Ignoring History Will Lead to Another Financial Crisis

Without understanding history, we cannot explain the present. This is certainly the case with economics. Since the 1950s, the tendency has been to advance this discipline as a science, removing the human element and using many assumptions and more mathematical formulas to process them than the “Apollo 11” program exploited to send Neil Armstrong to the moon. If we want to understand where the next financial crisis will come from, it is essential we learn from this misstep.

Economics is, after all, a study of human behavior. It should not be relegated to a series of mathematical models that physicists would envy. Mathematical models have encouraged the idea of constant growth and controlled risk management. In nature, neither one is possible.

The only thing that real economics has taught us is that there are no guarantees or certainties in economic theories. There are no scientific laws that can be extrapolated. Had the financial gurus who toyed with the idea of sub-prime mortgages considered finance in those terms, they would have understood the fallacy of their “product” before the financial crisis.

You Can’t Prevent a Financial Crisis

Financial crises are inevitable. But the right thinking could mitigate their effects, so long as we understand that there’s no such thing as self-regulation. Humans must remain in control. There’s still the weakness of the global banking financial system, even as we have faced the fallout of financial failure since 2007. The crisis on Wall Street produced a worldwide chain reaction, which has not yet settled.

Yet, the crisis is part of a timeless or cyclical course of events. They don’t repeat, but they alter and adjust the context in which they manifest themselves. At the core, though, they have the same overarching problem or cause.

Since the early 1990s, the financial markets have influenced the lives of ordinary people. They had nothing to do with Wall Street. We have witnessed a veritable quarter-century (or longer) of banking-financial colonization. But this is not new.

We look to the 1920s and 1930s for explanations about how the world could have permitted the unhinged speculation that produced the 2008 financial crisis. In the similarities, there is the hope of identifying solutions. The quest remains crucial because, while the financial markets have recovered from the crisis, average people have not.

The Historical Approach to Finance and the Medici of Florence…

The historical approach to understanding social and economic problems is the only way to get any answers. Economists, who believe they are as scientific as physicists with their formulas, have only perpetuated the problems. (Source: “How Did Economists Get It So Wrong?,” The New York Times Magazine, September 2, 2009.)

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