E-mail a friendNiall Ferguson
airdate December 10, 2008
Named by Time as one of the world's 100 most influential people, British historian Niall Ferguson is a professor at Harvard, a senior research fellow at Oxford and a senior fellow of Stanford's Hoover Institution. Commenting on contemporary politics and economics, he's also a contributing editor for the Financial Times and a regular contributor to TV and radio on both sides of the Atlantic. The best-selling author shows how finance is the foundation of human progress in his latest book, The Ascent of Money.
Historian assesses the appointments made by President-elect Obama to his economic team. (3:06)
Full interview. (12:43)
Niall Ferguson
Tavis: Niall Ferguson is a professor of history at Harvard and a senior fellow at Stanford's Hoover Institution. He's also a bestselling author whose latest book is called "The Ascent of Money: A Financial History of the World." He joins us tonight from New York. Professor Ferguson, nice to have you on the program.
Niall Ferguson: Nice to be on the show, Tavis.
Tavis: Let me start by asking, given the economic crisis that we are in, we'll go right to it, how might we have handled this crisis different, might we be in this crisis if we understood money a little better?
Ferguson: I think if we had known a little bit more financial history - by "we," of course, I mean the people running the financial system and particularly the people running the major banks - we might very well have avoided it. You have to ask yourself what were the prime drivers of the crisis. One of them was clearly irresponsible lending in the mortgage market, but the other one was the way in which the banks were managed.
We've got excess leverage, excess debt, not only in the household sector as people's mortgages ballooned, but also in the banking sector as banks borrowed more and more money in order to (unintelligible) their returns. I don't think it took too much financial historical knowledge to see that this would end in tears, but somehow in 2006 - I remember it very well - people on Wall Street were in denial about the dangers.
Tavis: So maybe, then, your read is a bit generous; a bit charitable. Maybe it's not about a lack of information or a lack of knowledge about money and the history of it and how to make better decisions, but about that old-fashioned notion of greed.
Ferguson: Well, human psychology is the key to understanding financial markets and our ability to swing from irrational exuberance to depression affects practically every aspect of our lives, so it's not too surprising that it affects financial markets, too. Unfortunately many financial institutions have run on the basis of mathematical models that leave the psychology out of account.
So I would say an ignorance of psychology, of human behavior, has been almost as important as an ignorance of financial history. It's the history, though, that I'd come back to. Most people operating on Wall Street in 2006 had careers that stretched back not much further than the early 1980s. They really had no first-hand experience of a crisis as big as this one, and so they found it very hard to imagine.
In 2006 I went around saying, "Watch out for a liquidity crisis. If you're a highly leveraged institution it's going to hit you very hard indeed," and people laughed and said, "Forget it, come back next year and show us the movie 'Mary Poppins.'" I had to remind them that in the movie 'Mary Poppins' there is actually a bank run. (Laughter) A bank fails, and therefore it was well worth watching that movie. But I don't think many of them remembered that scene.
Tavis: I guess the follow-up question, Niall, is whether or not one has to have experience of a financial meltdown to understand how to avoid it. That's not a good strategy, it seems to me.
Ferguson: It's a terrible strategy. Fortunately, one of the key players in our system, Ben Bernanke, the chairman of the Federal Reserve, does have a great deal of knowledge of financial history. Most of his academic career was spent studying the Great Depression. And I think he understands better than most people the enormous dangers that we run if we allow too many banks to fail.
One of the lessons of the Great Depression was that if you have massive banking failures, your money supply contracts drastically and you end up with the economy shrinking by as much as 30 percent, unemployment up in the range of 25 percent.
Bernanke's been working extremely hard for more than a year now to prevent that kind of contraction from happening again, and all credit to him. But it may not be enough to bring us back to the kind of growth that we're used to. Tavis, my sense is that although there'll be an extremely painful recession next year, we'll avoid a Great Depression. But I don't think we're going to be bouncing back any time soon to the sort of growth that we got used to over the past couple of decades.
