WHAT HAVE WE LEARNED.

That was the subject of a remarkable meeting I attended last week of about 40 people who had worked through most of the financial crises of the past 35 years.  The names of course shall not be revealed to protect the guilty but more than half would be easily recognizable.

One participant started out by saying, "you know these things had one thing in common: you could all see them coming.  At least WE should have been able to see them coming, but we didn't pay attention to the signs that were right in front of us."  Around the room you could see signs of a great deal of discomfort because the truth of the assertion was immediately recognized.  The speaker continued:

"It's not hard if you are looking for it.  If something feels wrong it probably is.  A concentration of debt, the apparent mispricing of risk, asset bubbles and all sorts of things we have seen before and should therefore know lead to no good."

"Ah", said another, "but where is the institutional memory in these matters?"

"Indeed.  And that is part two of the same problem.  We do not value experience as highly as we should or once did for often the experience does not match the perceived risk of the day.  In 1982, there were no derivatives.  In 2007, derivatives, if not the cause, played a big role in the crisis.  But why was there allowed a massive mispricing or risk?  Probably because nobody was paying attention."

"Another thing that goes to this point is the globalization of finance which has resulted in far more players fighting for every piece of an increasingly larger pie and in so competing, losing sight of the tell-tale signs of trouble approaching than they might have noticed in an individual market.  That is why it is so important for central banks to communicate with one another and share collectively what is going on out there.  The continuance of experience at central banks is far greater but we have done a lousy job on this."  (He was a central banker of considerable note)

"We also have to remember that there are other players involved in this that even after things came under control were barely examined.  A lot of this might never have happened if those who participated in the crisis of 2007-08 as purchasers of newly created risk had not done so.  And yet we have barely explored this element of the event despite it's importance.  Why?"  (What was remarkable to me was that this subject was never raised again in over two hours of discussion.  Indeed, one could ask, Why?).

Tomorrow, Part II.  This is hard to write by the way.