Niall Ferguson has been getting a lot of press recently. Apparently he made a big impression on people in Davos at the recently held conference, and he has followed up on this publicity with a column in the Financial Times, where he is a contributing editor, and a blog on The Huffington Post. The basic idea Ferguson is presenting to the world is that the underlying problem in the financial crisis is too much outstanding debt. He says that rather than add more debt, through government stimulus programs, to the toxic waste that currently exists, policymakers should develop a plan that would actually reduce leverage, i.e. reduce the amount of debt outstanding.
He is highly critical of the “born-again” Keynesians who have taken the writings of Keynes out of context and applied them to a situation that is not appropriate. Hence, to Ferguson, those countries enacting “Keynesian” stimulus plans will be exacerbating the current financial problem and not solving it.
Ferguson's recent book “The Ascent of Money” is not only a very worthwhile read, but it also provides some of the history and background to his policy conclusions. For either reason - or both - I would highly recommend this book to the reader of this blog.
Getting away from the “current events” application of this book, there are several other important lessons in history that Ferguson would like us to consider, making the book not only provocative, but supportive of financial institutions and those that work in the finance field. Seldom today, do you see such a defense raised.
First, Ferguson takes on the work of those utopian writers who consider the ideal world to be one in which there is no money, no finance. He concludes that modern, successful economies have a well developed money system and effective financial institutions that contribute to economic innovation and growth. Those societies that do not have a functional money system and no financial structure are the ones that do not grow and develop; this includes areas or regions (e.g. urban areas and agricultural regions) as well as nations. He contends that before the Industrial Revolution could take place in the West, there first had to be a financial revolution.
Ferguson then presents a discussion of why finance and financiers have such a “bad” reputation and are so easily picked upon when something goes wrong. For one, he argues, “debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter.” Also, “financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability.” And, finally,
“for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust.”
The book makes three other points. One has to do with the fact that finance is often looked upon as a parasite to the “real” activity that goes on in the world, contributing little to the actual production of goods and services. The second is that financial systems seem to “reflect and magnify” what human beings are really like. That is, money
“amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong…But finance also exaggerates the differences between us, enriching the lucky and the smart, impoverishing the unlucky and not-so-smart.”
A third point deals with the seeming contribution of finance to tremendous amounts of wealth and to skewed income distribution, which has raised suspicions that finance is a parasite to “real” economic activity and contributes to the violent swings that take place within the economy - the assumption being that “real” economic activity would be more stable and less volatile without finance around.
There is one other key element to Ferguson’s world view. Ferguson does not believe in economic determinism; that is, he does not think that all decisions are made using rational economic reasoning. He believes that politicians and political events, especially wars, shape the institutions and policies, the rules and regulations, of modern economic life. In pure economic theory these inputs are treated as “exogenous” shocks, events that occur outside of our economic models but that significantly affect the future path of the economy.
What are these exogenous shocks? Well, how about a taxcut for the wealthy? How about a war on terrorism? How about a policy of keeping “real” short-term interest rates negative for over a year and a half? How about “domestic political conflicts” that arise relating to religion or other factors that can divide a nation -- say, cultural wars that relate to abortion, stem-cell research, and same-sex marriage? Ferguson contends that there is nothing in economics that can specifically account for these types of events and yet they play a major role in determining the evolution of an economy.
The body of the book is about the subtitle: A Financial History of the World. This may be a bit of a stretch, but he does cover a lot of history. There is a chapter on the history and evolution of the bond, a chapter on the rise of the joint-stock, limited-liability company and stock markets, a chapter on insurance and insurance companies and a chapter on the development of the idea of home ownership and whether or not home ownership should be a universal dream.
And then there is a chapter that moves us up to April 2008, when the book was being finished. The focus of this chapter is on “Chimerica”, the co-evolution of China and America in this current age of globalization. This chapter is worth reading even though a lot has happened since the author wrote the book. Of course, this leads into a discussion of all the debt that America has recently put on the books, and how this debt has been financed by nations that are just emerging into the modern financial system, dominated by China.
The rest of the story remains to be written -- and Ferguson, I’m sure, will contribute to its writing. Read this book. Read Ferguson’s earlier book “Cash Nexus: Money and Power in the Modern World, 1700-2000.” I believe that his ideas are going to be much discussed, and rightfully so. Having consumed these two books, as well as his several others, will give you a leg up on those discussions.
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