We're going to get used to a much more slowly growing economy, and we're going to get used to having to save some of the money that we earn rather than just relying on borrowing to keep our consumption going.
Tavis: I want to come back to the financial history of the world in just a moment, and the parallels that can be drawn and consequently the lessons that can be learned when we understand the financial history of the world a little bit better for these challenging times that we live in.
Before I come back to that, though, Niall, let me swerve for just a moment, if I can, and ask you to assess for me Mr. Obama's economic team. We know pretty much who the players are at this point. Assess for me their understanding of the history of finance and how we ought to be getting out of the crisis. Assess for me his team.
Ferguson: Well, I'm extremely impressed by his picks, not only of Treasury secretary in Timothy Geithner, but perhaps more importantly of his White House economics chief, Lawrence Summers. Larry Summers is really one of the most powerful minds in economics today. His commentaries on this crisis in the "Financial Times" and elsewhere have been second to none, and I only wish that this team could get started working today rather than our having to wait until late January, because this crisis is moving extremely fast.
And I must say I've had doubts for some time as to whether Treasury Secretary Hank Paulson was really equal to the task. Experience on Wall Street is not really the same as having a grasp of the kind of macroeconomic problems we currently face, and I do feel as if the Treasury secretary has been improvising, has been making it up as he has gone along. And so the sooner that Summers and Geithner are in office and at work, the better.
Tavis: Everyone says that Larry Summers is brilliant and indeed he is - he knows what he's talking about with regard to so many money matters - and yet Larry Summers is one of a group of people back in the day that were part of that deregulation crowd. That's not good news to me.
Ferguson: Well, I think you've got to be careful, Tavis, not to create a false dichotomy between regulation and deregulation. Regulations were in many ways burdensome, if you think back to the 1970s, when many banking systems were under all kinds of state control, when capital controls existed in many countries you couldn't take money out of the country, when there were all kinds of restrictions on what banks could and couldn't do.
The 1970s weren't a great time. In fact, we ended up with double-digit inflation in that period. And the deregulation that began in the late '70s and early '80s and continued through the 1990s brought all kinds of benefits for households not only in the United States but around the world. We've lived through a period of extraordinarily rapid global growth and financial liberalization has been part of that story.
I think we need to look more closely at what went wrong and realize the regulations that existed but weren't enforced. Let me give you just one example. Bank capital adequacy has been a crucial issue here. Banks have been allowed to leverage their balance sheets in ways that were frankly crazily irresponsible, despite the existence of rules, the so-called Basel Accords, that should have limited that process.
So I think we need to realize that the regulations were there but they were being ignored. The SEC has some of the responsibility to bear here, and I think we also need to ask questions about the way in which the Fed regarded asset bubbles in the Greenspan years.
So I would say we don't need to turn the clock back to the heavily regulated markets of the 1970s. Rather, we need to learn from the mistakes that were made quite recently and make sure that the regulations that already existed were properly enforced in the future.
Tavis: Here's what bothers me, though, and this is not about casting aspersions specifically on Larry Summers. But when you're talking Larry Summers, with all due respect, or Robert Rubin or many of the other people who are now on Obama's team who he recruited from the Clinton era, this boom that you were talking about, the same period during which regulations were not enforced, those that were on the book, Summers, Rubin and company were at the helm then.
He was Treasury secretary. Why weren't those regulations that you're complaining about now that were not enforced, enforced then? So why are we praising Larry Summers now?
Ferguson: Well, most of the problems that blew up, blew up long after the Clinton administration had left office. It was in 2004, I think I'm right in saying, that the rules were relaxed on bank leverage - the investment banks' leverage by the SEC. The extraordinary excesses of Fannie Mae and Freddie Mac were sanctioned by Congress during the Bush administration.
Now of course you can trace the roots of some of these mistakes back to the 1990s, but I think it would be quite hard to see this as the culmination of problems from that era, and I think it would be very hard indeed to lay blame on Larry Summers, whose record in managing financial crises 10 years ago - remember, in '97 and '98 was a time of financial crisis - was extremely impressive.
