Tracing the whole financial history of the United States from the 18th century onwards is an especially ambitious but essential undertaking. The most up-to-date such work prior to the book under review was Jerry W. Markham’s multi-volume collection Financial History of the United States Series. Other century-spanning history books appeared much earlier and due to this fact don’t reap the benefits of the experience and scholarship of recent a long time. These include Paul Studenski and Herman Edward Krooss in addition to Margaret Good Myers.
The writer clarifies some common misconceptions about financial history. He rightly says that the stock market crash of October 29, 1929 didn’t trigger the worldwide economic crisis. According to the National Bureau of Economic Research, the economic downturn began in September 1929. The crash contributed less to the severity and duration of the downturn than monetary and monetary policy errors.
Even well-informed practitioners can gain recent insights from Higgins’ careful research. For example, it should be news to lots of them that today’s closed-end funds represent a revival of a product that suffered, on average, a staggering 98% loss in value between July 1929 and June 1932.
On one other topic just a few years ago a headline read: “The culprits of the 1987 market crash remain a mystery” However, Higgins cites six specific causes for the Dow Jones Industrial Average’s record-breaking 22.61% plunge on October 19, 1987. He also refutes the thought popularized by the true estate industry before the 2008 bust that home prices couldn’t possibly fall nationwide because there are still had never happened before. Higgins cites precedents that accompanied the economic crises of the 1820s and 1840s.
The book’s title expresses Higgins’ concept that the study of the past could be way more than a fun mental exercise. Still, the book comprises evidence of an attraction to history for its own sake, corresponding to in a 25-plus page discussion of the preparations for World War II, followed by 14-plus pages on the war itself. This is actually more detailed information on the strategies and battles than it takes to attract the relevant financial lessons from them.
Bond specialists will query Higgins’ assertion that structured mortgage products of the early 2000s were, due to their complexity, “well beyond the competence of ratings analysts – or, in many cases, of any human being.” Goldman Sachs famously had no trouble acting on behalf of a significant client who Short selling sought to discover pools of mortgages that were particularly vulnerable to default. The credit rankings of mortgage-backed securities (MBS), which turned out to be far too lenient, were fairly a results of a conflict of interest on the a part of the rating agency – i.e. the issuer payment model that was more successfully controlled in the company asset class. Unlike the MBS market on the time, corporate bond investors demanded that issues be rated by each leading agencies. This prevented issuers from offering fees to pit one agency against one other. Another difference was that no single corporate issuer represented a big enough percentage of the agencies’ revenue to entice them to sacrifice their repute by putting a thumb on the size to assist the issuer reduce its borrowing costs . In contrast, at MBS, just a few investment banks dominated the initiation of business and the payment of rating fees.
Some readers may scratch their heads once they see a graphic accompanying Higgins’ discussion of Moore’s Law. Intel co-founder Gordon Moore predicted in 1965 that the variety of transistors per chip – and due to this fact the chip’s performance – would double about every two years. To illustrate the accuracy of his prediction, the graph shows the variety of transistors per CPU in 1965, 1967, 1969, and 1970. In a future edition, the writer may clear up any possible confusion by repeating his statement that the graph “uses …” expands Data from Fairchild Semiconductor and Intel Corporation show the common variety of transistors on silicon chips manufactured from 1960 to 1971.” Production of older, less densely packed semiconductors is not going to stop once engineers reach a brand new high in transistors per reach chip. The mixture of older and newer chips that corporations make varies from 12 months to 12 months, so the common density per chip may decrease in a given 12 months, despite the fact that the density of probably the most advanced chip may only increase or remain constant.
These minor criticisms mustn’t deter investment professionals from reaping the advantages of careful study. Meanwhile, John Templeton’s dictum is true “The four most dangerous words in investing are ‘This time it’s different'” has grow to be a cliché. However, it has achieved this status since it comprises a variety of wisdom. Certainly one ought to be prepared for the opportunity of an unprecedented event, but smart investors will set the bar high to make this their base case. Higgins’ epic book provides invaluable context for predicting the direction of the economy and the market.*
* The reviewer thanks Jesse Ausubel, Peter Barzdines, David Burg, Emanuel Derman, Michael Edelman, John Pantanelli, Felix Suarez, and Richard Sylla for his or her insights. The reviewer is liable for any errors or omissions.
