Investors often joke that Economists are by nature pessimistic individuals with a common observation being that “they have predicted 10 of the previous 2 economic recessions.” So, what are we to make of the lack of accurate financial crisis predictions in the run up to the recent debacle and what that says about our industry?
For sure, we can reflect on the fact that there were warning signals which we either did not fully understand or perhaps where it was perhaps more convenient to ignore, such as aggressive residential mortgage lending and the not unrelated matter of robust bank profitability growth.
We can observe that we have seen similar events before, for example the Savings and Loans crisis in the US which had its origins as recently as the 1970s and 80s. This event also had negative repercussions for the global economy.
Perhaps most unsettling of all is the unavoidable conclusion that we will see its like again. Ours is a cyclical industry where booms and busts are a recurring reality and where like our Economist friends, we work very hard at attempting to predict.
But its not as if the financial sector can claim that it corners the market in having to deal with crises or the threat of them. If we look around there are plenty of other sector examples; health (Ebola), IT (computer viruses) and Government (let’s not mention the “B” word!). Therefore, it might be useful for us to look outside our industry for insights that could help us, if not become better at accurate financial crisis prediction, at least understand how we might effectively manage our way through such an event.
We are of the view that much can be learned from the experiences of the defence industry. Senior military personnel operate in a global environment and are continually having to plan for multiple possible future scenarios. Therefore, it makes sense to work alongside them and consider the lessons we can learn and what useful behaviours we can apply to what we do that can help the financial sector manage its way successfully through any future financial crisis.
