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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
‘Different’ often turns out to be the same
"THIS TIME is different."
It seems that phrase is uttered during every financial bubble. In the past decade, it’s been used to explain skyrocketing stock and housing prices. It’s the kind of justification that leads people to jump into the bubble before it bursts.
There’s always some kind of detailed reason for why, in fact, that era’s circumstances justify the fast rise in asset prices, and why it should continue.
In the late 1990s, it was that technology was changing the world, so even at 100 times earnings the stocks on the high-flying NASDAQ stock exchange represented good value. More recently, it was that a wave of prosperity would keep housing prices going up and up.
Sadly, these arguments that "this time is different" seem pretty convincing during boom times. It’s only after the bubble bursts that it becomes clear that in fact nothing was different.
Economics professors Carmen M. Reinhart (of the University of Maryland) and Kenneth S. Rogoff (of Harvard University) write about this phenomenon in a recently published research paper that examines financial crises in 66 countries throughout the world over the past 800 years.
The paper is titled "This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises."
The authors find that financial crises have occurred regularly over the past 800 years. And each time there has been justification for why the boom times will continue.
"Technology has changed, the height of humans has changed, and fashions have changed," the authors write. "Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant."
I particularly liked this passage from the paper:
"The pervasive view that ‘this time is different’ is precisely why it usually isn’t different, and catastrophe eventually strikes again."
It’s bound to happen again, whether it be the price of stocks, bonds, houses, oil or tulip bulbs. If the price of that asset rises to a level that seems unsustainable, and if the pundits start talking about why "this time is different," you’ll know what to do.
Run for the exit rows.