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November 1, 2009
David Warsh, Proprietor


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What The Woman Lived

Elinor Ostrom’s Nobel Prize raised an interesting question. Who’s the most famous female economist in the profession today? Ostrom’s influence, via her field work on informal governing coalitions, had been greatest among political scientists. She was not among the worthies (Ronald Coase, Douglass North, Oliver Williamson) who founded the International Society for New Institutional Economics. Indeed, most economists had never heard of her before last month.

So who is the most widely read woman in the profession? Susan Athey, of Harvard University, the first woman to win the Clark Medal? Christina Romer, of the University of California at Berkeley, chair of the President’s Council of Economic Advisers? Laura Tyson, also of the University of California at Bekeley, who held that job fifteen years before? Anne Krueger, of Stanford University, the second woman to serve as president of the American Economic Association? Alice Rivlin, of the Brookings Institution, the first?

The answer is probably Carmen Reinhart, of the University of Maryland, when measured by citation counts, the yardstick commonly used to gauge professional fame. (Google Scholar, which I consulted, makes this easy, but is in the nature of a leading indicator; the Web of Science database is more precise, but takes more time to search.) Reinhart is author, with Kenneth Rogoff, of Harvard University, This Time Is Different: Eight Centuries of Financial Follies, a book of tables, figures, flow charts and data appendices that has become one of the business best-sellers of 2009.

More to the point are the two electrifying papers that Reinhart and Rogoff brought to the yearly economic meetings in January 2008 and 2009. Both depended on a large historical data set the authors had compiled that in due course would be published as This Time Is Different. The first, “Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison,” persuaded a wide range of professional economists that the US economy was in for a terrific shaking – nine months before the banking crisis began.

The second, “The Aftermath of Financial Crises,” dispelled hopes that the recession would be an ordinary “v”-shaped variety, showing that financial crises, especially those involving asset bubbles, were almost always protracted affairs. Citations of the two papers are only now beginning to show up. Yet Reinhart and her co-authors have two papers with more than 2,000 citations and three more of around 1,000 each, dating back to 1993, analyzing previous crashes. Ordinarily, three or four papers of 300 citations or more are enough to make you a risen star: 575 for Christina Romer’s best-known paper, 265 for that of the more technical Athey.

So never mind, for the moment, “the second great contraction,” as Reinhart and Rogoff call it. Her story is interesting in its own right.

Reinhart (nee Castellanos) was ten when she left Cuba with her father and mother in 1966, each of them carrying what was permitted to those able to qualify for an exit visa: a suitcase containing three changes of clothes. An older brother had gone ahead of them. Her father, an accountant, found work as a carpenter in Pasadena, California. When the family moved to Miami, Reinhart started college at two-year Miami Dade College (where a professed Communist taught the economics course from Douglass Dowd’s The Twisted Dream: Capitalist Development in the United States Since 1776), then transferred to FloridaIinternational University, where, as luck would have it, Peter Montiel, a recent PhD from the Massachusetts Institute of Technology was teaching while he cared for his aging parents. (He teaches and does research at Williams College today.) It was Montiel who in 1978 recommended Reinhart to Columbia University.

Columbia in the late 1970s was enjoying something of a golden age. Philip Cagan and John Taylor taught monetary theory; Edmund Phelps, Guillermo Calvo and Maurice Obstfeld, macroeconomics; Ronald Findley and Jagdish Bhagwati, international trade. Reinhart married classmate Vincent Reinhart and, after the two passed their field examinations, quit to try her hand at Wall Street. She joined Bear Stearns as an economist in the spring of 1982, just as petrodollar recycling of the 1970s ended, and the Third World debt crisis of the 1980s began. It was, she says, an invaluable education in dealing with incomplete information. Three years later she was the firm’s chief economist. A year of that was enough. She returned to Columbia to write her thesis, under Robert Mundell, who by then was returning to economics after some years away.

The Reinharts moved to Washington. She worked as a research economist for the International Monetary Fund; he began a long climb to the top of the staff of the Federal Reserve Board, eventually serving as secretary of the Federal Open Market Committee under Alan Greenspan and, for a time, Ben Bernanke. (He’s at the American Enterprise Institute today.) Financial crises, colorful events in distant lands, came and went. A 1993 paper with Calvo created a ruckus within the Fund, suggesting that a rise in US interest rates might trigger a rapid outflow of funds elsewhere; it was especially disparaged in Mexico City. Six months later the “Tequila Crisis” began, and, as Calvo says, “The show was on.” Calvo brought her to the University of Maryland in 1996. A series of papers followed on the Asian financial crisis (and the threat of contagion it entailed), culminating in ‘The Twin Crises: the Causes of Banking and Balance-of-Payments Problems,” with Graciela Kaminsky, of George Washington University

It was in 2001 that Rogoff, by then teaching at Harvard, began a two-year term as chief economist at the IMF. Almost immediately he hired Reinhart to be his deputy. The two began collaborating at once, stitching together the patchwork history of post-war exchange rate regimes and financial crises. The record was far from complete. A substantial fraction of the policy literature on public debt was based on data collected since 1980, since it was in that period that they became easy to collect. The trouble was that financial crises unfolded in much longer cycles, and data that spanned 25 years had no better than a one-in-four chance of capturing the proverbial “hundred-year flood.” They expanded their horizons: one year, for Valentine’s Day, Reinhart gave his wife a complete set of the League of Nations’s annual economic reports from the 1920s. “It was like reading [the IMF’s] World Economic Outlook or the newspapers,” she says. Before long they were immersed in the details of sovereign default on external loans as far back as fourteenth century Europe. Says Rogoff, “I never worked harder in my life.”

The result was a growing sense that the first major crisis of the twenty-first century was really very little different from the five worst post-war episodes in industrial countries they had studied (Finland, Japan, Norway, Spain and Sweden). The run-up in equity and housing prices in countries experiencing large capital inflows was the same; so was the sharp peak in growth and so were the rationalizations, the stories about why “it’s different this time” (productivity growth, a savings glut). The fear was that the aftermath, too, might be little different: a dismal 5 percent from peak to trough, requiring more than three years to return to trend.

This is not the place to gauge the effectiveness of the stimulus enacted earlier this year in staving off a worse recession than the one that already has occurred. Reinhart and Rogoff are busy preparing a third paper for the January meetings, this one concerned with “de-leveraging,’ meaning the steps necessary to cause banks to write down overvalued assets and begin lending freely once again. Reinhart enumerates three worries about the present situation: the tendency to declare premature victory versus the tendency of spending to fall; delaying the re-liquefaction of banks, and general complacency about the rest of the world, particularly emerging markets. In China, for example, credit has been expanding at an annual rate of forty percent or even fifty percent; it’s hard to do that for any length of time without running into problems.. “It’s always a surprise when it happens,” says Reinhart “There’s always a plausible story about why it’s different this time.”

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