The Complacency and Perception of Financial Crises in Asian Countries

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Asian countries ran large current account deficits, financing them with short-term capital inflows. There was a complacent belief that these problems only happen in Latin America, not in Asia. This mindset, shared in the United States, was a major tipping point for the speaker, as it revealed an endemic problem of thinking the rules apply to someone else. This is similar to Kindleberger's concept of euphoria.

Carmen Reinhart of the University of Maryland talks with EconTalk host Russ Roberts about the ideas in her book This Time is Different: Eight Centuries of Financial Folly (co-authored with Kenneth Rogoff). They discuss the role of capital inflows in financial crises, the challenges of learning the right lessons, and what is generally true about financial crises over time and place. Reinhart applies these observations to the current crisis, discusses the possibility of the U.S. defaulting on its sovereign debt, and discusses the possibility of financial reforms that might make a difference.