CHAPTER FIVE

This Time Is Different

Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that “this time is different.” That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.

—Carmen M. Reinhart and Kenneth Rogoff, This Time Is Different

Capitalism without failure is like religion without sin.

—Charles Kindleberger, Manias, Panics and Crashes

When does a potential crisis become an actual crisis, and how and why does it happen? Why did almost everyone believe there were no problems in the U.S. (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. “The subprime problem will be contained,” said Fed Chairman Bernanke, just months before the implosion and significant Fed intervention.

This chapter will attempt to distill the data assembled and the wisdom contained in a very important ...

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