For the past three years, Research magazine has been running “Historical Research,” a regular feature on financial history. We’ve covered topics ranging from the dot-com boom of the nineties to the newborn financial markets of the 1790s, from Dutch East India Company shares to biotech exchange-traded funds and from fictional Hollywood stock scandals to the real-life one that toppled 1930s Wall Street titan Richard Whitney.
As the writer of these articles, I’m pleased to delve into such interesting topics, and to have a beat offering a vast supply of potential future material. Financial history is a compelling subject, partly because it’s colorful but also because it’s relevant, offering context and comparisons that help make sense of current issues and future prospects.
Now, with a few dozen “Historical Research” articles in the archives (they can be found via www.advisorone.com/research-magazine), and with a few years’ perspective on the current financial turmoil, it’s a good time to contemplate some themes that emerge from our study of financial developments over the decades and centuries. Here are five history lessons that advisors would be well-advised to keep in mind.
1. Financial people aren’t very popular.
Polls show a dramatic decline in public confidence in financial institutions during the past several years. That’s not surprising, given the recent history of market convulsions and government bailouts. But public displeasure with the financial sector should not be dismissed as some temporary mood or cyclical pattern.
Consider: Gallup has been asking people how much confidence they have in financial institutions since 1979. That year, 60 percent said “a great deal” or “quite a lot.” In 2009, that figure was 18 percent, a record low, and this year it ticked slightly upward to 20 percent. Confidence in financial institutions trended downward even through the booming eighties, and stayed well below its 1979 peak during the soaring nineties.
Moreover, anti-financial feelings form a persistent thread through American history, going back long before there were polls. Politicians have been running against Wall Street since around the time 24 brokers formed a stock exchange by a buttonwood tree in 1792. Thomas Jefferson and his political allies railed against banks — not just a central bank but all banks. In later eras, politicians ranging from Andrew Jackson to William Jennings Bryan to Ron Paul drew upon popular distrust of financial types.
As a financial advisor, you face the challenge of earning and building your clients’ trust. History underscores that such confidence is not easy to win or to keep. Your clients may like you but not feel so sure about your firm or your bosses or the investment vehicles you’re steering them into. Also, don’t be surprised if elected officials and regulators show less-than-total sympathy for you and your fellow professionals.
2. Crises are never a thing of the past.
Shortly before the Great Crash of 1929, economist Irving Fisher famously stated: “Stock prices have reached what looks like a permanently high plateau.” Such optimism that we have moved beyond financial downsides in some lasting way has been a recurrent feature of market psychology. It reappeared in the 1960s, fueled by go-go stocks and a belief that Keynesian economists knew how to fine-tune the business cycle. It showed up yet again in early-21st-century proclamations of an economic and financial Great Moderation.
Economists Carmen M. Reinhart and Kenneth Rogoff, authors of the 2009 book This Time It’s Different: Eight Centuries of Financial Folly, cite the belief that “this time it’s different” — in other words, that unlike in the past, we now know how to avoid crises — as a key factor in causing financial turmoil. That’s because the complacency of thinking risks are under control leads people to take bigger risks.
The safer bet is to assume that you haven’t seen your last serious financial crisis, and that your clients haven’t seen their last one either. On a brighter note, history’s litany of crises can offer some solace that, bad as things might be at the moment, they typically were indeed worse, and sometimes quite a bit worse, at various points in the past.
3. Personalities matter.
Financial history is filled with moments when an individual had some major impact. Alexander Hamilton became Treasury secretary in 1789 and spent the next couple of years remaking — or, largely, just making from scratch — the financial landscape of the new United States. It’s far from clear whether anything similar would have happened had he not been at the Treasury. Perhaps the U.S. would have remained a financial backwater.