Pages

Monday, May 4, 2015

Financial history lessons

My latest at Research magazine: I interview historians Richard Sylla and Robert E. Wright about their new book Genealogy of American Finance (Columbia Business School Publishing). Excerpt:

Does the subject of financial history get as much attention as it ought to from financial professionals? How about from the general public?

Wright: Financial professionals, policymakers, and the general public do not pay enough attention to financial historians when times are good. When times are bad, the stock of financial historians does increase but then it is too late to do much good. We were much in demand in 2008–9 as journalists, policymakers, investors, and voters tried to wrap their heads around the financial crisis but it would have been better for everyone if they had paid attention to us in 2002–7! Ken Snowden, for example, had shown that six previous mortgage securitization schemes had blown up between the Civil War and World War II. While his historical analysis did not conclusively “prove” that trouble loomed (the past can never be used to predict the future with certainty because the past rhymes rather than repeats) it should have set off more alarm bells, as it did for our colleague at NYU-Stern (where I taught from 2003–9), Nouriel Roubini, one of the few economists to make accurate predictions of the impending disaster.

Studying financial history, all forms of the past for that matter, can help to create good, old-fashioned judgment, the “soft” skills that help financiers like Henry Kaufman to discern the difference between junk mathematical models and the real deal.

Sylla: Most financial professionals pay too little attention to financial history, which ought to instruct them. In the wake of the recent crisis, a good number of them became more interested in financial history for the perspectives it shed on what had happened, and some even advocated more study of it. The CFA Institute has been studying ways of adding more financial history to its educational programs for finance professionals. But as the crisis fades in memory, finance professionals talk less and less about history's importance. Its cautionary lessons might interfere with taking the next big risk to make the next fast buck. One of the great lessons of financial history is that a lot of finance professionals over the decades and centuries never learn, and so they repeat the mistakes of the past. The general public ought to learn more financial history to protect themselves from short-sighted finance professionals!

No comments: