Publications by Author: Ferguson%2C%20Niall

If financial crises were distributed along a bell curve—like traffic accidents or people’s heights—really big ones wouldn’t happen very often. When the hedge fund Long-Term Capital Management lost 44 percent of its value in August 1998, its managers were flabbergasted. According to their value-at-risk models, a loss of this magnitude in a single month was so unlikely that it ought never to have happened in the entire life of the universe. Just over a decade later, many more of us now know what it’s like to lose 44 percent of our money. Even after the recent stock-market rally, that’s about how much the Standard & Poor’s 500 index is down compared with October 2007.

Financial crises will happen. In the 1340s, a sovereign-debt crisis wiped out the leading Florentine banks of Bardi, Peruzzi and Acciaiuoli. Between December 1719 and December 1720, the price of shares in John Law’s Mississippi Company fell 90 percent. Such crashes can also happen to real estate: in Japan, property prices fell by more than 60 percent during the ’90s.

For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. As a result, 9 times out of 10 we overreact. The usual response is to introduce a raft of new laws and regulations designed to prevent the crisis from repeating itself. In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis—or predicted the wrong crisis (a dollar crash)—have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans—who supposedly have much better-regulated financial sectors than the United States—have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the "Anglo Saxon" financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets, so that (for example) the ratio of Citigroup’s tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

All of these were sins of commission, not omission, by Washington, and some at least were not unrelated to the very considerable political contributions and lobbying expenditures of the financial sector. Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes?—Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Niall Ferguson follows the money to tell the human story behind the evolution of finance, from its origins in ancient Mesopotamia to the latest upheavals on what he calls Planet Finance.

Bread, cash, dosh, dough, loot, lucre, moolah, readies, the wherewithal: Call it what you like, it matters. To Christians, love of it is the root of all evil. To generals, it’s the sinews of war. To revolutionaries, it’s the chains of labor. But in The Ascent of Money, Niall Ferguson shows that finance is in fact the foundation of human progress. What’s more, he reveals financial history as the essential backstory behind all history.

Through Ferguson's expert lens familiar historical landmarks appear in a new and sharper financial focus. Suddenly, the civilization of the Renaissance looks very different: a boom in the market for art and architecture made possible when Italian bankers adopted Arabic mathematics. The rise of the Dutch republic is reinterpreted as the triumph of the world’s first modern bond market over insolvent Habsburg absolutism. And the origins of the French Revolution are traced back to a stock market bubble caused by a convicted Scot murderer.

With the clarity and verve for which he is known, Ferguson elucidates key financial institutions and concepts by showing where they came from. What is money? What do banks do? What’s the difference between a stock and a bond? Why buy insurance or real estate? And what exactly does a hedge fund do?

This is history for the present. Ferguson travels to post-Katrina New Orleans to ask why the free market can’t provide adequate protection against catastrophe. He delves into the origins of the subprime mortgage crisis.

Perhaps most important, The Ascent of Money documents how a new financial revolution is propelling the world’s biggest countries, India and China, from poverty to wealth in the space of a single generation—an economic transformation unprecedented in human history.

Yet the central lesson of the financial history is that sooner or later every bubble bursts—sooner or later the bearish sellers outnumber the bullish buyers, sooner or later greed flips into fear. And that’s why, whether you’re scraping by or rolling in it, there’s never been a better time to understand the ascent of money.

Future historians, I suspect, will look back on Saturday's anticlimactic G-20 gathering in Washington less as Bretton Woods 2.0 and more as a rerun of the London Economic Conference of 1933. Back then, representatives of 66 nations completely failed to agree on a concerted international response to the Great Depression. The fault lay mainly with the newly elected U.S. president, Franklin D. Roosevelt, who vetoed European proposals for currency stabilization.

This time around, it wasn't the newly elected Democrat but the outgoing Republican who wielded the veto. Even before his counterparts reached Washington, President Bush made it clear that recent events had done nothing to diminish his faith in free markets and minimalist regulation. Over the weekend, it was the United States that resisted European calls for a new international regulatory body, opposed significant redefinition of the International Monetary Fund's role and showed no interest in the idea of a global stimulus package.

A real opportunity has been missed. Just as happened in the 1930s, what began as an American banking panic has now escalated into a global economic crisis. And just as happened in the 1930s, a lack of international coordination has the potential to turn a recession into a deep and protracted depression.

