800 Years of Financial Folly

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Carmen Reinhart and Kenneth Rogoff have done something that, apparently, no one has done before: rigorously collect data on debt and risk management (or lack thereof) over the past 800 years, rather than only since 1980.  Their conclusion: excessive debt accumulation is always and everywhere a very, very bad thing.

Also: credit booms and busts happen over and over throughout history, with only the details changing; public sector debt crises are common and devastating; banking crises hit every country, rich and poor alike; and when credit bubble pop, everything pops along with it.  And finally, a fifth lesson, as summarized by Martin Wolf:

The final lesson is that financial liberalisation and financial crises go together like a horse and carriage. It is no surprise, therefore, that the last 30 years have seen waves of financial crises, of which the latest one is merely the biggest. The current crisis is the worst since the Great Depression. Yet, argue the authors, no one should have been surprised by this outcome. The US showed all the classic symptoms of a country heading for crisis: a huge current account deficit; soaring house prices; headlong credit growth; and, let us not forget, excessively complacent regulators.

It always comes back to debt and leverage, doesn’t it?  There are lots of other things to watch out for too, but the bottom line is that if you keep leverage at reasonable levels, your financial crises are likely to be manageable.  If not, not.  Tim Geithner, please take note.

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