Monday, April 28, 2008

This time it's different

Two papers by Carmen Reinhart and Kenneth Rogoff reminded me of this from Robert Rubin's book In An Uncertain World:
[referring to earlier booms in stock markets e.g. euphoria about conglomerates, "energy darlings",1990s biotech boom] ... Excess flows of credit produced by a similar kind of mind-set were at the heart of the Asian financial crisis. ... But people involved in markets don't seem to learn from past episodes. They always think, This time it's different, and here are the reasons why. Often those reasons are based on genuinely constructive developments, but investors extrapolate too much from the developments and provoke a market overreaction. And that overreaction can endanger the strength of the underlying economy. ... I didn't say that I thought that stocks were overvalued. I said that risk premiums were at historic lows and that discipline tends to get lost in good times. (p. 324)

The two papers are:
1. Is The 2007 U.S. Subprime Financial Crisis So Different?, ungated versions here and here for now.
2. This Time is Different: A Panoramic View of Eight Centuries of Financial Crises. See VoxEU for a summary. Ungated version here for now. Looking forward to the data if the authors release them.

I particularly like all the graphs that show the correlations since it allowed me to flip through most of the articles while skimming the text.

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