Panic, Fraud and Misadventure

WATSON, WILLIAM

Panic, Fraud and Misadventure The Ascent of Money: A Financial History of the World By Niall Ferguson Penguin. 442 pp. $29.95. Reviewed by William Watson Chair of Economics,...

...Focusing his story on once “redlined” but more recently subprimed areas of Detroit, the author finds himself wondering, as he drives through these neighborhoods, “whether subprime was in fact a new financial euphemism for black...
...His editor resisted but that very night at the opera (appropriately Verdi’s The Force of Destiny), it was announced at the intermission that Britain had left the Exchange Rate Mechanism...
...There I dug out Money: Whence It Came, Where It Went, another popular history of the medium of exchange written by an even more brilliant, provocative, media-savvy, witty, and eloquent Harvard don, John Kenneth Galbraith...
...the Dutch East India Company, whose shares, because of the sound-money policies of the Amsterdam Exchange Bank, never did suffer a bubble...
...But it comes close to proof by anecdote, an approach economists generally continue to disdain...
...True, Ferguson does finally throw up his hands while trying to explicate the Black-Scholes equation for the pricing of stock options...
...It is therefore no surprise to learn that, like its model, Jacob Bronowski’s Nixonera The Ascent of Man, Ferguson’s work initially surfaced as a British television series...
...His Afterword tells us that monetary institutions evolve in a process not unlike natural selection: Those that do not adapt are left behind...
...But another reason to study the history of money is to draw lessons from it...
...It rehearses the familiar yet always interesting stories of: the Scottish rogue John Law, who commandeered the finances of Bourbon France (1715-20) and blew them up in the Mississippi Bubble (describing him, Daniel Defoe used “bubble” as a verb, as in “bubble a nation, and you will soon be a great man...
...Bismarck introduced social insurance in Germany “to engender in the great mass of the unpropertied the conservative state of mind that springs from the feeling of entitlement to a pension...
...The book is very visual—there was obviously a trip to Venice to inspire a discussion of the Italian invention of banking...
...Early on he wrote columns for Britain’s Daily Mail under a pseudonym, to avoid harming his academic career...
...The struggle, Ferguson fears, may lead to a replay of the destructive deglobalization following the geopolitical shoot-out of 1914-18...
...The “where it went” refers to the evaporative nature of money during those inflationary years...
...A drawback of the TV technique is whiplash from the quick cuts...
...STRANGELY, because he is a historian known for his often wise opinions, Ferguson left me wondering exactly what the bottom line on money is...
...Squeamish he is not...
...Not that a productivity-enhancing technological revolution hurt...
...Ferguson’s lesson from the above is that without the kind of loose money former Federal Reserve Board Chairman Alan Greenspan made available in the 1990s and after 9/11, bubbles don’t happen...
...the lifetime odds of supposedly optimistic Americans committing suicide are 1 in 119...
...Galbraith’s book appeared in 1975 and its narrative returns always to the preoccupation of the Gerald R. Ford Administration: How to tame inflation without plunging the economy into recession...
...Apart from that, however, The Ascent of Money is almost George Soros-like in its prescience...
...At this stage—let alone six months into the crisis, when Ferguson went to press—no one can say...
...introduce currency-signer Henry M. Paulson Jr., George W. Bush’s third and final Treasury secretary...
...To that end, however, a capable expositor is crucial...
...A similar drive along Interstate 30, near Dallas, reveals “mile after mile of half-built houses and condominiums . . . one of the last visible traces” of the 1980s’ savings and loan crisis...
...THE BOOK’S six chapters are arranged thematically...
...Galbraith illustrates this by calculating that the $100,000 gift from Howard Hughes that President Richard M. Nixon kept in a safe for three years lost 13.75 per cent in value to the inflation he was officially attempting to control...
...It is a convincing measure of the economic successes enjoyed since the early 1980s that Ferguson’s book is not obsessed with inflation...
...But given our current difficulties, Ferguson is more concerned with panic, fraud and misadventure in the financial markets...
...Ferguson’s first 20 pages begin at an Inca silver mine in the Andes...
...Will it be the central chapter or merely a compelling footnote in a future history of money...
...Ferguson recounts how in 1992 he could not convince his newspaper editor the great Hungarian speculator would beat the Bank of England by shorting sterling—that is, borrowing $10 billion worth of pounds, converting them into German marks, then buying them back once the pound had fallen...
...fully 2,000 banks did not return from FDR’s bank holiday...
...They discuss money, bonds, bubbles, risk (and insurance), houses (and “surreal estate”), and, finally, the geopolitical future of the world as China and America—dubbed “Chimerica,” given the bonds that tie them together—struggle for economic superiority...
...It is a plausible conclusion (although the Bank of England did not accommodate the South Sea Bubble, which inflated nevertheless...
...He and Soros had been right...
...ONE REASON to study the history of money, Galbraith says, is that it is fascinating...
...Money, Shiller argues, enables ascent...
...It will be interesting to learn, in the next edition of Ferguson’s book, whether he is as optimistic...
...What an exhausting thing to be Niall Ferguson’s brain— or producer...