The problem that seems scarcely to have been discussed over the weekend is that each national government is currently responding to the crisis with its own monetary and fiscal measures. Some central banks have already slashed official rates to close to zero. Some treasuries have already launched multibillion-dollar bailouts and stimulus packages. The devil lies in the different timing and magnitudes of these measures. The absence of coordination makes it almost inevitable that we will see rising volatility in global foreign exchange and bond markets, as investors react to each fresh national initiative. The results could be nearly as disruptive as the protectionist measures adopted by national governments during the Depression. Now, as then, a policy of "every man for himself" would be lethal.

At the heart of this crisis is the huge imbalance between the United States, with its current account deficit in excess of 1 percent of world gross domestic product, and the surplus countries that finance it: the oil exporters, Japan and emerging Asia. Of these, the relationship between China and America has become the crucial one. More than anything else, it has been China's strategy of dollar reserve accumulation that has financed America's debt habit. Chinese savings were a key reason U.S. long-term interest rates stayed low and the borrowing binge kept going. Now that the age of leverage is over, "Chimerica"— the partnership between the big saver and the big spender—is key.

In essence, we need the Chinese to be supportive of U.S. monetary easing and fiscal stimulus by doing more of the same themselves. There needs to be agreement on a gradual reduction of the Chimerican imbalance via increased U.S. exports and increased Chinese imports. The alternative—a sudden reduction of the imbalance via lower U.S. imports and lower Chinese exports— would be horrible.

There also needs to be an agreement to avoid a rout in the dollar market and the bond market, which is what will happen if the Chinese stop buying U.S. government bonds, the amount of which is now set to increase massively.

The alternative to such a Chimerican deal is for the Chinese to turn inward, devoting their energies to "market socialism in one country," increasing the domestic consumption of Chinese products and turning away from trade as the engine of growth.

Memo to President-elect Barack Obama: Don't wait until April for the next G-20 summit. Call a meeting of the Chimerican G-2 for the day after your inaugural. Don't wait for China to call its own meeting of a new "G-1" in Beijing.

Niall Ferguson is a faculty associate of the Weatherhead Center; Laurence A. Tisch Professor of History, Department of History; and William Ziegler Professor of Business Administration, Business, Government, and the International Economy Unit, Harvard Business School.

We are living through a paradox—or so it seems. Since September 11, 2001, according to a number of neo-conservative commentators, America has been fighting World War III (or IV, if you like to give the Cold War a number). For more than six years, these commentators have repeatedly drawn parallels between the "War on Terror" that is said to have begun in September 2001 and World War II. Immediately after 9/11, Al Qaeda and other radical Islamist groups were branded "Islamofascists". Their attack on the World Trade Center was said to be our generation’s Pearl Harbor. In addition to coveting weapons of mass destruction and covertly sponsoring terrorism, Saddam Hussein was denounced as an Arab Hitler. The fall of Baghdad was supposed to be like the liberation of Paris. Anyone who opposed the policy of pre-emption was an appeaser. And so on. Yet throughout this period of heightened terrorist threats and overseas military interventions, financial markets have displayed a remarkable insouciance.

It is now nearly five years since President Bush promulgated what has become known as "the Bush Doctrine". The seminal document, published above the President’s signature twelve months after the terrorist attacks of September 11, 2001, and entitled National Security Strategy of the United States, argued that because "deliverable weapons of mass destruction in the hands of a terror network or murderous dictator … constitute as grave a threat as can be imagined", the President as commander-in-chief should, at his discretion, "act preemptively" to forestall or prevent any such threat. "As a matter of common sense and self-defense", the President stated, the United States would “act against such emerging threats before they are fully formed” and before they reached America’s borders. NSS-2002 asserted not only the principle of preemption but also the principle of unilateralism. "While the United States will constantly strive to enlist the support of the international community," the document declared, "we will not hesitate to act alone, if necessary..." At the time, and subsequently, the two principles of preemption and unilateralism were widely criticized as dangerous novelties in American foreign policy.

From the conflicts that presaged the First World War to the aftershocks of the Cold War, the twentieth century was the bloodiest in human history. This was an age when multicultural communities were torn apart by the irregularities of economic boom and bust. It was also an age poisoned by an idea: the idea of irrevocable racial differences. Above all it was an age of struggle between decaying old empires and predatory new ‘empire-states’. Who won the war of the world? We tend to assume it was ‘the West’. Some even talk of ‘the American century’. But for Niall Ferguson the biggest upheaval of the twentieth century was the decline of Western dominance over Asia. Drawing on history, economics and evolutionary theory, The War of the World is a revolutionary new interpretation of the modern era.

