This time will never be different

The four most dangerous words in finance are “this time is different”. Thanks to this masterpiece by Carmen Reinhart of the university of Maryland and Kenneth Rogoff of Harvard, no one can doubt this again.

As the authors note, “If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by government, banks, corporations or consumers, often poses greater systemic risks than it seems [to do] during a boom”.

The authors have put an immense amount of work into collecting the data financial institutions needed if they were to have any chance of making quantitative risk management work. Needless to say, they failed to put even a tiny proportion of their revenues into this essential task. As a result, stress the authors, “a large fraction of the academic and policy literature on debt and default draws conclusions based on data collected since 1980, in no small part because such data are the most readily accessible”. This was simply ludicrous.

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