Crisis: Rainhart & Rogoff vs. Galbraith vs. Mackay
by Benjamin on November 29, 2010
Tongue in cheek, but not quite there
My bedside table is a victim of the debt crisis – how else can I explain it being overburdened by Reinhart & Rogoff’s This time is different (2010), Galbraith’s The Great Crash 1929 (1954) and Mackay’s Extraordinary Popular Delusions (1841) ? Apparently Reinhart & Rogoff”s book nearly topped the Amazon best-seller list (only beaten by Stieg Larsson), but is it better than Galbraith or Mackay? I don’t think so, even though Reinhart & Rogoff make an incredible important argument about national debt crisis, and crises more generally. They happen often, play out in various ways and there is a lot of novel data and research in the book (!) to prove it. But it’s a pain to read…
I don’t understand why it is so bloody difficult for them to make their argument simply and clearly. The writing – or possibly the editing – is quite frankly poor. Never mind that they make a lot of technical points first, that’s fine; it’s the general structure of the writing which is frustrating. Whenever an argument begins to be developed (and you have to get to chapter 4 before arguments appear) they interrupt the story with two-page text-boxes, unrelated tables or other random elements. All of them valuable in their own right, but none of them in an order that makes much sense. Consider the opening of chapter five on page 68:
We open our tour of the panorama of financial crisis by discussing sovereign default on external debt… (Some background on the historical emergence of sovereign debt markets is provided in box 5.1). Figure 5.1 plots the percentage of all independent countries… [and between 1820-1840s] nearly half the countries in the world were in default (including all
That’s where the page ends… ! The next two and half pages are one long text box, and thereafter the sentence ”(including all…” is completed. By the next page we get to see figure 5.1 (promised at the start), but they throw in figure 5.2 for good measure, not that it’s clear what it means yet (Reinhart & Rogoff 2010: 68-72).
It’s annoying. And particularly so as Renhart & Rogoff has such an important point to make, with such interesting data. Apparently it took 10 years to write this book. I wish they’d spent some more time editing. There is a reason why Galbraith’s and Mackay’s work not only became standard references in the literature (as Reinhart & Rogoff’s will), but also became classics (which Reinhart & Rogoff’s won’t). The classics are well researched and well written. At times wonderfully so; as with Galbraith’s commentary on how banks very efficiently lend money to speculators, which does lead to some instability:
Banks supply funds to brokers, brokers to customers and the collateral [which customers use to leverage stock transactions] goes back to the banks… Wall Street, in these matters, is like a lovely and accomplished woman who must wear black cotton stockings, heavy woollen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot. (1954 [2009: 47-8])
Or Mackay’s oft cited example, of the craziness that attends bubbles when investor’s ahve faith in firms that have no business plans and no experience:
An absolute classic
But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled ‘A company for carrying on an undertaking of great advantage, but nobody to know what it is’. Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could be duped by such a project… Next morning at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his doors, and when he shut up at three o’clock… He was thus, in five hours, the winner of £2,000. He was philosoper enough to be contented with his venture, and set off the same evening for the Continent. He was never heard from again. (Mackay 1841 [2006: 46])
Reinhart & Rogoff has much to contribute with their book. A good read is tragically not one of them, and that may stop its transition from good research into great piece of work. What a shame.