No, my sense is that many of the excesses that produced this crisis can be traced back to 2000, 2001. I wouldn't blame it all on the Bush administration because Democrats in Congress were equally negligent of the way that Fannie Mae was being managed, but I do think this is something of rather more recent origin than maybe you're implying.
Tavis: Okay, we'll move on. The auto industry, of course, in the news today. Talk to me about the auto industry and your take on how we get out of the mess that we're in.
Ferguson: Well, as a British citizen I have bitter memories of the efforts to keep the British automobile industry alive in the 1970s, which cost hundreds of millions, if not billions, of pounds of taxpayers' money and achieved practically nothing. You have to ask yourself what kind of a future the Big Three can really have, given that they've consistently failed to match their foreign competitors in terms of the quality of the product and the underlying labor costs of their organizations.
If they couldn't get this right in the good times, I don't really see how they're going to get it right now when they're on a drip feed of government support. What we're doing here is a kind of hospice operation. We're trying to make the death of one or possibly two of these firms as painless as possible. We don't want them to collapse tomorrow; we don't want their workers to be thrown out of work immediately.
But long-term, it's very hard for me to imagine there being a Big Three. Indeed, I would say that by this time next year we may well be talking about the Big One in Detroit, because there's clearly massive overcapacity there, and no amount of taxpayers' money is going to change that.
Tavis, the real key issue here is the financial system, and we mustn't let ourselves get distracted by other sectors of the economy. Their problems are not as systemically important as the problems of the banking system, and those problems haven't yet been solved.
What worries me is that Detroit is distracting our attention from the ongoing crisis in the banking system, and until we fix that, really, there is no way out of this crisis.
Tavis: And ultimately the way to fix that crisis is?
Ferguson: Well, it seems to me that we've got to recognize that the losses on the banks' balance sheets have not been fully acknowledged. The write-downs are significantly short of the likely losses that are out there. And so it's in my mind not clear that the banks have yet come clean.
There has already been a huge amount of money committed to them as part of the various bailouts that went through Congress, but I suspect that more is going to be needed, and I wouldn't be surprised if we saw in the course of the next six months far more radical steps being taken with respect to recapitalizing the banks, dealing with the toxic assets on their books, and possibly even radically altering the shape of the mortgage market.
What's been done so far looks impressive on paper if you add up all the loans, investments, and guarantees that the government has put up - we're getting into the realm of $7 trillion, even $8 trillion. And yet this may not be enough to solve a fundamental structural problem in the American financial system.
Incidentally, similar problems exist on the other side of the Atlantic. This isn't just an American phenomenon. It's a European phenomenon, too. And I think we could end up seeing a significant increase in the realm of government involvement in banking and in the mortgage market before next year is out.
Tavis: Here's the quick exit question, since the book is really about a financial history of the world. Back to that question I mentioned a moment ago, or suggested I was going to get to, about parallels from then to now. What is, historically speaking, the lesson you think we most ought to learn that would help us, given the crisis that we are in right now, domestically and globally?
Ferguson: I think the great lesson is that you have to do everything in your power to avoid a rerun of the 1930s, when a banking crisis in the United States and breakdown of global trade plunged the world into the worst economic crisis of all time.
Now it's not clear that we have necessarily avoided a Great Depression yet - the dangers are still there for a breakdown in the global economy as the various countries adopt their own measures to try and save their own skins. I think we need to see much more global coordination in the year ahead, particularly between the United States and China, to make sure that we avoid the nightmare of Great Depression 2.0.
At best, though, we're still going to have to put up with a big recession, and I think the most that we can look forward to next year is something along those lines, followed by four or five years of much slower growth than we've been used to.
Tavis: His name, Niall Ferguson. The book, "The Ascent of Money: A Financial History of the World." Professor Ferguson, nice to have you on. Thanks for your insight; I appreciate the time to talk to you.
Ferguson: Thanks very much, Tavis.
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