It has never been more necessary to understand the ascent of money than it is today,” says Niall Ferguson, well-known historian, newspaper columnist and creator of highly successful television documentaries. Hence his attempt to explain today's financial crisis by bridging the gap between “financial knowledge and other kinds of knowledge”. The book was finished in May, well after the onset of the crisis, but before the serial collapse and rescue of some of the biggest financial institutions in the world. Hence the layman, at whom the book is targeted, can look in it for the genesis of the crisis— the reason why— discovered through perspicacity rather than hindsight.
The book is highly accessible, with all basic terms lucidly explained. It is also a very good read, strong on storytelling, though occasionally overdoing a bit in trying to be entertaining. For example: “So how did this ‘Mr Bond’(of the bond market) become so much more powerful than the Mr Bond created by Ian Fleming? Why indeed do both kinds of bond have a licence to kill?”
The major pillars of the world of finance— money, banks, bonds, stock and insurance— are traced form their origins. The compelling stories are those of the successful Dutch East India Company, the Mississippi bubble in France, Enron which was at the heart of the nineties bubble, and a highly informed account of the Anglo-Saxon obsession with property ownership, which created the first bubble of this century. This is followed by an examination of the key current global imbalance between the over-consumption of the US and the under-consumption of China. They could and have till now complemented each other beautifully, but this could change because of the inherent tensions and there could be another war, putting to an end the current phase of globlisation, as did the two wars of the last century.
As to why the world is in such a mess today, the author notes that the villain is not traditional bank lending or bankruptcies. “Its prime cause was the rise and fall of ‘securitised’ lending, which allowed banks to originate loans but then repackage and sell them on,” via the bond market, which did such a fine job of globally distributing toxic assets. The sellers of structured products boasted that securitisation allocated assets to those best able to bear it, but it turned out to be to those least able to understand it.
Throughout financial history there have been “crooked companies” and “irrational markets”, “indeed the two go hand in hand.” When the bulls stampede and people get taken for a ride, it is the job of the central bank to control the herd. Without control of France’s Banque Royale, John Law could never have achieved what he did. Without the loose money policy of the nineties, the Enron bosses would have struggled to crank up its share price. On the other hand, the Great Depression offers the costliest “lesson in the dangers of excessively restrictive monetary policy during a stock market crash.”
In a parallel narrative the history of finance or money is fascinatingly retold through the rise and fall and likely rise again of the welfare state. Social security, which was given concrete shape by Scottish Widows, took an unexpected turn in Japan to build its war machine. Then, the stagflation of the seventies gave rise to the Anglo-American disenchantment with welfare-- handouts and high taxes-- and risk returned under the intellectual guidance of Milton Friedman. The first laboratory of this was Chile, which made welfare gains through reduction in the budget deficit and pension reform. Recession in the developed world and its ageing population signal a new life and another round of reform for the welfare state.
At the end of the day the author has great faith in and appreciation for the historical role of the financial system. Look where we have come from the moneylenders of Mesopotamia. There have been great reverses for sure; “though the line of financial has a saw-tooth quality, its trajectory is unquestionably upward…. the ascent of money has been one of the driving forces behind human progress.” True, but the story is far from over and right now we are passing through tumultuous times. So much so that verdicts have to wait till the final denouement of the present downturn is clear. Paul Krugman’s “talk of a return of Depression
Economics (in 1999 in the aftermath of the Asian Crisis) now looks overdone.” That was written in May. What a lot has changed in six months!
More From This Section
THE ASCENT OF MONEY: A FINANCIAL HISTORY OF THE WORLD
Niall Ferguson
Allen Lane
Price: Rs 595;
Number of pages: 442