Monday, 2 March 2015
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Sep 1 2009 | 12:04pm ET
By Christopher Silvester -- Widely acclaimed by reviewers and commentators, Liaquat Ahamed’s Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World is one of the most compelling and accessible works of financial history to have appeared for several years, and its appearance could hardly have been more timely.
Through the prism of four central bankers – Montagu Norman of the Bank of England, Benjamin Strong of the Federal Reserve Bank of New York, Hjalmar Schacht of the Reichsbank, and Emile Moreau of the Banque de France – Ahamed analyses the policy blunders in response to various financial crises in the 1920s which eventually led to the Great Depression of the 1930s.
Back in June, I sat on the panel of judges that gave Ahamed’s book the prize for Financial History of the Year at the Spear’s Book Awards. At the end of the summer, I asked him about the journey that led him to produce his impressive study and what he thought about our contemporary situation.
Of Indian ethnic origin, Ahamed is a fourth-generation Kenyan on his mother’s side. ‘My grandfather was born in Zanzibar. They came from India at the end of the 19th century and they prospered during 60 or 70 years of British rule. My father was a businessman. He actually ran a department store in Nairobi, which at one point in the 1950s was quite famous. Kenya was just a wonderful place when I was growing up.’
Ahamed went to boarding school in England (Rugby), then to Cambridge, and after that to graduate school at Harvard. While his parents remained in Kenya, he became a citizen of the international financial world.
He read economics at Cambridge, where the faculty was split down the middle between one group who were quasi-Marxists and another group of conventional economists. Among the quasi-Marxist group was Ahamed’s director of studies, John (now Lord) Eatwell, who was an adviser to Neil Kinnock. ‘It was very stimulating to be an undergraduate in that environment and I certainly owe a debt to John Eatwell for introducing me to Keynes. I’ve retained the fascination with John Maynard Keynes ever since.’
Harvard was much more mainstream. ‘Everyone there wanted to get their thesis done and then get a job as an assistant professor. I survived four years there, did not finish my PhD, and went to the World Bank.’ There he worked as a development economist, assigned to Bangladesh, but again he realised that it wasn’t what he wanted to do and instead gradually moved into finance, managing bond portfolios from the late 1980s to 2005.
‘We had some investments that got badly caught in the Asian crisis of ’97-’98 and I started reading a lot more economic history at that time,’ he recalls. ‘I stumbled across these characters from the 1920s and a light bulb went on in my head and I said, Wouldn’t it be fun to write a book built around these characters? Then in 2004 I saw a window of opportunity.’ He found an agent and wrote his book proposal that summer.
‘Obviously, I did not realise that the western financial system would collapse, but I did realise that financial crises were becoming more and more frequent,’ he says. ‘I got to the topic because of a financial crisis, began to realise that these crises were part of the landscape of modern capitalism, and thought there was an opportunity to write about the mother of all crises, and that there would be interest in that. But in no way did I predict that three months before my book came out Lehman Brothers would collapse and most of the world’s financial system would be put in jeopardy.’
With regard to the current crisis, Ahamed identifies three elements to what our central bankers and the people in charge have done that has basically prevented another Great Depression. ‘The first was bailing out banks, and there’s no question in my mind that the Fed injecting all that massive amount of liquidity, combined with the TARP programme in the US which injected equity into banks and the British scheme to provide a guarantee insurance to banks, saved the banking system.
Element number two was to cut interest rates to zero, and element number three was to allow budget deficits to expand. Budget deficits expanded by about five per cent of GDP across the world, so we’re basically going to have a fiscal stimulus of $5 trillion – two-and-a-half trillion dollars for two years in a global economy of about $50 trillion.
The best estimate of the stimulus package up to now is that in the last quarter it probably added, on an annualised basis, about 3 per cent to GDP, and in the last quarter we were minus one, so without it we’d have been minus four. The stimulus package will not restore the economy to health. It has prevented it from spiralling downwards. It’s about stabilising the patient, not getting the patient up and walking around.’
As far as government deficits are concerned, he is sanguine. ‘There are two problems with the US deficit. At some point it becomes counter-productive, i.e. government spending and borrowing causes what is called “crowding out”, which in effect subtracts from private investment. But the first symptom of that will be a rise in interest rates. With ten-year notes in the US at 3.4 per cent, that is not going to crowd out private investment.
'There’s a second problem, which is that the more you add to government debt, the more you have to raise taxes in the long run to service that debt, so that the government doesn’t go bankrupt. I’ve always thought that taxes in the US are too low for the amount we demand that our government does. Either we’ve got to stop being the world’s policeman or whatever, or we’ve got to pay for it. But that is a problem for five years from now. It is not a problem for this year, or next year, or probably even the year after.’
Politicians have been quick to latch on to scapegoats such as short-sellers and tax havens. ‘Short-sellers are not the problem, nor are tax havens the problem,’ explains Ahamed. ‘Citibank being allowed to keep $2 trillion off its balance sheet when it has another $2 trillion on its balance sheet and doesn’t have enough capital, is a problem. That seems so absurd. It’s like allowing them to have a second set of books.
'It just makes no sense. Interestingly, most of the $2 trillion that’s off balance sheet isn’t in the Cayman Islands. Most of it is in special-purpose vehicles set up in Luxemourg and Ireland – you know, perfectly legitimate financial centres.’ In other words, it is nothing to do with the OECD’s black list or grey list, whatever Sarkozy or Brown might suggest.
Ahamed has just come back from a writers’ conference in Sun Valley, Idaho, the ski resort in the Rockies, where there were a couple of other speakers talking about the current crisis. ‘What was fascinating was that even in this community of rich people you get a rise if you go after Goldman Sachs. The anti-Goldman Sachs sentiment runs right through society, including wealthy people.’
But that does not necessarily mean that a fundamental problem of the current crisis has been the inherent greed of Wall Street. ‘There are people writing that the problem was greed,’ says Ahamed, ‘but I’ve taken the view that the problem is the people who set the rules, not the people who are the players.’
If there is a hero in Ahamed’s book it is John Maynard Keynes, who provides an ironic counterpoint to the writhings of his four central bankers. Indeed, Ahamed admits to being a Keynesian himself. Until recently, Keynes was unfashionable, but that was because the Keynes everyone thought they knew was not the real Keynes but a projection of right-wing paranoia.
‘People misunderstood Keynes,’ says Ahamed. ‘Keynes was trying to save capitalism, not destroy it. He’s basically saying that at times the whole thing goes slightly haywire and you need government to step in when it does go haywire. And we’ve just seen that in spades. I cannot imagine anything crazier than to have allowed a sequence of banks to go under within a week. Keynesianism means fiscal expansion and understanding the incredible fragility of a capitalist system that is reliant on a complex financial mechanism.’
I ask Ahamed whether he is keeping a foot in the financial-management camp. ‘It’s probably more like a toe,’ he says with a chuckle, adding that he is now committed to being a writer and commentator. ‘I definitely enjoy writing and I’d like to write another book. It’ll probably be about economic history. But it’s not going to be about the current crisis.’ He is content to leave that story to others.
This article first appeared in the Fall 2009 edition of Spear’s Wealth Management
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