Top positive review
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A valuable contribution to the learning process
on 28 February 2012
This, I suspect, is one of those books, like Stephen Hawking's A Brief History Of Time, which far fewer people read than own. It is not a book of popular economics, and it does not have a straightforward story line. It is, however, a book of extraordinary significance to our times, and of more immediate importance, I'd venture, than Professor Hawking's opus. This is a book that looks backwards, sideways and forwards all at the same time, examining financial crises of the past, drawing comparisons with the current crisis, and outlining some ways those of the future may be spotted on the horizon and at least alleviated. It warns particularly of the all-too-frequent tendency of developing countries to assume that times of plenty will never end and therefore to spend profligately, a tendency also seen in certain developed countries. Find the steepest point in the uptrend and extrapolate to infinity. We're rich forever!
In creating this relatively short but gigantically impressive and influential (while some possibly have not read it, many nevertheless have) work the authors have dug deep into what archives they have been able to delve. At times the charts are so numerous the text has a job keeping up. The tables, too, are frequent, informative and, often, frightening. But they underline the herculean task involved in prising the data out of some hands, and make a case for a centralised clearing house for making such data transparent, rather than the current opacity and obfuscation.
The central point, of course, is that the fundamental tenets of economics do not change. You can't spend what you'll never have and get away with it. There's a price to pay, always, as the world economy, and especially the increasingly pauperised south Europeans are now finding. This time, and any other time you care to mention, really is not different. The dotcom boom was replete with spotty youths accusing the oldsters that they didn't "get it", all too often hounding them out of the boardroom so they could observe at a distance as their dire predictions came true. Ditto with the armies of derivatives sellers explaining how their CDOs, CDSs and their like would completely diversify risk away. Instead, they were the root of the problem as the subprime deck of cards came tumbling down, leading to the discovery that much of the risk had been diversified away to the same place.
Perhaps of most pressing interest is the coverage received by Greece, including the disclosure that since independence in 1820 the country has spent over half the time in default, and looks like continuing that illustrious achievement for a few more years still. But the authors use the example of Argentina in 2001-2 to demonstrate the perils awaiting should Greece leave the eurozone, a sentiment echoed by, amongst others, former central-bank governors of Argentina and Mexico (The Economist, February 18th 2012), who remind us of the chaos following the abandonment of Argentina's peg to the dollar and point out that, given the deep integration of Greece with the rest of Europe, the result of the country abandoning the euro would be many times worse.
We have, say Reinhart and Rogoff, learnt a lot about the way the world economy works since the Great Depression. But we have much left to learn, and besides, the world is constantly in a state of change and the learning process never ends. Their book is a valuable part of that learning process.