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During the long years of the credit boom, most investors and bankers overlooked signs of excess and insisted that things were different than in previous eras. This was a shame, as there were many interesting parallels to be drawn with earlier bubble periods.

Since the crisis everyone aspires to become a financial historian. Yet it’s as misguided to fashion crude analogs in finance as it is to ignore the lessons of the past.

In his latest book, The Road to Financial Reformation, Henry Kaufman bemoans Wall Street’s poor collective memory. Business schools, complains the veteran economist, have preferred teaching quantitative methods to providing a historical perspective. As a result, freshly minted MBAs went out to create collateralized debt obligations, stress-tested using Monte Carlo simulations that proved they could never default. Their ignorance of the past turned out to be an expensive oversight.

Academic economists, with their penchant for mathematical modeling rather than direct observation of the real world, largely failed to anticipate the crisis. By contrast, most historians were expecting something unpleasant to occur. After all, the credit boom had many of the typical characteristics of earlier market manias, such as declining credit standards, rising leverage, intense competition among financial players, frenetic financial innovation, a decline in credit spreads and a general overvaluation of asset prices. During the boom, Jim Grant used the pages of his fortnightly newsletter to warn readers of an approaching financial apocalypse.

Belatedly, the world has woken up to the significance of financial history. Over the past 12 months, there have been nearly 60,000 references to the Great Depression in the various news sources aggregated by Factiva. That’s up sixfold from a couple of years back.

Kaufman suggests that business schools should be required to teach history. However, he acknowledges the discipline’s limits when applied to financial markets. “We do not relive the past in any precise manner,” he points out.

At the beginning of the Great Depression, for instance, many expected just a replay of the sharp but brief economic contraction of 1921. When the stock market crashed in October 1987, doom-mongers mistakenly warned of “another 1929.”

Wall Street today is awash in historical analogs. Perhaps the most popular is the parallel drawn between the current position of the U.S. and that of Japan in the early 1990s. Many commentators expect the U.S. to experience something akin to Japan’s “lost decade.” Richard Koo, chief economist of Nomura, has drawn on Japanese experience to elaborate his thesis that America now faces a prolonged “balance-sheet recession.”

The similarities are obvious: Both the U.S. and Japan experienced real estate bubbles accompanied by rapid credit growth. After their respective bubbles burst, both economies found themselves burdened with excessive debt. The naive inference is that the U.S. will experience a prolonged period of deleveraging similar to Japan’s. Those who adopt this argument suggest that low interest rates and unconventional monetary policies will persist, accompanied by deflationary pressures; fiscal deficits will continue long into the future, but yields on government debt will remain low; and the U.S. economy will remain on government life support indefinitely.

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