Jeremy Warner: We forget the lessons of the past at our peril





[Jeremy Warner is assistant editor of The Daily Telegraph.]

'Prediction is always difficult," Niels Bohr, the atomic physicist, famously remarked, "especially when it's about the future." Few decades provided better proof of the perils of prediction than the Noughties. The past three years of financial turmoil, for example, made fools of most economic forecasters.

From the September 11 attacks to the worst banking crisis in history, the century has begun with some startling events. Neither occurrence bears any comparison with some of the world-changing happenings of the past, such as the two great wars of the 20th century or the fall of the Berlin Wall. But largely unpredicted they were, which in some way makes them more shocking. How were they not foreseen, and what lessons can we learn from these oversights?

The four most expensive words in the English language, according to Sir John Templeton, the stock market guru, are "it's different this time". He was referring to the propensity of generations of bankers, investors and policy-makers to believe that they've abolished the economic cycle, whereas of course they haven't.

It's become one of the most widely quoted – and flouted – sayings in investment. Yet it might equally apply to other spheres. Prediction may be difficult, but we can identify fault lines and probabilities, and we know that if we don't do anything about them, they invariably return to bite us.

It may not have been possible to predict September 11 or the banking crisis precisely, but the risks and dangers that lay behind both events were quite widely understood. Unfortunately, they were also largely ignored, in part because convenient ways of discounting the risks were discovered or invented. Everyone knew about the threat posed by al-Qaeda, but it was underestimated and US homeland security had been allowed to deteriorate to the point of virtual non-existence.

Likewise with the financial crisis, where benign economic conditions stretching over many years had led to an almost total collapse in previously vigorous standards of banking oversight. The problem of excessive credit was thought to be contained by market forces and securitisation.

Alan Greenspan, the former chairman of the Federal Reserve, warned of the dangers of "irrational exuberance" in markets in1996, but by the early Noughties he had almost wholly fallen for the myth that the wonders of structured finance had enabled the banking system substantially to reduce its risk.

Later, after the folly of this assumption became apparent, Mr Greenspan admitted that he had put too much faith in the idea that self-interest alone would guard against reckless behaviour. Despite his age and wisdom, he had ignored the lessons of history and had become as beguiled by the snake-oil salesmen of Wall Street as everyone else.

Down the ages, banking crises conform to a well-established pattern. The longer that benign economic conditions persist, the more lulled into a false sense of security everyone becomes, until eventually, in a process Wall Street veterans call "reaching for yield", all caution is thrown to the winds in the hunt for ever-higher returns.

No wonder the Queen was prompted to ask; how come no one saw this coming? However, if those who ignore the lessons of history are doomed to repeat them, the predictive powers of history can be equally misleading...


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