The authors present eight centuries of financial folly, demonstrating the common theme that excessive debt accumulation regardless of the source -- government, business or consumer -- poses greater systemic risks than it seems at the time of the boom. (MoneyWatch recently interviewed Reinhart for her views on the current state of the economy.)
- Infusions of cash make a government look like it's providing greater growth than is actually being provided.
- Private-sector borrowing binges inflate housing and stock prices beyond sustainable levels and make banks seem more stable and profitable than they really are.
- Large-scale buildups of short-term debt make an economy vulnerable to crisis of confidence.
- Asset market collapses are deep and prolonged. Declines in real housing prices average 35 percent and stretch over six years. Equity prices collapse an average of 56 percent over a downturn lasting three-and-a-half years. Thus, the most recent crisis seems quite typical.
- The aftermath of banking crises is associated with deep declines in output and employment. Unemployment rises an average of 7 percent over cycles lasting more than four years on average. Output falls more than 9 percent over two-year periods, and it has taken about four-and-a-half years for output to fully recover.
- Government debt surges an average of 86 percent in real terms. The main cause is not spending but a decline in revenues.
I recommend this book for those interested in the history of financial folly, though just about anyone could benefit from learning a little more about past financial crises. As Spanish philosopher Santayana stated: Those who cannot remember the past are condemned to repeat it.