x Abu Dhabi, UAEFriday 28 July 2017

The only way is down

Books Niall Ferguson is the man to explain both the 'giddy heights' of finance and the precipitous fall of markets. But, Matthew Price writes, his new history of money is subprime.

Ferguson says that finance has rescued us from
Ferguson says that finance has rescued us from "wretched subsistence", but "the giddy heights of material prosperity" look rather less giddy of late.

Niall Ferguson is just the man to explain both the 'giddy heights' of modern finance and the precipitous fall of world markets. But, Matthew Price writes, his new history of money is subprime.
The Ascent of Money: A Financial History of the World Niall Ferguson Allen Lane Dh138
It is too soon for an account of the global economic crisis, but Niall Ferguson's publishers may be quietly grateful for the recent unpleasantness. Whether it will boost sales remains to be seen, but few are as well equipped as Ferguson, one of the most numerate, economically literate historians working today, to explain the rise - and fall - of the modern financial system. At 44, Ferguson is already perhaps the most accomplished historian of his generation. A brash, telegenic and media-savvy Scotsman, Ferguson is as comfortable in front of the camera - he has presented a number of television documentaries - as he is with the arcana of economic history.

Ferguson is a number cruncher: his work bristles with charts, graphs and tables, but his prose is readable, fluent, even brisk. In his several books, he has tackled the very biggest themes of history - war, money and empire. Ferguson, in some ways, looks back to the grand, synthesising tradition of a Macaulay. He works in broad strokes, but his arguments are backed up by cutting-edge economic research and an almost bewildering array of data. And he's not afraid to cause a stir.

Like an impish if clever schoolboy, Ferguson seems to take delight in overturning conventional wisdom. In The Pity of War, a provocative study of the First World War, he argued that Britain, not Germany, turned a regional crisis in the Balkans - the assassination of Archduke Franz Ferdinand in Sarajevo - into a global cataclysm. Ferguson, noting that Germany is now Europe's dominant power, argued that had Britain sat out the war and let the Kaiser win, "continental Europe could therefore have been transformed into something not wholly unlike the European Union we know today." Ferguson likes to ponder alternative historical scenarios - he even edited a collection of essays on counterfactual history - but this particular provocation struck many of his critics as ludicrous.

The cause for which he may now be best known - an unstinting defence of the British Empire - is no less controversial. But Ferguson's claims about British imperialism aren't merely nostalgia; he has a serious argument to make about the role of empires in the expansion of global capital. For Ferguson, the British Empire was largely a force for good. "No organisation in history has done more to promote the free movement of goods, capital, and labour than the British Empire in the 19th century and early 20th centuries," he wrote in his 2003 book Empire: How Britain Made the Modern World. Ferguson says that United States is the rightful heir to Britain's role as a tribune of "Anglobalisation", but remains an "empire in denial". (Ferguson supported the Iraq war, but has criticised the occupation). Not surprisingly, such notions earned Ferguson the scorn of the postcolonial studies crowd - one British academic called the historian "the Leni Riefenstahl of George's Bush new imperial order."

Ferguson's historiography tends to discount the role of independence movements and colonial revolts in the Empire's demise. Britain lost its empire, Ferguson argues, because it lacked the will to maintain it. The Empire, he has argued, was undone by understretch, not overstretch. Britain, he contends, failed to present a convincing threat - a larger army - to deter German ambitions, and thus had to fight two enormously costly wars, conflicts that drastically accelerated imperial decline. Deterrence was the far cheaper option: in his most recent book, The War of the World, Ferguson suggested that Britain could have crushed the Wehrmacht by launching a pre-emptive strike against Hitler's undermanned armies in 1938.

Ferguson doesn't excuse the brutalities of imperialism so much as he looks past them: he tends to view the empire as a giant balance sheet. Where others see exploitation, Ferguson sees investment opportunities and capital flows. However, for all his concern with cash transactions, Ferguson is not an economic determinist. Money, as he sees it, does not make the world go round, though it certainly helps it spin. In his account, the rise of finance - the development of increasingly sophisticated instruments to multiply money - accompanied the ambitions of modern states for territorial expansion. The institutions of modern economic life - a strong central bank to print and manage currency; government fiscal policy; stock and bond markets - emerged in the 17th and 18th centuries to make it possible for revenue-hungry states to wage war, an idea Ferguson outlined in his densest, most theoretical work, The Cash Nexus, a study of money and power in the modern world.

The Ascent of Money is a more user-friendly version of that book, sheared of its ponderous complexities and breezy in tone. ("If the pension plan falls short, never mind. If you run out of health insurance, don't panic. There is always home, sweet home.") It is more a primer of economic ABCs than a sustained argument. Given the high calibre of much of Ferguson's work, it is also a disappointment. There are provocations here, but the book feels like a collection of magazine articles cobbled together between covers. Doffing his journalist's hat, Ferguson touches down in Memphis, Tennessee, the bankruptcy capital of the United States; the devastated working class neighbourhoods of Detroit, reeling from the sub prime mortgage crisis; and La Paz, Bolivia, where he checks in on an experiment in microfinance.

