“History doesn’t repeat itself, but it does rhyme.”
– Mark Twain
One of the great triumphs of man is when he first discovered the invention of writing. It’s probably one of the most underrated inventions that is taken for granted by the majority of people. Not only because it’s used on a daily basis by practically everyone in society but because it’s not used to its full potential. Some have figured out its power, possibly the most successful ones, but definitely not the majority. And the argument of why writing is so powerful is not very difficult to understand.
Despite what some may have you believe, humans are just another kind of animal. Special perhaps but still just animals. One of the ways we learn is through experience. We do something, it’s beneficial, we keep doing it. We do something else, it’s detrimental, we stop doing it. Over our lifetime, we fill our brain with our cumulative experiences and it guides our actions. However, our life has to end sometime. We only have a finite lifespan so we can only accumulate a lifetime’s worth of experiences to guide our actions. So one would expect our knowledge to be limited to a lifetime’s worth of experiences. But it’s not. The invention of writing allows us to pick and choose from over 6000 years of human knowledge. We are not limited by the experiences of just one lifetime, but limited by the amount you can learn in one lifetime. There’s a big difference.
Which brings me to my thoughts on the recent financial crisis. Many claim it was a fluke, a one in a hundred year event. It shouldn’t have happened. But it did. And it was predictable because something very similar happened before. Roger Lowenstein documented it clearly in his book “When Genius Failed: The Rise and Fall of Long-Term Capital Management”. In 1998, Long-Term Capital Management, with their mathematical models and leveraged portfolios, jeopardized the stability of the entire financial system. Take this quote:
“If the Long-Term episode proved anything, it is that the system of disclosure that has worked so well with regard to traditional securities has not be able to do the job with respect to derivative contracts… As the use of derivatives grows, this deficiency will return to haunt us.”
Sound familiar? This book was written in 2000. I sometimes think that it’s wishful thinking to think that things could have turned out differently. Take a bunch of smart young grads, throw them on a trading floor, and show them how to make lots of money. They’re not going to care what the derivative contract represents or whether liquidity will always be this good, they’re just going to keep making money. Unfortunately, the same thing is probably going to happen again and it’ll be another one of those once in a hundred year events, only 10 years after the last one.
We’ve figured out how to learn from those before us, now only if we’d do it.