It was November 2006 - too early for anyone to be worrying about a recession or a stock market decline or the cascade of foreclosures that were to come. But here and there, some people were holding up yellow lights, warning of financial changes, of impending danger.
One was British historian Niall Ferguson, a professor of history at Harvard University whose books examine the role of money in major historical events. At a conference in the Bahamas that month, he warned “self-satisfied bankers” and investors that “it would not take much to cause a drastic decline in the liquidity that was then cascading through the global financial system and that we should be cautious about expecting the good times to last indefinitely.”
His audience pooh-poohed him. Ferguson, who just published “The Ascent of Money,” remembers that one investor remarked that they should not bother with a speaker at their next conference and instead screen “Mary Poppins.”
As we know today, “Mary Poppins” - with its tale of money woes and bank runs - might not have been a bad movie to show.
Easy credit helped make our lives easy once; now easy credit is ending our easy lives. Money has leached out of our retirement accounts, people have lost their homes to foreclosure, investment banks and other financial giants are underwater, solid companies are looking to retrench, governments are having to infuse capital to loosen the credit markets, and the entire global money-and-market system is under siege.
What happened? How did we get here in this day and age? What are we to do?
Several fine books by economists and analysts are just out or about to be published to help explain our economic condition today - and also to outline the steps needed, both personally and institutionally, to get us out of our folly-induced economic straits. Much has been written about how we got here. These books detail the issues as well as put them in historical context and suggest solutions.
They acknowledge the problem is bad but also suggest this is not the time to panic.
The morning after Barack Obama’s historic presidential victory, John Talbott, a former investment banker and author of the new book “Obamanomics: How Bottom-Up Economic Prosperity Will Replace Trickle-Down Economics” (Seven Stories Press), prescribed the president-elect’s primary work in the first months of office.
“I think he is walking into the worst presidential handoff in history, in terms of the economy and world opinion of the U.S.,” Talbott said. “So you can’t talk about big-picture ideas about improving education and the environment until you address this economic problem. He’s got to focus 100 percent on the financial crisis.”
Talbott, a former vice president of Goldman Sachs who predicted the housing crisis in his 2003 book, “The Coming Crash in the Housing Market,” lays the blame for what he calls “the phony economic growth” of the Bush years on a lack of regulation of lending and other practices. Trickle-down economics of the Bush years did not work, he said. The solution, he writes in “Obamanomics,” is to reform lobbying and campaign contributions so that government can regulate major industries such as banking, insurance, airlines and pharmaceuticals as it should.
These industries were not being regulated, he argues, because they have been the biggest contributors to Congress. Also, he said, the American people had lost their involvement with democracy because they were not demanding better from Congress.
“There’s huge hope, I think, to turn the economy around,” Talbott said. “To say that people on Wall Street are greedy - that’s like saying the sun also rises. That’s why people go to Wall Street. ... But step one is to understand that in the very long-lived industries, an unregulated free market doesn’t do a good job.
“That’s Obama’s challenge. It wasn’t only the Republicans that were bought off. It was also the Democrats. Obama has to address campaign contributions and lobbying. Billions of dollars are being spent there. ... But Obama cannot do any of this by himself. He has to face all of the senators and congressmen. He will lose the battle without the involvement of the American people.”
Two books that almost lyrically - well, at the very least they’re fascinating and readable - explain our current crisis are Ferguson’s “The Ascent of Money” (Penguin Press) and Nobel Prize-winning economist Paul Krugman’s forthcoming revision of “The Return of Depression Economics” (W.W. Norton).
Both give us the big picture of how money works and the booms and busts that have cycled through the centuries in various national economies. They detail how central bank or federal action can stimulate or mute an economy; how capital infusions by government can blunt the recessionary fallout from a cash drought; how we can help pull ourselves out of a recession; how single, powerful men (George Soros, for instance) and huge hedge funds can cause massive currency and stock market upheavals - changes that leave you feeling as if you’re riding a roller coaster being run by someone else who has pocketed the key to the machine.
