With the 10th anniversary of the collapse of Lehman Brothers upon us, it is instructive to look back over the period and ask ourselves what, if anything, we have learned from living through these exceptional events. As is often the case, actual new lessons to be learned may be few, but there are some valuable older lessons to be relearned.
Lessons to learn
Lesson 1: Credit cycles are inevitable
Lesson 2: The financial system is based on confidence, not numbers
Lesson 3: Managing and controlling risk is a nearly impossible task
Lesson 4: Don't panic!
Lesson 5: Some banks are too big to be allowed to fail
Lesson 6: Emergency and extraordinary policies work!
Lesson 7: If massive amounts of liquidity are being pumped into the financial system, asset price will surely rise
Lesson 8: If short-term rates are kept at extraordinarily low levels for a long period of time, yields on other assets will eventually fail in sympathy
Lesson 9: Extraordinary and untried policies have unexpected outcomes
Lesson 10: The behaviour of securities markets does not conform to expectations
Thoughts From a Peek Into the Future
Thought 1: The next crisis will undoubtedly be different from the last - they always are
Thought 2: Don't depend on regulator preventing future crises
Thought 3: The outlook for monetary policy is unknown
So what now?
Action 1: Don't abandon diversification
Action 2: Be dynamic!
Action 3: Don't abandon active management