Media Spotlight: This Time is Different by Carmen Reinhart and Kenneth Rogoff
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With the dust starting to settle on the financial crisis regulators and governments across the world are looking to tighten up the markets that caused the mess in the first place.
Their collective rallying cry has been that this can never be allowed to happen again and that, given varying degrees of regulation, it won’t.
This week the UK mortgage market should finally get to see what the Financial Services Authority has in store for it. As Mortgage Strategy exclusively revealed last Monday, rumour has it that we will see level proc fees and have to wave a fond farewell to self-cert and fast-track.
The aim of future regulation is that past financial abuses should never rear their ugly heads again. But ‘this time is different’ is possibly the most dangerous phrase in the financial world, as Reinhart and Rogoff argue in their book with the same title.
Working their way through centuries of global financial disasters the authors assemble a huge amount of information on the background of big and small financial meltdowns in 66 countries.
This reveals that the essence of the ‘this time is different’ syndrome is simple - it’s rooted in the belief that financial crises are things that happen to other people in other countries at other times. The delusion is that we are doing things better, we are smarter and we have learnt from past mistakes.
Unfortunately, a highly leveraged economy can be unwittingly sitting with its back to the edge of a financial cliff for years before chance and circumstance provoke a crisis of confidence that pushes it over.
Just look at the current crisis. The US is big and has a stable political system. Also, having the largest and most liquid capital markets seemed to make it a special case. But sure enough, the economy tanked in the end, taking the rest of the world with it.
To emphasise this the book includes a graph comparing recessions in developed countries with those in emerging ones.
The graph compares the duration of the big five downturns in developed economies (Finland 1991, Japan 1992, Norway 1987, Spain 1977, Sweden 1991) with the big six Asian recessions in 1997 (Hong Kong, Indonesia, Malaysia, Philippines, South Korea, Thailand) and recent emerging economy downturns (Argentina 2001, Columbia 1997), looking at the respective peak to trough falls in house prices.
This analysis reveals little difference in price falls or the length of time downturns persist.
The most recent downturns in developed countries lasted between four and six years and saw house price falls of between 30% and 50%. The present recessions in the US and UK have seen peak to trough falls of 16% and 12% respectively.
Looking to the future, the authors call for more sharing of information globally, an improvement in the reporting of data and further investment to identify trends. They also call for the setting up of a new international regulator to develop and enforce financial rules.
And whatever the content of this week’s Mortgage Market Review the FSA would be wise to heed Reinhart and Rogoff’s last point - no matter how rich a financial system starts out it can collapse under the pressure of greed, politics and profit despite how well regulated it seems to be.
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