Time to Apply Financial History Lessons
On my drive in this morning, I heard a quote attributed to Harvard financial historian Niall Ferguson. In essence, he was commenting that current U.S. government efforts to stimulate our economy with enormous amounts of new spending and borrowing was simply passing debt-driven consumption from one set of trouble-makers (us) to a bigger troublemaker (the federal government).
I have to confess I had not heard of Niall Ferguson before this and was frankly surprised to hear such things being attributed to a professor at Harvard, a bastion of left wing academia. (Full disclosure: I am a Cornell grad and hockey fan and therefore a long-time hater of all things Crimson.) So I did some research on this very interesting fellow.
Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession, curable by a simple downward adjustment of interest rates. It is the reason we still have to fear, if not a second Great Depression, then very likely the biggest since the 1930s. We are living through the painful end of an age of leverage which saw total private and public debt in the US rise from about 155 per cent of gross domestic product in the early 1980s to something like 342 per cent by the middle of this year.
With average household debt rising from about 75 per cent of annual disposable income in 1990 to very nearly 130 per cent on the eve of the crisis, a large proportion of American families are submerging under the weight of their accumulated borrowings. British households are in even worse shape.
Then Ferguson has this to say about government economic policies since 2007, and associated with stimulus plan 2009:
Although commentators like to draw parallels with Franklin Roosevelt’s New Deal, in truth the measures taken since the crisis began in August 2007 more closely resemble those taken during the world wars. After 1914, and again after 1939, there was massive government intervention in the financial system. Banks and bond markets were reduced to mere channels for the financing of huge public sector deficits. That is what is happening today, but without the stimulus to manufacturing that the world wars provided. We are having war finance without the war itself.
Yet the effect of these policies is essentially to add a new layer of public debt to the existing debt mountain. Added together, the loans, investments and guarantees made by the Fed and the Treasury in the past year total about $7,800bn, compared with a pre-crisis federal debt of about $10,000bn. The Treasury may have to issue as much as $2,200bn in new debt in the coming year.
I couldn’t have said it better myself.
The second Ferguson article is nothing short of brilliantly fascinating. He wrote “An Imaginary Retrospective of 2009.” It is a pretend historical review of what happened to the U.S. and world economies in 2009, as if written by a financial historian in the future. I loved this imaginary quote from Ferguson’s piece :
“We assumed that we economists had learned how to combat this kind of crisis,” admitted one of President Barack Obama’s “dream team” of economic advisers, shortly after his return to academic life in September 2009. “We thought that if the Fed injected enough liquidity into the financial system, we could avoid deflation. We thought if the government ran a big enough deficit, we could end a recession. It turned out we were wrong. So much for [John Maynard] Keynes. So much for [Milton] Friedman.”
If you are at all interested in a historian’s perspective on current day government fiscal and monetary policy, you need to read Ferguson’s essay.
Finally, I learned that Ferguson was a guest earlier this month on the Colbert Report, pushing his new book “The Ascent of Money.” Most of the interview was a discussion of the question: What is Money? I think you might enjoy it.
I’ve decided to keep tabs on Niall Ferguson’s writings. I may not agree with all that he writes but I’m confident I will learn a lot.