Face to face
Niall Feguson, professor of financial history at Harvard University and Harvard Business School, is not new to controversies. He had to fend off serious criticism in 2003 as an apologist for European imperialism after Empire was published. His latest book, on the history of money — mostly dealing with the evolution of financial markets — is another important work marred by two shortcomings: its failure to explain the current crisis and its Europe-centric view of the world. In conversation with Amitava Sanyal, Ferguson addresses these charges.
You finished writing the book in the middle of 2008, when the sub-prime crisis was just deepening. Then the Crash happened. Do you think you finished it two months too soon?
Well, if I’d written a history of the last four years, then yes. But since the book attempts to cover financial history of 4,000 years, missing out on a couple of months wouldn’t be the end of the world. When I come to publish a paperback, I’ll surely look to take the story up to the present. But I don’t feel that the last couple of months have invalidated the analysis. The Darwinian theory of finance is looking pretty credible at the moment.
On the Darwinian theory: we’ve seen the evolution of some large investment banks such as Morgan Stanley and Goldman Sachs — that started out as banks, became investment banks, thus increasing their leverage — who have turned back to being banks again. Will this lead to a credit crunch?
That’s absolutely right. This is no ordinary recession. This is the first set of deleveraging — not just for households, but banks in the West to radically shrink their balance sheets. The ratio of assets to capital had become, in some cases, crazily high. Some European banks were leveraged 90:1. It’s amazing that they didn’t blow up long ago. So I think this is really a very profound shift. We’ve lived through the age of leverage — from the 80s to 2008. And the end of it means a very, very different financial system, one in which banks are far less profitable enterprises and rather less risky too.
One difference between 1929 and 2008 is that we’re still trying to find what caused 1929, whereas we seem to know the reasons behind this one. But no one knows what to do now...
One thing economic historians are good at is devising ever more elaborate explanations after the facts. You can be sure that within the next 50 years, a spate of theories will be propounded probably saying that the financial crisis of 2007-08 had nothing to do with sub-prime mortgages or central bank policies.
You have looked at some changes, especially the emergence of the bond market in 16th-century Venice, through the necessities of funding wars. Didn’t some of it also have to do with the colonial requirements of fighting wars in Asia?
It’s certainly true that Britain’s debt mountain in the 18th century accumulated in the imperial context. The big debt mountains of the 20th century were however caused by the World Wars, which were also, in their own ways, imperial wars. Part of this book is about the relation between finance and empire. The last time around it was enforced by the Royal Navy; this time it’s being enforced by rather different agencies like the International Monetary Fund.
You look at the good side of microfinance through Bolivia and Bangladesh. India’s experience has been a bit different. While it has helped to empower people to an extent, it continues to drive several thousand debt-ridden farmers to commit suicide every year...
There are two kinds of microfinance: philanthropic and for-profit. And most people are embarrassed to talk about the effective interest rate the latter charge to cover the high transaction costs on relatively small sums. I don't have a starry-eyed, Bill Gates-like belief that microfinance will solve the problems of the world. The experiments we are carrying out reveal the limits. There are very few magic bullets for poverty.