For a closer examination of the crisis, there’s “The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It” (Princeton University Press) by Yale University economist Robert J. Shiller, the best-selling author of “Irrational Exuberance.”
In his new book, Shiller focuses more tightly on the stock market bubble of the 1990s and the housing market bubble of the last seven years, which led lenders to loosen requirements for loans and resell these questionable loans in the subprime market. He shows how the bubble, when overheated housing prices cooled and asset values fell, burst and led directly to the subprime mortgage crisis that torpedoed the credit markets and with them stock markets worldwide.
Shiller also discusses the “contagion of ideas,” the “zeitgeist” and the emotions that affect economies and financial thought and markets. The very people charged with regulating such areas as lending practices were caught up in the euphoria of the bubbles and were unable to believe “there could be a housing crisis of the proportions we are seeing today,” he writes.
Two other books - “The Great Inflation and Its Aftermath: The Past and Future of American Affluence” (Random House) by columnist Robert J. Samuelson, and the coming “The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy” (Vintage) by fund manager George Cooper - explore the role of inflation and fiscal policies.
Cooper argues that the economy cannot be left to find its way in a market cycle. He writes that “the U.S. Federal Reserve has inadvertently slipped into a mode of monetary policy that is generating a series of ever-larger credit cycles and which, if continued, will significantly impair the prospects of what is still the world’s most important and vibrant economy.” Instability requires “central banks to manage the credit creation process,” he argues.
All of these authors agree on a central point: Economies, with their bubbles and busts, their reliance on human nature and emotions, cannot be left alone to work themselves out under capitalism’s free-market philosophy.
The argument is hammered home in “The Ascent of Money” as well as “The Return of Depression Economics.”
Krugman, who gives example after example of government help during financial crises (Roosevelt in 1933; Sweden in the early 1990s; Japan in 1998), writes that government may need to put more capital into the banking system and make sure the money reaches the proper places to thaw credit. The effort should be global, with other countries involved, because developing countries also need to be rescued. Non-bank institutions (which helped create the current crisis) should be subject to regulation. Some hard thinking will be needed about how to deal with financial globalization.
In “The Ascent of Money” Ferguson details how, since ancient Babylon, “money is the root of most progress” and that “the ascent of money has been essential to the ascent of man.”
He discusses the origins of the world’s first stock market in Amsterdam and explains why a market bubble set in motion by a convicted Scots murderer (who went on to head the treasury in France) later gave rise to the French Revolution. The bond market played starring roles in the Seven Years’ War and the American Civil War, he notes.
“Sooner or later every bubble bursts,” he writes, explaining how historical bubbles have important lessons for us today. “Sooner or later the bearish sellers outnumber the bullish buyers. Sooner or later greed turns to fear.”
To be sure, the current economic crisis is bad, but it’s not a repeat of the Depression and “it’s not quite as bad as we’re making it sound,” Ferguson said in an interview.
“We’ve gone back a few years and the illusory wealth we accumulated over the last seven years is gone. It’s not so much a loss as a return to reality,” he said. “The good news is we probably won’t see what we saw in the 1970s - double-digit inflation ... We’re not going to have a very bad recession, but we will have a few years when the economy won’t grow as fast as we are used to.”
What advice do Ferguson, Krugman and the others have for ordinary people and businesses, then?
Be sensible. Live well but within your means. Take on debt judiciously. Save and invest some. If you’re in the market, there’s no point in selling out at the bottom. Businesses should pay down debt, hold down costs, and keep innovating for the future. Government should balance the budget, make sure the bailout money goes where it’s most needed, and be prepared to reform its regulatory and lobbying areas.
“We should not panic, because panic will make it worse,” Ferguson said. “My sense is there’s no need to take extreme measures. No need to take your money out and into gold…. In the end, the U.S. is a better place to weather this than in many other countries.”
Finally, to figure out how to save and invest with some knowledge, here’s a book that spells it out as simply as possible: “Investing for Dummies: A Reference for the Rest of Us” by Eric Tyson (Wiley). It’s an A-to-Z for saving and investing in today’s world.