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Over at Aidwatch, Bill Easterly is diving in to Reinhart and Rogoff's This Time It's Different, an epic catalog of financial crises through history. (As a side note, the book is excellent. Although, as Rogoff is a crack statistician, it leans heavily on data sets and can be a bit dense. It's also heavy on perspective, so if you're not looking for any of that, stay away.)

The main message of This Time It's Different is, of course, that this time is not different: that financial crises repeat themselves, repeatedly, under remarkably similar circumstances (although always slightly different in the final details). Rather than reading this as a dour condemnation of the market system, Bill Easterly reads this as a ringing endorsement:

"First, financial crises are remarkably common... Second, the global capitalist system does well in the long run anyway....I don’t mean to minimize the short run pain that the current financial crisis has caused. It’s horrible. But there is no reason to panic about the long run growth potential looking forward. The obvious rejoinder is Keynes’ “in the long run, we are all dead.” But we can’t ignore that Capitalism already survived repeated financial crises and has made us all vastly better off despite them. So here’s a counter-quote: “In the long run, we are all better off because our dead ancestors stuck with capitalism.”

Easterly's advice, like that found in the Hitchiker's Guide to the Galaxy, is simple: Don't Panic. I made a thematically similar argument back in the fall of 2008. But what are the implications of this conclusion?

Easterly seems to be suggesting that short-run worries about debt-sustainability and economic recovery are misplaced. Things will be fine once growth returns. Mark Thoma, however, reads this slightly differently: if the economy will return to growth eventually and debts will be slowly inflated away, don't you dare hold off on that monetary/fiscal stimulus when a crisis is afoot! Do not, in other words, go easy with the firehose for fear of soaking the curtains: they will dry eventually. The implications of Thoma's view are clear enough - we need to address the immediate problems immediately, and that means unemployment, social safety nets, getting credit flowing again, etc.

These are good arguments for you to ponder. But before you begin pondering, I would only add a couple of small, niggling points:

Primo: not all countries have the same bounce-back capacity as the United States. When you have the world's reserve currency - and when global commodities are priced with your moolah - you have great power to outgrow deficits. You can effectively outsource your debt. Most countries do not have this capacity, and a financial crisis of significant magnitude can bog an economy down for years and sometimes decades. For most countries, then, panic is an appropriate response.

Secondo: despite appearances, these charts are far from a ringing endorsement of the bounce-back ability of financial markets. We do not know what those charts would look like if financial crises ran their course because that has never been allowed to happen. Let me repeat: governments always intervene in the event of a financial crisis. Eventually. Sometimes it takes a very long time (i.e. 1930s) to set things right again, but financial crises have never been permitted to simply run themselves out. This was a fundamental point I took from Charles Kindleberger's work on financial crises, and I think it's something to keep in mind when you evaluate the long-run historic success that is capitalism.