Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Following their surprise bestseller This Time Is Different: Eight Centuries of Financial Folly, in January 2010 Reinhart and Rogoff launched a research paper with the title “Growth in a Time of Debt.”2 This purported to show that as public debts passed the threshold of 90 percent of GDP, economic growth slowed down sharply. It was a slippery slope that ended in a cliff. Excessive debt weighed on growth, which made the debt even less sustainable, further slowing growth. To avoid this fate, it was crucial to take action sooner rather than later. On closer inspection, Reinhart and Rogoff’s analysis turned out to be riddled with errors. Once their Excel spreadsheet was properly edited, there was no sharp discontinuity at the 90 percent mark and the case for emergency action was far weaker than they made out.3 But in early 2010 their arguments ruled the roost. In the Financial Times they opined: “[T]he sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems. . . . Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning.” Once bond markets realized the full measure of the “fiscal tsunami” unleashed by the banking crisis, their judgment would be merciless. “Countries that have not laid the groundwork for adjustment will regret it.”4 No one was safe. As