"The ascent of money has been essential to the ascent of man," Ferguson writes. "Financial innovation has been an indispensable factor in man's advance from wretched subsistence to this giddy heights of material prosperity that so many people know today." (The manuscript was completed in May, before the credit crisis mutated into a full blown recession and sent many of those who occupied the "giddy heights" into free fall.)

The story Ferguson tells is the evolution of money into finance. As he puts it, money is not some metallic object; rather "it is trust inscribed." But money itself is inert: it can be traded for goods and services, or saved for a rainy day, but left alone it does not compound and multiply into prosperity. Finance harvests the potential energy of money and transforms it into force - and binds people and institutions into new relationships, central among them the tie between lender and borrower.

More than anything, Ferguson argues, the growth of these relationships explain the growth of a system of finance: "Without the foundation of borrowing and lending, the economic history of our world would have scarcely gotten off the ground." He takes a brisk historical tour, surveying how the Medici family transformed banking in 15th century Florence by being larger than their competitors and spreading risk. In Holland, the modern joint stock company began with the United East India Company and its monopoly on the spice trade in the Far East. He details the emergence of the British bond market in the 18th century, and "the most successful bond ever issued," the British consol, created in 1752 to convert all Britain's outstanding debt into a single bond, which still exists today.

The emergence of markets for government debt made it possible for the British to finance their frequent wars with France, which suffered from a creaky financial system. Ferguson also provides a brisk account of the Rothschild family, who made a mint on the bond market during the Napoleonic wars. A lot of this is old hat for Ferguson - he wrote an acclaimed two-volume biography of the Rothschilds, and has cribbed at will from his previous writings. He throws off ideas willy-nilly, and leaps around from past to present at a dizzying clip. But the history Ferguson recounts is not merely an exercise. Finance, he is saying, is no less essential to our understanding of the modern era than war or politics. What he describes is the enormously complicated transformation of money by powerful instruments - not only bonds and stocks, which are centuries old, but totally newfangled beasts like mortgage-backed securities, derivatives and an otherworldly species called collateralised debt obligations. Money begat credit and credit begat leverage, and leverage more sophisticated means of increasing leverage. And herein lies the problem.

About the present moment, Ferguson says, it is no ordinary financial crisis. As his history shows, the cycle of boom and bust is endemic to the rise of finance. There have been panics, bank busts and stock market swoons for centuries; but we are entering a new phase of financial derangement. Credit and leverage have become detached from tangible economic growth. Borrowing led the way - fueled by the risky presumption that asset prices would continue to rise and rise.

Nowhere was this more true than the American housing market. Ferguson's chapter on the origins of the subprime mortgage is his sharpest, most original and most contrary. He argues that the notion of home ownership is a peculiar novelty in the English-speaking world. "For most of history... it was the exclusive privilege of an aristocratic elite." The move from a culture of tenants to one of owners - what Ferguson calls "property owning democracy" - began in the United States during the Great Depression. New Deal agencies like the Federal Housing Administration and spin-offs like Fannie Mae made it possible for more Americans to own homes than ever before, at the same time creating a secondary mortgage market that reduced average monthly payments. The US government was now in the mortgage business, and property ownership boomed.

But Ferguson is sceptical about this universal drive to home ownership; for him it is something like a cult built on an illusion. (Houses, Ferguson notes, are illiquid assets, difficult to sell quickly.) The explosion of subprime mortgages, often to poor black and Latino buyers, might be seen as "the zenith of the property owning democracy." But the secondary mortgage market, which repackaged subprime debt and sold it to the highest bidder, severed the old link between debtor and creditor. Once, there had been "meaningful social ties between mortgage lenders and borrowers," who often lived in the same community. No longer.

Ferguson doesn't come right out and say it, but he seems to lament the disappearance what might be called capitalism with a human face - or at least a face that you know. By taking risky subprime mortgages, bundling them together into securities, and selling them on global markets, Wall Street made a packet. Ferguson's thumbnail sketch of the new dynamic between borrower and lender is powerfully cogent: "The key to this financial alchemy was that there could be thousands of miles between the mortgage borrowers in Detroit and the people who ended up receiving their interest payments. The risk was spread across the globe from American state pension funds to public health networks in Australia and even to town councils beyond the Arctic circle."

There is geopolitical dimension to the phenomena that Ferguson also finds troubling, namely that America's imperial rival - China - bankrolled the whole thing. The vast pool of Chinese savings, lent out to the United States, "was the underlying reason why the US mortgage market was so awash in cash that you get a 100 per cent mortgage with no income, no job or assets." Chillingly, Ferguson reminds us the last time there was such "a fine line between symbiosis and rivalry," it was the eve of the First World War, and the two countries were Britain and Germany.

Ferguson is a pessimist, but he backs away from any radical prescriptions to address the problem (perhaps because they aren't any; the crisis takes on a new dimension almost daily). For him, individual initiative is the remedy, and he takes a page out of a Charles Schwab brochure to offer some canned advice: "The key to financial security," he tells us, "should be a properly diversified portfolio of assets." Putting it all in the house and on "the far from risk-free property market" is a one-way bet that's bound to fail. After a dazzling account of the subprime crisis that showcases Ferguson's sure grasp of 21st-century finance and his willingness to buck convention, such bathos is little more than cold comfort.
Matthew Price's writing has been published in Bookforum, the Los Angeles Times, The Boston Globe and The Financial Times.