The Financial Times reported this week on a study by the Chartered Financial Analyst Society of the UK that argues that “financial amnesia” among institutional investors–particularly a failure to heed the lessons of past bubbles–has contributed to the global financial crisis.
The answer, according to the Society’s report, is that the study of financial history should form a major part of all compulsory education for all investment professionals. “Financial amnesia disarms individuals, the markets, and the regulator. It causes risk to be mispriced, bubbles to develop, and crises to break.” The report further argues that the British CFA program should be reformed to include “a practical history of financial markets, designed to remind us about the effects of liquidity, psychology, and regulatory failure.”
As the author of a book on financial financial history, I am favorably inclined toward this proposal. In fact, I’d be happy to call Princeton University Press and ask if they would give the Society a discount on 9000 copies of Unsettled Account. Purely as a public service–after all, we were allies in two world wars.
To be honest, though, it is not financial professionals who are in most need of a course in financial history. True, it wouldn’t hurt them to be reminded of the amnesia that plagues the financial community. Nonetheless, financial professionals generally respond to the incentives of the market–which they do quite efficiently–and so it is not reasonable to expect the next financial crisis to be halted by better educated financial advisors.
Rather, it is the politicians and policy makers who need to be reminded of financial history. Someone should have reminded President George W. Bush that cutting taxes and raising spending simultaneously is a recipe for generating an unsustainable macroeconomic boom. Someone should have reminded Alan Greenspan that keeping interest rates at unreasonably low levels during 2001 to 2004 would lead to disaster.
Policy makers create the conditions that lead to financial excess. They need the lesson in financial history.