Ken Rogoff: Market Crashes- ‘It really boils down to arrogance and ignorance’

Original source: SimoleonSense.com .

Interesting interview with Ken Rogoff

Introduction (via Ezra Klein Washington Post)

In their book “This Time is Different,” Carmen Reinhart and Kenneth Rogoff construct the richest and most detailed history of financial crises that anyone has developed. Their data set covers 66 countries, five continents and eight centuries, and gives them an unparalleled ability to see patterns and predictors amongst different types of crashes. And see them they do. I spoke to Rogoff about the causes, trajectories and solutions to financial crises earlier today. A lightly edited transcript of our conversation follows.

Excerpts (Via Ezra Klein Washington Post)

Has our financial crisis fit the pattern of other financial crises, or was it somehow different?

In many ways, our experience has been a garden-variety post-war deep financial crisis. The recessions from financial crises typically last a year and a half, and that’s about what ours was. With the notable exception of Japan, equity prices tend to bounce back reasonably quickly, and that’s happened with U.S. stock prices. We probably came back a little faster. The main way in which this crisis is different from other post war crises, however, is that it was global. And that adds an important dimension to it. The Great Depression was global and there were global crises in the 1800s, but they’re not common. And global crises are more worrisome because a major way countries get out of these crises is exports. But in a global crisis, not everyone can ramp up exports all at once.

Has looking at other financial crises changed your perspective on how ours began? That is to say, was this really a predictable event, or did we go through a unique problem that became a common crisis?

As Carmen Reinhart and I have emphasized, it really boils down to arrogance and ignorance. Across the huge range of crises we look at, the similarities are remarkable. Countries have different policy responses, central bank systems, political institutions and financial systems, but they share the quantitative markers that precede these crises: Run-ups in housing prices and huge leverage are major indicators. So the people who think this was all about Lehman haven’t read our book. This wasn’t about some mistakes made over one weekend the way many books portray it. Housing prices had doubled, debt had exploded, we were set to lose trillions of dollars in the value of our capital stock. Lehman was the spark, but the idea that it could’ve been largely avoided is very naive. If people think that the only real problem was letting Lehman fail, then that bodes badly for the steps we’ll take to prevent future crises.

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