After the Yalta conference near the end of World War II, Franklin Roosevelt was asked by a reporter if the meeting of Allied leaders laid the foundation for enduring peace. Roosevelt – sick, tired, and weeks from death – replied: "I can answer that question if you can tell me who your descendants will be in the year 2057. We can look as far ahead as humanity believes in this sort of thing."
In hindsight we know Europe would remain mostly peaceful for decades. But no one knew that at the time. The actual outcome was one of a million different scenarios that could have played out. What if Hitler escaped, then regained power? What if Germany built an atomic bomb? What if the Cold War turned into a nuclear war? There are so many realistic alternative histories that a wise man like Roosevelt just laughs off the question of predicting a long-term outcome. The documentary How to Live Forever asks centenarians what the happiest day of their life was. One 104-year-old said Armistice Day – the end of World War I – because her family was certain it meant lasting peace in Europe. The amazing thing isn't how wrong she was; it's realizing how easily she could have been right, and what that would have meant for the 20th century.
History is full of these things: Very realistic, very different, outcomes that never happened because of chance.
I think about this a lot with investing. More investors are digging through reams of historic data to study how markets work and what to expect in the future. I do it too. It beats relying on your gut. But the data we have tells the story of one outcome out of an infinite number of possibilities. Worse, there are a handful of really important events that changed the course of investing and economics over the last century, and all of them could have easily turned out differently.
Take the Great Depression. It was the biggest economic tragedy in modern history. But for its first year it wasn't obvious that it would be all that bad. The Great Depression started in 1929 as a bad recession and a stock market crash -- the latter of which was a side show because so few Americans owned stocks. It didn't get devastating until 1931, when the banking system began to fail.
Why did it fail? A lot of reasons, but one was an Austrian bank called Credit-Anstalt. In 1931 Credit-Anstalt was weakening under bad loans. One of its directors, Zoltan Hajdu, refused to sign off on its books until its assets were reevaluated. This caused panic, which caused depositors to demand their money back, which caused the bank to collapse. Credit-Anstalt was taken over by the Austrian government, which terrified Vienna and lit a full-blown banking panic. Bloomberg's Peter Coy describes what happened next:
The Viennese panic brought down banks in Amsterdam and Warsaw. In June and July the scare spread to Germany, and from there immediately to Latvia, Turkey, and Egypt (and within a few months to England and the U.S.).
In 1931, The Economist wrote of a "widening circle of distrust and financial difficulty that commenced to spread through Europe with the failure of Credit-Anstalt." Economist Roland Vaubel wrote that the "collapse of [Credit-Anstalt] set a chain reaction in motion: the run on the German banks, the withdrawals from London, the large scale withdrawals from New York and another series of bank failures in the United States."
It makes you wonder: What if Credit-Anstalt was run by more competent people? What if the Austrian government led a more orderly bailout? It's entirely possible the worst of the Great Depression would have been avoided. If it were, every economics textbook, every stock market model, every return assumption, every worst-case scenario forecast today would look different – all because a guy named Zoltan had a bad day 84 years ago.
Or take the recent financial crisis. It got ugly when Lehman Brothers collapsed, smashing the confidence of the world financial system. But Lehman Brothers was almost saved by British bank Barclays, which offered to buy Lehman with government support. Alas, the deal was dashed by a legal technicality. Ben Bernanke wrote in his memoir:
Under British law, Barclays would not be allowed to guarantee Lehman's liabilities until after the acquisition was approved by Barclays' shareholders, a process that could take weeks or months. ... Hank [Paulson] appealed to his British counterpart, Alistair Darling, chancellor of the exchequer, for a waiver of the shareholder approval requirement. Darling refused to cooperate, on the grounds that suspending the rule would be "overriding the rights of millions of shareholders."
It makes you wonder: What if a waiver was approved? Laws were bypassed left and right during the crisis. If a waiver was granted, the post-Lehman trauma that sent unemployment to 10% may have been avoided. And today's Lehman-inspired obsession with risk – Black Swans, fat tails, too big to fail, hedging, reform – would sound far different, all because a guy named Alistair wasn't open to change on a sunny September day.
This can go on and on. What if Alexander Fleming hadn't discovered penicillin? What if the Soviet Union didn't collapse? What if Steve Jobs didn't get cancer? What if Barack Obama did? What if Bill Clinton killed Osama Bin Laden in 1998, when the U.S. military knew where he was? What if Saddam Hussein turned himself in in 2003, avoiding a trillion-dollar war? What if the Taliban turned Bin Laden over in 2001, avoiding another trillion-dollar war? What if a handful of Floridians voted differently in 2000, Al Gore became president, and spent those trillions on something else?
That's all imaginary. But it's all easily within the realm of possibility, which should give anyone trying to predict the future by weaving together the past a giant smack of humility.
But here's the thing: It doesn't. This morning I read a headline that asks, "The World in 2050: Will the shift in global economic power continue?"
I can answer that question if you can tell me who your descendants will be in the year 2127.
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