They Did Their Homework (800 Years of It)

[donsutherland1]

The July 4, 2010 edition of The New York Times profiles a recent book written by Carmen Reinhart and Kenneth Rogoff entitled This Time is Different. The book examines 800 years of experience concerning sovereign and domestic debt defaults, banking crises, currency debasement, and inflation.

Some excerpts from the article:

In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor...

But in the wake of the recent crisis, a few economists — like Professors Reinhart and Rogoff, and other like-minded colleagues like Barry Eichengreen and Alan Taylor — have been encouraging others in their field to look beyond hermetically sealed theoretical models and into the historical record.

http://www.nytimes.com/2010/07/04/business/economy/04econ.html

This look at the historical perspective is refreshing and urgently needed, Indeed, in the opening of Benjamin Graham's classic work Security Analysis, Graham wrote of the 1927-33 period that witnessed the U.S. stock market crash and, in its aftermath, the Great Depression:

It can hardly be said that the past six years have taught us anything about speculation that was not known before. Even though the last bull and bear markets have been unexampled in recent history as regards both magnitude and duration, at bottom the experience of speculators was no different from that in all previous market cycles… That enormous profits should have turned into still more colossal losses, that new theories should have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair are all in strict accord with age-old tradition.

In the end, the lessons of the past provide a potentially invaluable foundation for risk management, economics, management, and any other endeavor in which human decision making plays an important role. Without a strong understanding of the historical experience, to borrow from Graham, the human “tendency to forgive, and particularly to forget, the sins committed against it in the past” will lead to society’s being caught unprepared when the seeds for a new crisis germinate and the crisis explodes onto the scene.

 

[oldreliable67]

Am right in the middle of Reinhart and Rogoff. It isn't easy or light reading, but it is fascinating. Recommended for anyone interested in economic history.

Speaking of recommended readings, here are a couple of others:

Demon of our Own Design, by Richard Bookstaber

The Big Short, by Michael Lewis