Eight Centuries of Financial Folly
Every few decades, the economy’s major players develop bulletproof confidence in the efficiency of markets and the health of the economy.
Known as ‘this-time-is-different syndrome’, this unrealistic optimism afflicted bankers, investors and policy makers before the 1930s Great Depression, the 1980s Third World debt crisis, the 1990s Asian and Latin American meltdowns, and the major 2008-2009 global downturn. Conditions differed, but the same mindset – a dangerous mix of hubris, euphoria and amnesia – led to each of these collapses.
In each case, decision makers adopted beliefs that defied economic history.
Even so, two steps could help avert repeat performances:
- An early-warning system – Because many decision makers ignore clear signs of trouble.
- A regulatory scheme with teeth – Because capital crosses borders in search of the lightest regulations.
Back in the 70s, US financial sector liabilities were less than 20% of GDP. Today the figure is close to 120%. Leverage has increased enormously. Back then, stringent liability rules inhibited risk taking. In the days when such liability provisions applied to banks, “conservative” was the adjective habitually attached to “banker.” It does not fit the high-stakes gambling “quants” of recent years.
The single best thing we could do for financial reform: Triple the budgets of all financial regulatory agencies. Immediately. Regulators are woefully understaffed; this is fact.
The bankers have been playing “I win, you lose” with the general public.
Here’s an old saw I once enjoyed: