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This Time is Different: Eight Centuries of Financial Folly. Reinhart&Rogoff (2009) (p. 210)

June 4, 2013

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“As money poured into the United States, U.S. financial firms, including mighty investment banks such as Goldman Sachs, Merrill Lynch (which was acquired by Bank of America in 2008 in a “shotgun marriage”), and the now defunct Lehman Brothers, as well as large universal banks (with retail bases) such as Citibank, all saw their profits soar. The size of the U.S. financial sector (which includes banking and insurance) more than doubled, from an average of roughly 4 percent of GDP in the mid-1970s to almost 8 percent of GDP by 2007.12 The top employees of the five largest investment banks divided a bonus pool of over $36 billion in 2007. Leaders in the financial sector argued that in fact their high returns were the result of innovation and genuine value-added products, and they tended to grossly understate the latent risks their firms were taking. (Keep in mind that an integral part of our working definition of the this-time-is-different syndrome is that “the old rules of valuation no longer apply.”) In their eyes, financial innovation was a key platform that allowed the United States to effectively borrow much larger quantities of money from abroad than might otherwise have been possible. For example, innovations such as securitization allowed U.S. consumers to turn their previously illiquid housing assets into ATM machines, which represented a reduction in precautionary saving.”

[op. cit., p. 210]

Manuel J. Matos‘s insight:

The book gets more and more interesting (in a sad way) as it gets into the recent crisis. And the title makes more and more sense …

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