The President of the Federal Reserve Bank of Kansas City, Thomas M. Hoenig presents several anecdotes about the run up to and the aftermath of the 1980’s energy markets crash. He then draws several parallels between the actions of many of the institutions before and after the crash and the actions of many of the banks recent actions in relation to the current Housing market bubble. He concludes:
My purpose in reviewing these stories with you today is not that I think a return to a 1980s-style crisis is imminent. Certainly, banking conditions today are good: strong earnings, good asset quality, no bank failures in more than two years. However, those who, in the early 1980s, predicted an endless rise in energy markets and real estate values were as confident in their outlook as we are today. And, certainly, the same rules and lessons continue to apply in banking and finance.
Although the world has changed during the last quarter of a century, at least one thing has not – human nature. As I mentioned earlier, greed, pride, arrogance and other human frailties are often at the root of bad banking decisions, and those qualities remain with us today. They still motivate behavior as they have in the past, and, in many cases, these frailties keep us from acting on the lessons we should have learned from previous generations. In addition, no matter how sophisticated we think current analytical tools, management information systems and financial instruments are, the most critical element in banking is still individual experience and judgment. In the end, bank employees, and, I would stress to this audience, bank directors, are still making the important decisions. The quality of those decisions will always depend on human characteristics and our ability to learn from the past.
Sound words. This (short) paper is highly recommended.
This Time It’s Different (Or Is It?)[pdf]
Working Through the BookLog 