Future financiers condemned to repeat sins of past
By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Future financiers are condemned to repeat the mistakes of the past. Nearly 150,000 wannabe investment advisers, bankers, risk managers and analysts around the world will sit for the CFA exam this weekend. Success hinges on their understanding of the capital asset pricing model and return on equity. Knowledge of disasters like the South Sea Bubble and the Great Crash, though, are not required. Widespread ignorance of financial history is an overlooked systemic risk.
Some degree of comfort can be taken from the fact that most of today’s finance professionals actually lived through a crisis memorable enough to be included in the economic canon. Even so, many of them still lack the context to realize the latest mortgage-induced meltdown wasn’t unique. The best chance to break, or at least subdue, the pattern of greed-induced exuberance followed by fear-fueled crash is with a certain degree of appreciation of the phenomenon.
There’s no evidence yet, however, of a scholarly renaissance. The latest candidates for the chartered financial analyst credential, much like the first class of just a few hundred in 1963, will have crammed for months to grasp the intricacies of currency exchange rates, credit risk, ethical practices and portfolio management. The ones who pass – only a small fraction do on the first attempt – will theoretically be in position to better serve customers and employers. But they will have a gaping hole in their education.
The CFA Institute is trying to adapt, albeit slowly and only up to a point. It wants to impress upon aspiring charter holders the significance of yesteryear without necessarily forcing it on them. The group eventually aims to teach students how to incorporate market history into investment-making decisions. Because the governing body creates its own materials to standardize them for a global audience, however, the likes of John Galbraith, Charles Kindleberger and Milton Friedman will not be the required reading they should be.
It’s much the same for MBAs. At New York University’s Leonard Stern School of Business, for example, Richard Sylla’s 24-year-old course on the history of financial institutions, markets and economics is an elective. That may prevent students from resenting the subject matter, but also means most of them will devote their time at school to learning about the latest derivative rather than the evolution of central banking systems. That’s why teaching the profession’s past should be mandatory.
A simpler place to start, though, would be with the philosopher George Santayana, and his warning about what happens to those who can’t remember history.