When bad memories matter

September 11 approaches again. Each year, I think back on all the times I spent in the World Trade Center during the 1980s and 1990s, and remember my personal friends and colleagues who perished that day.

Over the following weeks and months, it seemed the city would never recover its spirit, as New Yorkers mourned, and shuddered at the amputated skyline.

Nine years later, even on Wall Street, the horrible memories have receded. Most of us still think about 9/11 from time to time – but probably not every day. Humans are hard-wired to be optimistic and resilient, with short lived recollections of pain.

Pleasant memories are more enduring. I have also spent time in Jackson Hole, Wyoming, enjoying climbing mountains. At the recent Federal Reserve Bank of Kansas City Symposium there, on August 26, Carmen Reinhart, a University of Maryland economist and bestselling author, reminded her banker audience that a selective amnesia applies to financial crises, which she has studied and documented in detail. She warned, “A ubiquitous pattern in policy pitfalls has been to assume negative shocks are temporary, when these were, in fact, subsequently revealed to be permanent (or, at least, very persistent.)” (article continues below)

Indeed, complacency is already setting in, the wake of the 2008 crisis. American financial regulation has been watered down in Congress; bankers again are reaping substantial bonuses; equity markets regained their oomph faster than anyone had expected; and “fiscal authorities are overestimating tax revenues,” per Reinhart. At first, we blamed Greenspan-style laisser faire. Soon, the financial industry and lobby was loudly protesting that overzealous regulation would impede recovery. It is tempting to shelve the fears and move on, from the dark hours when the fate of the Troubled Assets Relief Program (Tarp) hung in the balance, or the lows of March 2009, when it briefly appeared that the American banking system might be nationalized.

If only we could bottle some of that dread, to serve as a warning, in anticipation of the next economic crisis. Meanwhile, especially large cities, like New York, Madrid and London, must be vigilant. We still remain at risk from terrorist mayhem.