THERE is nothing more enlightening than financial history – yet perhaps the only real lesson of all kinds of history is that we never learn from it. Let me attempt, nevertheless, to draw a couple of key conclusions.
The first lesson from market history is that slumps and market crashes can always be much, much worse than nearly everybody’s worst fears. While we have just emerged from a devastating, bitter recession which bankrupted and harmed millions, several aspects of previous crises were worse.
The stagflation of the mid-1970s, including the Secondary Banking crisis which destroyed numerous financial firms financed on the wholesale market and invested in property, was in many ways even worse for the City that the disaster of 2007-09. Those few individuals still working today who were already active in the City in the early and mid-1970s always speak of the secondary banking crisis – when the likes of Jessel Securities and Slate Walker collapsed – in hushed, almost reverential tones; to them, it was the scariest times in their lives, financially and economically.
As Kevin Dowd and Martin Hutchinson’s new book, Alchemists of Loss, reminds us, the old FT share index dropped from its 1969 and 1972 peak of over 500, and around 400 in late 1973, to just 150 in January 1975. This was a collapse of 70 per cent in nominal terms – and given the rampant inflation at the time, it slumped to a real terms level of under the nadir of 40.4 hit after the 1940 evacuation of Dunkirk, an almost total destruction of value. The FTSE 100 didn’t perform anything like as badly during the recent crisis and neither did stocks in any major rich nation. Next time a market crashes, commentators should remember this: it may be bad or even unbearably terrible but it’s almost certainly been worse.
The other big lesson is that we always think we will be cleverer next time, that we won’t be caught out by the next bubble and that our forbears were idiots. The truth, unfortunately, is that very few people maintain their cool when all around them are losing their heads. In retrospect, the mass naivety and stupidity is almost always unbelievable. By late 1989, the grounds of the Imperial palace in Tokyo were worth more than the entire state of California. Japanese ingenuity then went one step further with the introduction of 100-year mortgages, which was the only way a salaryman could ever hope to afford the dementedly high property prices prevalent at the time. Nobody noticed that people don’t frequently work for a century, even in Japan, and that it can’t be moral for a parent to bequest decades of debt to their children and grandchildren. It made sense at the time – just as the world’s cleverest merchants seemed quite relaxed about the fact that 12 acres of prime farm land in Holland was offered up for a single tulip bulb at the heart of the mania of 1636-37.
So what about today’s world will future generations think is crazy? Perhaps the fact that we have near-zero Bank base rates and yet believe that inflation is going to remain under control (or even, as many households seem to think, that such low rates will remain for the foreseeable future). Or that we have convinced ourselves that London property prices are fairly valued again? Or that it is right that gilt and bond yields in the UK and US are so ridiculously low? Take your pick.