This paper reassesses the importance of colonial status to investors before 1914 by means of multivariable regression analysis of the data available to contemporaries. We show that British colonies were able to borrow in London at significantly lower rates of interest than non–colonies precisely because of their colonial status, which mattered more than either the convertibility of their currencies into gold or the sustainability of their fiscal policies. Allowing for differences not only in monetary and fiscal policy but also in economic development and location, the Empire effect was, on average, a discount of around 100 basis points, rising to around 175 basis points for the underdeveloped African and Asian colonies. We conclude that colonial status significantly reduced the default risk perceived by investors.

Not all of the judgements in A. J. P. Taylor’s The Origins of the Second World War, published forty-five years ago, have stood the test of time. Taylor was right about the Western powers: the pusillanimity of the French statesmen, who were defeated in their hearts before a shot had been fired; the hypocrisy of the Americans, with their high-faluting rhetoric and low commercial motives; above all, the muddle-headedness of the British. Where Taylor erred profoundly was when he sought to liken Hitler’s foreign policy to "that of his predecessors, of the professional diplomats at the foreign ministry, and indeed of virtually all Germans", and when he argued that the Second World War was "a repeat performance of the First". Nothing could be more remote from the truth. Bismarck had striven mightily to prevent the creation of a Greater Germany encompassing Austria. Yet this was one of Hitler’s stated objectives, albeit one that he had inherited from the Weimar Republic. Bismarck’s principal nightmare had been one of "coalitions" between the other great powers directed against Germany. Hitler quite deliberately created such an encircling coalition when he invaded the Soviet Union before Britain had been defeated. Not even the Kaiser had been so rash; indeed, he had hoped he could avoid war with Britain. Bismarck had used colonial policy as a tool to maintain the balance of power in Europe. Hitler was uninterested in overseas acquisitions even as bargaining counters. Throughout the 1920s Germany was consistently hostile to Poland and friendly to the Soviet Union. Hitler reversed these positions within little more than a year of coming to power.

On April 20, 1949, the New York Times carried three items about Japan. The most arresting headline was: "Japan’s War Cost Is Put at $31 Billion; 2,252,000 Buildings Razed, 1,850,000 Dead." Similar figures were produced in the post-war period for nearly all the combatant countries. In four countries—China, Germany, Poland and the Soviet Union—the death toll was even higher, or five if the mortality of the 1943 Bengal famine is attributed to the war. Altogether, the best available estimates suggest, somewhere in the region of 60 million people lost their lives as a result of the Second World War. In some countries the mortality rate was higher than one in ten. In Poland it approached one in five. No other previous war had been so catastrophic in relative, much less in absolute, terms. Nor was Japan unique in the scale of destruction its capital stock had suffered.

"I think that this could still fail." Those words—uttered by a senior American officer in Baghdad last week—probably gave opponents of the war in Iraq, particularly those clamoring for a hasty exit, a bit of a kick. They should be careful what they wish for.

For history strongly suggests that a hasty American withdrawal from Iraq would be a disaster. "If we let go of the insurgency," said another of the officers quoted anonymously last week, "then this country could fail and go back into civil war and chaos."

As many of the war's opponents seem to have forgotten, civil war and chaos tend to break out when American military interventions have been aborted. Think not only of Vietnam and Cambodia, but also of Lebanon in 1983 and Haiti in 1996. To talk glibly of "finding a way out of Iraq," as if it were just a matter of hailing a cab and heading for the Baghdad airport, is to underestimate the danger of a bloody internecine conflict among Kurds, Sunni Arabs and Shiites.

Instead of throwing up our hands in an irresponsible fit of despair, we need to learn not just from past disasters but also from historical victories over insurgencies. Indeed, of all the attempts in the past century by irregular indigenous forces to expel regular foreign forces, around a third have failed.

In 1917 British forces invaded Mesopotamia, got to Baghdad, overthrew its Ottoman rulers and sought—in the words of the general who led them, Sir Stanley Maude—to be its people's "liberators." The British presence in Iraq was legitimized by international law (it was designated a League of Nations mandate) and by a modicum of democracy (a referendum was held among local sheiks to confirm the creation of a British-style constitutional monarchy). Despite all this, in 1920 there was a full-scale insurgency against the continuing British military presence.

Some may object that warfare today is a very different matter from warfare 85 years ago. Yet the striking thing about the events of 1920 is how very like the events of our own time they were. The reality of what is sometimes called "asymmetric warfare" is how very symmetrical it really is: an insurgency is about leveling the military playing field, and exploiting the advantages of local knowledge to stage hit-and-run attacks against the occupiers, as well as anybody thought to be collaborating with them.

