Thursday, January 21st, 2010
Minor Rant

The statement “An understanding of the past is necessary for solving the problems of the present” has value in many situations, but is not a universal truth. The two primary underlying assumptions of this statement are that the past is an accurate informer of current circumstances, and that our interpretation of past events is correct. This is incorrect in many situations, and in some circumstances can be damaging or even dangerous. An example of this is the 2008-2009 collapse of the United States sub-prime mortgage market.

During the 1990’s and 2000’s a ‘common sense’ consensus developed in the American regulatory, banking, and economics community that postulated a theory that the driving forces behind the real estate market were understood and could be improved upon by increasing the level of risk tolerated in the market. This was implemented through both decreased regulation, and increased risk taking in lending behavior. Both of these strategies were justified by stating that regulators, mathematicians, and economists understood the lessons of the past and could solve the problems of the present by acting on these lessons.

And act they did. The 1990’s and early 2000’s saw unprecedented change in the regulatory and financial systems related to mortgage financing. These changes seemingly solved the problems of the present. However the past was either not completely understood, or did not contain the appropriate lessons to prevent the eventual destruction of the new system.

Some seek to rectify the problems of this collapse by looking to the past, by re-instituting old regulatory structures. This behavior will only exacerbate existing problems by forcing old rules on a new problem. What is called for in this case is an acknowledgment of the wisdom of the past, combined with a recognition that the past is not the place for new solutions. Constantly looking to the past for solutions is equivalent to driving a car with the rear view mirror, for a short time the view will be ok, but it will soon lead to disaster.

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