizen. Money, via advertising and media outlets, delivers votes, whether we like that situation or not. Equality in opportunity is now a thing of the past. Translating this comes to the conclusion that America has now passed the apex as a civilization. Decline, given our growing federal deficit, seem inevitable.

Reinhart and Rogoff chart this history of events that led to this economic mess over most of the developed world. That history has been repeated again and again. These authors provide a brilliant and detailed rendition of the continuing March of Folly so ably rendered by Barbara Tuckman in her “March of Folly.” In terms of the link between capitalism’s self-centered actions and how cycles begin and end, their book not only has no peer, it is truly ground breaking in its clarity of how the human condition leads to repetitively self defeating behaviors. Not all countries are so affected; Canada is a notable example. In large measure, China is another.

In their historic view, how the typical cycle begins and progresses follows:

• Financial liberalization,
• Beginning of financial crisis,
• Currency crash
• Inflation picks up,
• Peak of banking crisis is no default,
• Default on external and/or domestic debt,
• Inflation crisis worsens, peak of banking crisis.

Not all the news is bad. Reinhart and Rogoff also delineate the several quantitative measures that warn of trouble brewing. In this sense, they give us our marching orders.

Reinhart and Rogoff provide some of the significant and predictive keys:

• Banking Related
  • Real exchange rate
  • Real housing prices
  • Short-term capital inflows
  • Current account balance / investment
• Currency crashes
  • Real exchange rate
  • Banking crisis
  • Current account balance / GDP
  • Real stock prices

Reinhart and Rogoff drew numerous other authors of more limited studies in assembling their data base. The consistency among all these sources is remarkable, but certainly not complete. Governments, at least 66 of them, now have the means at their disposal to watch these harbingers in reference to their own economies and should be able to respond accordingly.

Yet the syndrome: “This time is Different!” arises again and again throughout two centuries of financial history. To be sure, the Obama administration avoided, or at least delayed, an impending deep depression. Many pundits believe his administration did not go far enough. Probably that is true. But what both parties seem to miss is the fundamental genetic predisposition toward dominance together with societal effects arising from the new religion that an unfettered market economy is somehow superior to all other economic forms. Reinhart and Rogoff devote 127 pages to appendices and notes. In those pages, the serious reader can find all sorts of gems that support their main theses.

We conclude this brief review and commentary quoting the author’s final paragraph:

“We have come full circle to the concept of financial fragility in economics with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked. This time may seem different, but all too often a deeper look shows it is not. Encouragingly, history does point to warning signs that policy makers can look at to assess risk—if only they do not become too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries, “This time is different.”

As a people, as a society, if we neglect these lessons, we shall reap what we sow, as the old saying goes.


We rate this book five stars.

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Note added in proof:

For what Wikipedia, the free encyclopedia on line has to say about K Street, see below for an excerpt.

"The K Street Project is an effort by the Republican Party (GOP) to pressure Washington lobbying firms to hire Republicans in top positions, and to reward loyal GOP lobbyists with access to influential officials. It was launched in 1995 by Republican strategist Grover Norquist and then-House majority whip Tom DeLay. It has been criticized as being part of a "coziness" between the GOP and large corporations which has allegedly allowed business to rewrite government regulations affecting their own industries in some cases (see Dick Cheney energy task force).

Shortly after the 1994 elections which gave a majority of seats to Republican candidates, DeLay called prominent Washington lobbyists into his office. He had pulled the public records of political contributions that they made to Democrats and Republicans. According to Texans for Public Justice, "he reminded them that Republicans were in charge and their political giving had better reflect that—or else. The "or else" was a threat to cut off access to the Republican House leadership."

The project is named for K Street in Washington, D.C., where the largest lobbying firms have their headquarters. Lobbyists are, in some circles, referred to as the "fourth branch of government," as some have great influence in U.S. national politics due to their monetary resources and the "revolving-door" practice of hiring former government officials. It is widely believed to be common practice for politicians to solicit money from lobbying firms in exchange for better access to officials, especially members of the United States Congress, and to buy favoritism in policies.

Candidates seeking to succeed DeLay as majority leader sought to distance themselves from the project, and as of January 15, 2006, all three announced candidates had vowed to dismantle it and overhaul the lobbying process. The fundamental quid pro quo at the center of the K Street Project -- the withholding of policy favors from interest groups and lobbying firms that hire Democrats -- is now illegal: the Honest Leadership and Open Government Act of 2007, Sec 102, bans members of Congress and staffers from using their political power to influence the employment decision of any private entity "on the basis of partisan political affiliation."

Snip

The Abramoff connection

Members of Congress in both parties are promising to reform the rules for lobbying Congress in the aftermath of the Jack Abramoff lobbying and corruption scandal. Abramoff, a top Washington lobbyist, was a prolific contributor to Republican political campaigns, and has recently pleaded guilty to conspiracy and fraud charges. His campaign contributions, lavish golf trips, jobs that required little or no work, and expensive meals for congressmen and their staffers are the focus of a criminal investigation.

Republicans distance themselves

Former Pennsylvania Senator Rick Santorum, who served in the House before 1994, has often been described as the Senate liaison to the K Street Project, as he met with Norquist on a regular basis to review openings at lobbying firms and the leading candidates for those positions. As the Abramoff scandal broke and grew, however, he denied the extent of the role attributed to him. He claimed his meetings with Norquist were not as frequent as asserted, that he did not know Norquist that well, and that he was unaware of a file keeping track of campaign contributions by lobbyists and their firms.

He took particular umbrage at claims to the contrary by then-Senate minority leader Harry Reid, saying they amounted to libel, although he did not deny that meetings took place. He referred to them as "good government" efforts. He claimed he had not seen Norquist in years, but later the blog Crooks and Liars posted a video clip of the two of them sharing a podium at a June 28, 2005, press conference.

Norquist, however, claims that at a 2002 meeting with Santorum and lobbyists he described the project to them. A contemporary report says he described its goals and asked those present to help complete the project. He passed out a list of lobbyists the project was checking on. At that time Santorum did not comment.

Later that year, Norquist publicly commented, "(Santorum) has gotten me in to talk to all those guys." Santorum also had publicly criticized the Motion Picture Association of America and Boeing for hiring former Clinton Administration officials, but said that was unrelated to his meetings with Norquist. Roll Call also reported that Abramoff himself attended one of Santorum's meetings in 2001. Santorum says he might have attended but does not specifically recall that. After the disclosures, Santorum announced the jobs list would no longer be part of the meetings.

Santorum lost his bid for re-election in 2006.”