This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff is essentially a book about data, but this shouldn't discourage any reader. It's both an essential and an eye-opening assessment of financial crises of all kinds. Despite having read already a lot of books about The Crisis and crises in general, I learnt a lot from this book.

The reason is that its authors have carefully and painstakingly assembled and analysed a superb data set covering some countries as far back as the Middle Ages and 66 countries back to 1800. In this way, it is one of the rich fruits of the pathbreaking work of gathering and making available online historical economic statistics, exemplified by Angus Maddison's millennium's-worth of GDP data. As described in my own book, The Soulful Science, the statistical efforts are having a huge impact on economics.

But back to financial folly. Some key findings stand out from This Time is Different:

– There is a gaping chasm when it comes to data on domestic government debt, as governments go to great pains to hide its true extent. “Government debt is amongst the most elusive of time series.” (p34) One can only infer that governments use off-balance sheet and implicit off-budget guarantees because their scale would scare lenders

– When data on domestic government debt are gthered and inspected, it becomes clear that partial defaults, reschedulings, or inflations to reduce real debt are extraordinarily common

– despite globalisation, including increased soveriegn foreign currency borrowing, the share of domestic government debt in the total has trended strongly upwards since 1900

– banking crises lead to sharp declines in tax revenues and, on average, real government debt rises by 86% in the three years following a banking crisis. This is due to the severe impact a banking crisis has on economic activity. The fiscal consequences dwarf direct bank bailout costs.

– Default and repayments are as much political as economic or financial events. For example, there's an unspoken convention that governments shouldn't have to sell national treasures to repay creditors – or at least there was until it was recently suggested by a couple of undiplomatic German politicians that Greece should sell some of its treasures;

– external defaults can occur at surprisingly low ratios of external debt to GDP, often well below 60%. This is because there is usually also a serious crisis in domestic public debt at the same time, often hidden because of the lack of data

– There is a suite of indicators which, when all flash red, are a clear indicator of impending financial crisis: deviations of the real exchange rate from trend, percentage change in real house prices, ratio of short term capital inflows to GDP, real share prices, ratio of current account deficit to investment plus, for currency crises, ratio of broad money to international reserves and presence of banking crisis.

– Real house prices in the US rose by 92% between 1996 and their peak in 2006 – an increase in one decade that was more than three times their increase in the previous century

These points skim the surface. The book is packed with historical charts and has a lengthy data appendix. The data are available online as well. It's clearly written, and even the theory chapters which the authors suggest are optional will make sense to non-experts.

I draw from the book two conclusions: one is that financial crises are indeed part of the fabric of capitalism, with periods of no crisis being rare and fleeting; the other is that government bonds are not a great investment at the moment. The title, of course, refers to the recurring delusion of policy makers that financial boom and bust is a thing of the past. As the authors write:

“The lesson of history …. is that even as institutions and policy makers improve, there will alwyas be a temptation to stretch the limits….A financial system can collapse under the pressure of greed, politics and profits no matter how well regulated it seems to be.” (p292)

For UK readers of this blog, both co-authors will be visiting our side of the Atlantic in the coming weeks. It will be well worth trying to hear them speak.