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Podcast: We've Been Here Before

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Podcast: We've Been Here Before

Podcast

Podcast: We've Been Here Before

January 13, 1995. The money exchange line at the Mexico City airport during the peso crisis. Jorge Uzon/AFP/Getty Images hide caption

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Jorge Uzon/AFP/Getty Images

January 13, 1995. The money exchange line at the Mexico City airport during the peso crisis.

Jorge Uzon/AFP/Getty Images

Podcast: We've Been Here Before

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On today's Planet Money:

When people talk about the current economic crisis they bring up the Great Depression and Japan's lost decade, but the world's history of 'financial folly' spans much larger, through eight centuries and 66 different countries. In their new book, This Time Is Different, economist Ken Rogoff of Harvard, and Carmen Reinhart of University of Maryland, tell the stories of financial crises from medieval currency debasements to the recent subprime mess. Reinhart says our current troubles are nothing new, but what's worse, she predicts we're doomed to repeat the mistakes of our predecessors.

After the jump, an excerpt from the book.

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From This Time Is Different: Eight Centuries of Financial Folly:

The This-Time-Is-Different Syndrome

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.

In the preamble we have already provided a theoretical rationale for the this-time-is-different syndrome based on the fragility of highly leveraged economies, in particular their vulnerability to crises of confidence. Certainly historical examples of the this-timeis-different syndrome are plentiful. It is not our intention to provide a catalog of these, but examples are sprinkled throughout the book.

A short list of the manifestations of the syndrome over the past century is as follows:

1. The buildup to the emerging market defaults of the 1930s

Why was this time different? The thinking at the time: There will never again be another world war; greater political stability and strong global growth will be sustained indefinitely; and debt burdens in developing countries are low.

The major combatant countries in World War I had built up enormous debts. Regions such as Latin America and Asia, which had escaped the worst ravages of the war, appeared to have very modest and manageable public finances. The 1920s were a period of relentless global optimism, not dissimilar to the five-year boom that preceded the worldwide financial crisis that began in the United States in mid-2007. Just as global peace was an important component of the 2000s dynamic, so was the widely held view that the experience of World War I would not soon be repeated.

In 1929, a global stock market crash marked the onset of the Great Depression. Economic contraction slashed government resources as global deflation pushed up interest rates in real terms. What followed was the largest wave of defaults in history.

Bonus: Download all of Chapter 1.