Other people's history

The title paraphrases the title of Louis D. Brandeis 1914 book "Other People's Money: and how the bankers use it", and probably aptly so. For those who prefer movies, they most likely remember Danny DeVito's 1991 comedy movie with the same name. Both the book and the movie highlight the than prevailing philosophy of pursuing gains based on other people's money, difference is they are almost a century apart.
Something to ponder upon; in 1914 Mr Brandeis was advocating greater regulation and transparency for the financial sector pursuant to the panic of 1907. From the above, while it appears that nothing has changed in almost a 100 years, the article nonetheless, presupposes that history can be a source of learning in one form or the other, simply to avoid conflicting arguments on the merits or demerits of studying history. While current events provide credence to the "Black Swan" theory, sometimes, you still need to glance at the rear view mirror when driving a car.
In the absence of sufficient history, however, the problem exacerbates. Even if proponents of history eventually do walk away with the laurels, 64 years is just not enough when compared with over 2000 years of known history. One remains cognisant that centuries of history may have been more relevant prior to the information age when wars were fought with guns and bombs and not with deficits and debt. However, ignorance of yesterday, presently, can have much more severe implications in the future.
Consider that at the end of 1980 US national debt was less than USD 1 billion; in 20 years at the end of 2000 it stood at approximately USD 5.6 billion. A decade later their government struggles to enhance the debt ceiling beyond USD 14.3 billion! Before the subprime crisis in 2008, analysts predicting the collapse of the housing bubble were considered lunatics and largely ignored. Most likely even the most pragmatic of those, did not predict that 3 years later USA will be facing a debt crisis.
In the information age a year is probably equivalent to a decade compared with the 20th century and probably equivalent to a century if you go beyond the 17th century, evolution and advent of technology have redefined time as we knew it.
The pace of innovation, consequent to a shorter time horizon for R&D, provides numerous options, unfortunately sans the benefit of hindsight, for every success there are probably a few hundred failures which just fade into history. Fortunately for us we are not even in a position to exercise the first mover's advantage, if there is such a thing. It is for the trail blazers to tread carefully in the sea of invention lest they drown, all we have to do is patiently look for the winners and imitate success.
Unfortunately even this requires acute awareness and perceptive analysis. The superstars of yesterday continue to get lost in the sands of time and the frequency of the storms increases every day. The irony is that even when a winner does emerge, resource constraints hamper developing nations in following in his footprints. But let's cross our bridges when we come to them.
Clearly Other People's History (OPH) can be a beacon of knowledge guiding us through this maze of products and policies. However, in order to do that we need to at least remember their history, be aware of their initiatives and try to analyse the results. Current happenings however create doubts and makes you wonder whether even "other people" remember their own history.
It may be legitimate to conclude that the world has forgotten the Junk Bond King. It was only in 1990 that Michael Milken pleaded guilty to felony charges for violating US securities laws. How different were the subprime securities from the "high-yield bonds" of the 1970-80s?
In 1997 the world confronted the Asian Financial Crisis. It started from Thailand but pretty soon the "Asian Tigers" were whimpering across the Board. One of the many reasons cited for the crisis is excessive foreign borrowing to fuel growth which ended up in unviable and unprofitable investments. How different is the European crisis today?
How many of us are even aware of the 1998 Russian Financial Crisis which was prompted by the Asian crisis. The Ruble collapsed as commodity prices went south, which was a natural casualty of the Asian Crisis. So how long do we have before we are faced with the Renminbi crisis?
Can we even recall that there was a Brazil Crisis and a Latin America crisis both in 1999? We may be able to recall, albeit vaguely, the Argentina Financial Crisis of 1999-2002, but will probably struggle to remember what happened, let alone learn from it. Mexico is also famous for crises but there have been two many of them to take them seriously for analysis?
Are we analysing the subprime crisis and learning what not to do? Dazzled by the allure of the free market theory and cornered by comparative disadvantage in manufacturing, the solution dreamt up by American entrepreneurs was exporting financial services to meet the trade deficit. At that point in time the lesson learnt from history was that manufacturing was the driver of growth, but the West riding high on its success chose riskier uncharted waters for higher returns.
The money started pouring in, subprime securities achieved the wondrous distinction of fuelling growth and allowed all and sundry to pursue the American dream, home ownership. The best part was that the rest of the world was paying for the dream and the largesse, or more accurately appeared to be paying for it. Unfortunately, universal laws cannot be avoided, what goes up must come down. Unprofitable investments through borrowed money result in a crisis; the Asian Crisis!
Apparently, as argued by subsequent literature on the subject, greed set in. The lust for profits culminated in a free for all. Regulatory environment systematically evaporated either through fresh legislation or simply through ignorance by those vested with the responsibility. What were the causes, frequent loaning of Wall Street professionals to the regulator, a widespread aura of the Masters of the Universe blinding the Government functionaries and professionals or deliberate engineering, the debate continues. Almost everyone was either on the bandwagon or a cheer leader. Consider that the rating agencies were competing for fees from their own "clients". The world seemingly forgot what Mr Brandies eschewed in 1914, stronger regulation to avoid panic.
OPH tells us that crises the size of the current American and European Crisis have a domino effect. Consider that the Chinese forgot that in the Asian Crisis the investors got burned. If the subprime crisis crumbles the western economies, how will they ever pay their debts? It's not like you can walk into White House with a side arm and demand to be repaid. With the western citizens struggling to meet ends meet and Chinese citizens wondering whether there savings exist or not, consumption will again be a casualty, the Russian Crisis!
The Asians have probably, belatedly, recalled the aftermath of their own crisis, which probably is the reason for the current gold rush. Again, what goes up must come down! We may have been insulated from or for other reasons may have survived previous crises, but we have almost used our nine lives. As the world gets more interconnected the resonance of a financial crisis will be felt globally. While we may have to wither this storm by necessity rather than choice, but we can still avoid creating our own. We only need to be aware of, analyse and remember OPH, before it becomes our future!
(The writer is Chartered accountant based in Islamabad)