This Time ISN'T Different

History proves the same thing time and time again.

Huge speculative bubbles lead to huge crashes.

As the San Francisco Chronicle puts it:

Any psychologist examining capitalism would quickly diagnose a manic depressive. Today's upheavals, coming after a generation of relative calm in the United States, may seem shocking to Americans who have primly observed bank runs in Argentina or scoffed at Japan's inexplicable reluctance to bury its zombie banks.

But financial crises have been common since the South Sea Bubble of 1720 and have grown more frequent in the last three decades, affecting larger and larger countries.

The problems always begin with asset bubbles that make every investor look smart. Neighbors envy neighbors getting rich and jump on board, often taking on debt to do so. Bubbles always burst, ending in tears and handcuffs and leaving everyone poorer.

It is human nature to "forget what happened before, to think that we've reinvented penicillin," said Reinhart, whose forthcoming book with Rogoff is called "This Time Is Different: Eight Centuries of Financial Folly." People think, "Oh yes, these things have happened, but they happened to somebody else, somewhere else, at another point in time. They don't happen to us. If you look at the mentality in the run-up to the current crisis, that's exactly what was going on with the real estate market."

Indeed, the speculative bubble from 2001-2007 was the largest speculative bubble in history.