Indeed, if there is asymmetry it lies in the advantages enjoyed by the insurgents. The cost of training and equipping an American soldier is high; by contrast, life is tragically cheap among the young men of Baghdad and Falluja. Even if the insurgents lose 10 men for every 1 they kill, they are still winning, not least because the American side takes its losses so much harder.

How, then, did the British crush the insurgency of 1920? Three lessons stand out.

The first is that, unlike the American enterprise in Iraq today, they had enough men. In 1920, total British forces in Iraq numbered around 120,000, of whom around 34,000 were trained for actual fighting. During the insurgency, a further 15,000 men arrived as reinforcements.

Coincidentally, that is very close to the number of American military personnel now in Iraq (around 138,000). The trouble is that the population of Iraq was just over three million in 1920, whereas today it is around 24 million. Thus, back then the ratio of Iraqis to foreign forces was, at most, 23 to 1. Today it is around 174 to 1. To arrive at a ratio of 23 to 1 today, about one million American troops would be needed.

The United States also faces two other problems that the United Kingdom did not 85 years ago. The British were able to be ruthless: they used air raids and punitive expeditions to inflict harsh collective punishments on villages that supported the insurgents. The United States has not been above brutal methods on occasion in Iraq, yet humiliation and torture of prisoners have not yielded any significant benefits compared with what it has cost the country's reputation.

The Americans' other problem has to do with timing and expectations. Secretary of Defense Donald Rumsfeld has said that American forces should aim to work to a "10-30-30" timetable: 10 days should suffice to topple a rogue regime, 30 days to establish order in its wake, and 30 more days to prepare for the next military undertaking. I am all in favor of a 10-30-30 timetable—provided the measurement is years, not days. For it may well take around 10 years to establish order in Iraq, 30 more to establish the rule of law, and quite possibly another 30 to create a stable democracy.

Those American officers who say that it could take years to succeed in Iraq are therefore right. But the Bush administration has just three and a half years left. Is it credible that American troops will still be in Iraq for even another four years after that?

The insurgents don't think so. They know that American democracy puts time on their side. Once again, the contrast with the British experience is instructive. Although Iraq was formally granted its independence in 1932, there was still some form of British presence in the country until the late 1950's.

So, if we acknowledge that the United States simply does not have the luxury of time that the British enjoyed and cannot be similarly ruthless, can it at least increase the manpower at its disposal in Iraq?

The official answer from Washington is that Iraqi security forces will soon be ready to play an effective role in policing. Few who have seen those forces on the ground find this strategy realistic. Some fear that the training that Iraqi soldiers are receiving may prove useful only when they fight one another in an Iraqi civil war.

What, then, of America's own resources? Almost no one (least of all the Pentagon) wants to go back to the draft. So could today's all-volunteer force somehow be expanded to double (at least) the troops available? That too seems unlikely. Indeed, the current system is already showing alarming signs of stress and strain as more and more is asked of the "weekend warriors" of the reserves and National Guard, who account for roughly two-fifths of the force in Iraq. In December, the Army National Guard acknowledged that it had fallen 30 percent below its recruiting goals in the preceding two months. Many members of the Individual Ready Reserve have been contesting the Army's right to call them up.

How did the British address the manpower problem in 1920? By bringing in soldiers from India who accounted for more than 87 percent of troops in the counter-insurgency campaign. Perhaps, then, the greatest problem faced by the Anglophone empire of our own time is very simple: the United Kingdom had the Indian Army; the United States does not. Indeed, by a rich irony, the only significant auxiliary forces available to the Pentagon today are none other than ... the British Army. But those troops are far too few to be analogous to the Sikhs, Mahrattas and Baluchis who fought so effectively in 1920.

No one should wish for an overhasty American withdrawal from Iraq. It would be the prelude to a bloodbath of ethnic cleansing and sectarian violence, with inevitable spillovers into and interventions from neighboring countries. Rather, it is time to acknowledge just how thinly stretched American forces in Iraq are and to address the problem: whether by finding new allies (send Condoleezza Rice to New Delhi?); radically expanding the accelerated citizenship program for immigrants who join the army; or lowering the (historically high) educational requirements demanded by military recruiters.

