This book appears at an appropriate juncture when credit and equity markets are in the intensive care unit. According to the author, Harvard financial historian, Niall Ferguson, hostility to financiers at times of crisis is a recurrent theme of the history of human civilisation. This is because debtors have always outnumbered creditors.
The author traces the evolution of credit and debt from the time of Mesopotamia (“the laws of Hammurabi prescribed debt forgiveness every three years”) to the growing power of moneylenders of Florence in the fourteenth century (“The Medici were the first bankers to make the transition from financial success to hereditary status and power— in finance small is seldom beautiful”).
|The Ascent of Money|
Pages: 432 Price: Rs 595
The birth of the bond market as a means of financing wars during the Italian Renaissance was one of the revolutions in finance. It also set the price of money and credit, and judged the creditability of fiscal and monetary policy. It was this bond market that made the Rothschild family rich. The large quantity of gold bought in anticipation of a long Battle of Waterloo would have declined in value but for the massive bet on British Government bonds that the Rothschilds made. And the bets that the Rothschilds did not make also helped them. For instance, the refusal to bet on Confederate paper in the American Civil War, which would have otherwise led to permanent loss of capital in the high inflation and defaults that followed (the “euthanasia of the rentier,” as Keynes later observed).
Next, Ferguson dwells on financial bubbles and their effect. Stock market bubbles rest on the troika of asymmetric information between the management and outsiders, free capital flows and easy credit conditions caused by the misadventures of central bankers fixated on inflation rates in the goods and services markets. Of the bubbles blown in history, two stand out: Mississippi Bubble, which demolished the French economy and was one of the causes of the French Revolution; and the South Sea Bubble—the South Sea company never gained control of printing notes like John Law did in France. As the author notes: “Crooked companies and irrational markets go hand-in-hand—for it is when the bulls are stampeding most enthusiastically that people are most likely to get taken for the proverbial ride.”
The pricing of risk due to theoretical insights into probability and statistical distributions and inference led to the development of the insurance market—“where the risks and uncertainties of daily life meet the risks and uncertainties of finance”. And the dismantling of the Western welfare state gave it the needed impetus.
The growth of the derivatives markets and the increased use of leverage in real estate resonate in the current credit crisis in “Planet Finance”. These crises stem from a) the fact that the future lies in the realm of uncertainty as opposed to calculable risk, b) human behaviour swings from euphoria to despondency along with the multitude of biases that make up the field of behavioural finance and c) the Darwinian quality of finance and the accompanying destruction. As the author notes: “the law of the survival of the fittest applies. Institutions with a ‘selfish gene’ that is good at self-replication and selfperpetuation will tend to proliferate and endure.”
I had read The Cash
Nexus by the same author and found some good insights. This book is in the same tradition.Bookmark
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The author is the Director of a portfolio management firm. These are his personal views.