...Barely five years later, Federal Reserve Chairman Paul A. Volcker showed the only thing needed to bring both price stability and, after a time, durable growth was a spine stiff enough to furnish a credible commitment to all economic actors that monetary policy would be conducted with inflation foremost in mind...
...the British South Sea Bubble in the same years...
...Much in Ferguson’s tale proves the point: Soros’ instincts are often “signaled by a spasm of back pain...
...Nonetheless, in the spring 2008 version of Econ 252, delivered as Ferguson must have been working on his page proofs, Shiller told his students to go into finance to do social good, not for the money...
...There is nothing about money,” Galbraith asserts, “that cannot be understood by the person of reasonable curiosity, diligence and intelligence...
...Shiller has been a Cassandra about irrational exuberance since writing the 1996 memo that some say inspired Greenspan’s famous speech on that theme...
...But can’t we say a little more than that...
...Galbraith: “So far as any business can be given ethnic association, banking belongs to the Italians...
...He also foresaw the dot.com and U.S...
...Yet ultimately so did the market, to the tune of a $3.6 billion bailout—a lot of money in 1998—after Myron Scholes and fellow economics Nobelist Robert C. Merton relied on the equation to run Long-Term Capital Management...
...There was a time,” Ferguson observes, “when academic historians felt squeamish about claiming that lessons could be learned from history...
...Primitive financial lifeforms like loan sharks are not condemned to oblivion...
...Still, for instant and grand historical perspective I prefer the introductory finance lectures of Yale’s Professor Robert Shiller (you can listen to them at http://oyc.yale.edu/economics/financialmarkets...
...Take his chapter on “Blowing Bubbles...
...No history of money, or pocket history—the text is 358 spacious pages, including 36 photos and reproductions—would be complete without it...
...And of course we are in the throes of an upheaval whose outcome we simply don’t know...
...until the New Deal Americans used to pay off their mortgage principal all at once at the end...
...the Black Monday in 1987, when the market again plunged almost 23 per cent—still the daily record, despite last fall’s landslides on Wall Street...
...proceed backward to Mesopotamia and clay tablet money...
...most of Kaiser Wilhelm’s merchant marine was insured by Lloyd’s of London...
...This is all fun to read...
...economy: “At the time of writing Asia seems scarcely affected by the credit crunch in the U.S...
...housing bubbles, and the ill effects of their bursting...
...Ferguson had concluded the arithmetic favored Soros: “a trillion dollars being traded on foreign exchange markets every day, versus the Bank’s meagre hard currency reserves...
...The history of the Dutch East India Company,” says Ferguson, “shows that, with sound money of the sort provided by the Amsterdam Exchange Bank, stock market bubbles and busts can be avoided...
...the Laws of Hammurabi granted debt forgiveness every three years...
...in 2006 the total volume of weatherrisk derivatives outstanding was $45 billion...
...From Empire to Chimerica” opens with the once popular nonsense about China having delinked itself from the U.S...
...Galbraith learned to write while on staff, under his own name, at For tune...
...The new financial technologies remain to be perfected—to say the least, it would seem— but once they have been, the risk reduction they promise will make ordinary people immeasurably better off...
...It does make the occasional appearance...
...It would be useful to have a more exhaustive list of bubbles laid out against a corresponding list of abnormal monetary expansions, to see whether there really is a correlation...
...But Ferguson’s discussion of subprime mortgages, in a chapter ironically titled “Safe as Houses,” is an instructive excursion along the faultline of last fall’s system quake...
...the run-up to and denouement of the 1929 Great Crash (poor Irving Fisher of Yale, who surely would have won a Nobel had there been one for economists then, declared just before Black Monday that stocks had “reached what looks like a permanently high plateau...
...Reviewed by William Watson Chair of Economics, McGill University...
...the plot of the film Mary Poppins hinges on a bank run...
...Ferguson does note, ominously, that in the natural world “evolution is not progressive...
...How quaint Galbraith’s policy prescription seems today: wage and price controls (which Nixon actually had tried) so the armwrestling over income by big unions and big businesses that supposedly caused the creeping rot could be contained...
...and the multiple malfeasances of Enron’s late Kenneth Lay...
...Did Greenspan, to borrow Defoe’s locution, “bubble” the world...
...the United Kingdom invested fully 13 per cent of its 1913 GDP abroad...
...Ferguson, who writes with wit and verve, is as clear as the best journalists...
...the inventor of Monopoly made the first sets by hand and could turn out one every eight hours...
...etc., etc...
...columnist, “Montreal Gazette,” “Ottawa Citizen,” “Toronto National Post” AFTER finishing The Ascent of Money by Niall Ferguson, who spends half of the year teaching at Harvard and the other half at Oxford University, I went to my bookshelves...
...then go on to Venice for banking and Shylock, whose pound of flesh leads to loan sharking in contemporary Glasgow...
...Well, yes, the age of clay tokens has clearly passed and byte-money is with us for good...
...head off to Pisa for a discussion of Fibonacci, who in the 13th century provided the arithmetic foundation for finance and accounting...
...A cute addendum on microfinance, “As Safe as Housewives,” doesn’t really fit...

Vol. 91 • November 2008 • No. 6


 
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