YES, as that anonymous officer said, the Bush administration's policy in Iraq could indeed still fail. But too few American liberals seem to grasp how high the price will be if it does. That is a point, unfortunately, that also eludes most of this country's allies. Does it also elude the secretary of defense? If "10-30-30" are the numbers that concern him, I begin to fear that it does. The numbers that matter right now are 174 to 1. That is not only the ratio of Iraqis to American troops. It is starting to look alarmingly like the odds against American success.

Before 1914 it was widely believed that a major European war would have drastic consequences for financial markets. To the editors of The Economist magazine, this seemed ?obvious?:

... To begin with, [war] must necessitate Government borrowings on a large scale, and these heavy demands upon the supplies of floating capital must tend to raise the rate of discount. Nor is it only our own requirements that will have to be provided for. ... From other quarters demands are likely to be pressed upon us. There is a very general conviction that if war is entered upon ? Other Powers ? will almost inevitably be, in some way or other, drawn into the contest. The desire, therefore, in all European financial centres, will be to gather strength, so as to be prepared for contingencies. Thus the continental national banks will all be anxious to fortify their position, and as they can always draw gold from hence by unloading here the English bills they habitually hold, the probability is that gold will be taken. And the desire on the part of the continental banks to be strong will, of course, be greatly intensified by the precarious condition of the Berlin and Paris bourses. At both of these centres it would take little to produce a stock exchange crisis of the severest type; and ... it is to the Bank of England, as the one place whence gold can promptly be drawn, that recourse must be had. The outbreak of war, therefore, would in all probability send a sharp spasm of stringency through our money market ... [that] would pretty certainly leave rates at a higher level than that at which it found them. ... There is, of course, one [other] way, apart from the depressing influence of dearer money in which war, should it break out will prejudicially affect all classes of securities. It will ... necessitate Government borrowing on a great scale, and the issue of masses of new stock will lessen the pressure of money upon existing channels of investment. ... And as it is to the volume of British ? securities that the additions would be made, these would naturally be specially affected. ... With European Government stocks ... a more or less heavy depreciation, according as war circumscribed or extended its sphere, would have to be looked for. ? For Russia ... war can mean little else than bankruptcy, possibly accompanied by revolution, and those who ... have become her creditors, have a sufficiently black outlook.

The most striking thing about this prescient analysis is that it was published in 1885, nearly thirty years before just such a war – and just such a crisis – broke out. In the intervening years, only a minority of commentators dissented from the view that a war between the European powers would lead to steep falls in bond prices. In 1899 the Warsaw financier Ivan Bloch estimated that ?the immediate consequence of war would be to send securities all round down from 25 to 50 per cent?. If a battleship belonging to a foreign power were to sail up the Thames, the journalist Norman Angell asserted in his best–seller The Great Illusion, it would be the foreign economy that would suffer, not the British, as investors dumped the aggressor?s bonds. Diplomats used similar arguments during the July Crisis itself. On 22 July 1914, to give just one example, the Russian charg? d?affaires in Berlin warned a German diplomat that German investors would ?pay the price with their own securities with the methods of the Austrian politicians?.

In this paper we review the hypothesis that adherence to the gold standard facilitated the access of peripheral countries to European capital markets in the first era of financial globalization. To test whether the gold standard worked as a credible commitment mechanism – a "good housekeeping seal of approval" – we have assembled the largest possible dataset covering almost the entire foreign borrowing in the London market. Our results suggest that the gold effect identified in previous studies was a statistical illusion generated principally by limited country samples. The market looked behind "the thin film of gold" not only at economic fundamentals but at political determinants of creditworthiness.

The economic integration of Western Europe after the Second World War proceeded by a circuitous route. It began with the creation of a "Community" to regulate the production and pricing of coal and steel in six European states: West Germany, France, Italy, Belgium, the Netherlands and Luxembourg. The Treaty of Rome then created a"Common Market", formally prohibiting barriers on trade between these countries. Trade between them had been growing rapidly before the formation of this European Economic Community; it continued to grow thereafter—as did world trade generally. However, in other respects economic integration proceeded slowly. In agriculture the development of an integrated market was positively hindered by the persistence of national subsidies until a Common Agricultural Policy superseded these. In manufacturing, too, national governments continued to resist pan-European competition by subsidizing politically sensitive sectors or by imposing non-tariff barriers. Such practices were less frequently adopted in the case of services, but only because services were less easily traded across national boundaries even under conditions of perfect free trade. In short, national markets were not being integrated because they were not really being liberalized. The exception to this rule was financial services, one of which—the sale of long-term corporate and public sector bonds to relatively wealthy investors—became integrated in a quite novel way in the course of the 1960s.