How the ascent of money led to crisis
TEXT OF INTERVIEW
Kai Ryssdal:
Money. We use it every day.
But how many of us actually think about it.
It’s used for payment for goods or services.
It’s the source of joy and angst.
Has been since ancient times.
And the pursuit of it’s gotten us into the fix we’re in.
Economic historian Niall Ferguson explores that idea, and many more, in his new book “The Ascent of Money.”
Good to have you with us.
Niall Ferguson: It’s nice to be here Kai.
Ryssdal: There is an abstraction here that sort of runs through this book. As money evolves from minted metal, to paper to instruments of higher finance, it eventually turns into nothingness right? I mean you make the point that once you get to a certain level in finance, it’s just numbers in a computer somehow.
Ferguson: Right, I mean most of what we call money today, technically, is not bank notes, much less coins. You have a little piece of plastic I’m guessing, Kai, that tells you you can put it in a hole in the wall and take out some cash. And you sort of assume that all the money you have in your account is there — but actually it’s not there. Because the whole point of what banks do is that they take deposits and they make loans. In the big transactions that go on in financial markets where people buy and sell derivatives, or whatever it is, in fact the money is nothing more than an entry on a screen. In that sense what we call money is an extraordinarily intangible thing. And it all depends on trust. We all have to believe the money is real. The moment that trust is gone, the moment we lose faith in the monetary system, the edifice comes tumbling down.
Ryssdal: Well, on that point, you make the observation that there is no small amount of Darwinism in the history of money. How did this idea of the survival of the fittest in the financial world get us to the crisis we’re in today?
Ferguson:I think there was tremendous competition in financial markets. You had banks incentivized to borrow ever more money in pursuit of the highest returns on the shareholder equity that they could possibly get. Which meant you ended up with balance sheets 40 times the size of the capital of the bank. This was attractive to bank executives, particularly at banks like Lehman Brothers, because they were compensated to the large extent by, you guessed it, stock of their own bank. So they naturally wanted to see the share price kept up. And the regulators took their eye off the balance sheets. They were, they were worrying about the wrong things it seems to me.
Ryssdal: Well one of the themes of this book is that the ascent of money, really is sort of a foregone conclusion. That despite ups and downs over time, money and it’s importance and significance and the benefits we all get from it will increase over time. I’m wondering though if maybe it got away from us this time?
Ferguson: When I talk about the ascent of money, I would compare it to a rather jagged, mountain horizon. You’re kind of rising up from the foothills but periodically falling off a cliff. You never go all the way back down to the foothills though, no matter how bad the crisis. During a crisis, it’s very easy to overreact. Yes this crisis is serious, it may well be the worst recession since the early 80s, maybe the early ’70s, maybe even the 1930s. But it’s not the end of the world. It’s has massive financial disruption, it has all kinds of negative consequences, but the fatal thing is to turn around and say, ah ha, this is the fault of banks. Therefore we should put all of them under state control and abandon the free market.
Ryssdal: Well, now, but wait a minute. Because didn’t money, that is to say financial institutions in this case, aren’t they, I guess to coin a phrase here, the root of all evil in this circumstance?
Ferguson: This crisis has very deep roots. I talk in terms of age of leverage, an age of debt that really got under way in the 1980s as interest rates began to come down after the big inflation of the 1970s. It seemed more and more straightforward, and more and more attractive, to borrow money whether you were a bank or a household. But it’s reached a kind of threshold, we’ve reached a point where we really couldn’t credibly borrow anymore. And I say we quite deliberately. It’s all very well pointing fingers of blame at, oh I don’t know, Alan Greenspan or Hank Paulson or the Wall Street bankers, but in some measure we were all caught up in this. I mean, who among us is without sin?
Ryssdal: Niall Ferguson professor of history at Harvard University, also an author, most recently, of a book called “The Ascent of Money.” Thanks a lot for your time.
Ferguson: Thank you Kai.
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