Carmen Reinhart Quotes

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More money has been lost because of four words than at the point of a gun. Those words are ‘This time is different.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
What is certainly clear is that again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
Bubbles are far more dangerous when they are fueled by debt, as in the case of the global housing price explosion of the early 2000s.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
There is nothing new except what is forgotten. —Rose Bertin
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
In sum, historical experience already shows that rich countries are not as “special” as some cheerleaders had been arguing, both when it comes to managing capital inflows and especially when it comes to banking crises.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
Of course, the problems of external default, domestic default, and inflation are all integrally related. A government that chooses to default on its debts can hardly be relied on to preserve the value of its country’s currency.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
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.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
unexpected increases in inflation are the de facto equivalent of outright default, for inflation allows all debtors (including the government) to repay their debts in currency that has much less purchasing power than it did when the loans were made.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
The U.S. conceit that its financial and regulatory system could withstand massive capital inflows on a sustained basis without any problems arguably laid the foundations for the global financial crisis of the late 2000s. The thinking that “this time is different”—because this time the U.S. had a superior system—once again proved false. Outsized financial market returns were in fact greatly exaggerated by capital inflows, just as would be the case in emerging markets.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
These findings on capital flow bonanzas are also consistent with other identified empirical regularities surrounding credit cycles. Mendoza and Terrones, who examine credit cycles in both advanced and emerging market economies using a very different approach from that just discussed, find that credit booms in emerging market economies are often preceded by surges in capital inflows. They also conclude that, although not all credit booms end in financial crisis, most emerging market crises were preceded by credit booms.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
Theoretical models encompass a wide range of assumptions about domestic public debt. The overwhelming majority of models simply assume that debt is always honored. These include models in which deficit policy is irrelevant due to Ricardian equivalence.7 (Ricardian equivalence is basically the proposition that when a government cuts taxes by issuing debt, the public does not spend any of its higher after-tax income because it realizes it will need to save to pay taxes later.) Models in which debt is always honored include those in which domestic public debt is a key input in price level determination through the government’s budget constraint and models in which generations overlap
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
The danger, of course, is that it is not always easy to distinguish between a default that was inevitable—in the sense that a country is so highly leveraged and so badly managed that it takes very little to force it into default—and one that was not—in the sense that a country is fundamentally sound but is having difficulties sustaining confidence because of a very temporary and easily solvable liquidity problem. In the heat of a crisis, it is all too tempting for would-be rescuers (today notably multilateral lenders such as the IMF) to persuade themselves that they are facing a confidence problem that can be solved with short-term bridge loans, when in fact they are confronting a much more deeply rooted crisis of solvency and willingness to pay
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
These crises are really a form of domestic default that governments employ in countries where financial repression is a major form of taxation. Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payments system, not simply currency. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. Of course, in cases in which the banks are run by the government, the central government simply directs the banks to make loans to it.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
The Fiscal Legacy of Crises Declining revenues and higher expenditures, owing to a combination of bailout costs and higher transfer payments and debt servicing costs, lead to a rapid and marked worsening in the fiscal balance.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
These crises are really a form of domestic default that governments employ in countries where financial repression is a major form of taxation. Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payments system, not simply currency. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. Of course, in cases in which the banks are run by the government, the central government simply directs the banks to make loans to it
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
Diamond and Dybvig argue that deposit insurance can prevent bank runs, but their model does not incorporate the fact that absent effective regulation, deposit insurance can induce banks to take excessive risk.6
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
. This time may seem different, but all too often a deeper look shows it is not. Encouragingly, history does point to warning signs that policy makers can look at to assess risk—if only they do not become too drunk with their credit bubble–fueled success and say, as their predecessors have for centuries, “This time is different
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
The top employees of the five largest investment banks divided a bonus pool of over $36 billion in 2007. Leaders in the financial sector argued that in fact their high returns were the result of innovation and genuine value-added products, and they tended to grossly understate the latent risks their firms were taking. (Keep in mind that an integral part of our working definition of the this-time-is-different syndrome is that “the old rules of valuation no longer apply.”) In their eyes, financial innovation was a key platform that allowed the United States to effectively borrow much larger quantities of money from abroad than might otherwise have been possible. For example, innovations such as securitization allowed U.S. consumers to turn their previously illiquid housing assets into ATM machines, which represented a reduction in precautionary saving.13
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
Another deep philosophical issue, in principle relevant to thinking about international lending, surrounds the notion of “odious debt.” In the Middle Ages, a child could be sent to debtors’ prison if his parents died in debt. In principle, this allowed the parent to borrow more (because the punishment for failure to repay was so great), but today the social norms in most countries would view this transfer of debt as thoroughly unacceptable
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
As we mentioned in the preamble, banks’ role in effecting maturity transformation—transforming short-term deposit funding into long-term loans—makes them uniquely vulnerable to bank runs
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
Were the United States an emerging market, its exchange rate would have plummeted and its interest rates soared. Access to capital markets would be lost in a classic Dornbusch/Calvo–type sudden stop. During the first year following the crisis (2007), exactly the opposite happened: the dollar appreciated and interest rates fell as world investors viewed other countries as even riskier than the United States and bought Treasury securities copiously.33 But buyer beware! Over the longer run, the U.S. exchange rate and interest rates could well revert to form, especially if policies are not made to re-establish a firm base for long-term fiscal sustainability.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
An event that was rare in that twenty-five-year span may not be all that rare when placed in a longer historical context. After all, a researcher stands only a one-in-four chance of observing a “hundred-year flood” in twenty-five years
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
in only one of these episodes (Swaziland, 1985) did the debt ratio decline primarily because the country “grew” out of its debts! Growth was also the principal factor explaining the decline in debt ratios in three of the fifteen default or restructuring cases: those of Morocco, Panama, and the Philippines. Overall, this exercise shows that countries typically do not grow out of their debt burden, providing yet another reason to be skeptical of overly sanguine standard sustainability calculations for debt-intolerant countries.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
Although private debt certainly plays a key role in many crises, government debt is far more often the unifying problem across the wide range of financial crises we examine. As we stated earlier, the fact that basic data on domestic debt are so opaque and difficult to obtain is proof that governments will go to great lengths to hide their books when things are going wrong,
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)
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 the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.
Carmen M. Reinhart (This Time Is Different: Eight Centuries of Financial Folly)