by Niall Ferguson
My attempt to grapple with economics and finance is a recurring theme of this blog (alongside my love/hate relationship with fantasy). This post falls right into that category.
Ferguson’s main argument with The Ascent of Money is that financial innovation leads to an increase in economic activity and, in the long run, individual prosperity, even if there are some bumps along the road. That this argument seems a bit defensive, in the wake of the recent market crash, doesn’t necessarily mean that it’s wrong. Ferguson writes as if he knows he’s fighting an uphill battle: convincing us, the unwashed masses, that banks and hedge funds aren’t responsible for our current predicament. In my opinion, he partially responds to this by dumbing down his explanations, presenting simplified histories, and essentially ignoring examples that don’t fit in neatly with his argument.
For me, this isn’t a problem most of the time. Ferguson’s histories of everything from credit to insurance are enlightening to a layman such as myself. I do have a problem, however, when I finally feel comfortable enough to have questions of my own, questions that Ferguson doesn’t really want to answer. Of course, it’s a book; perhaps it’s unreasonable of me to expect that the author is only presenting information exactly on the level of my understanding. That book would be impractical, and it probably wouldn’t sell a lot of copies. On the other hand, unanswered questions feed into this feeling I get, the feeling that when it comes down to it, financial experts don’t really want us to understand how the system operates. It might make us question the status quo.
But let’s turn from cynicism back to the book itself. I do feel like Ascent helps put into context the new financial techniques that are partially responsible for the most recent financial crisis. To hear Ferguson tell it, finance has always been an arms race between, on the one hand, whatever geniuses have the newest ideas on how to make money, and, on the other, industry regulators. From the invention of bonds to the first stock market to the derivatives of the last couple decades, people who handle money for a living are always looking for new ways to take the money they have and use it to create more money. Whether because these new schemes are initially too complicated to effectively oversee, or because those meant to oversee the schemes have a stake in seeing them succeed, or perhaps because there’s no regulation at all, the latest financial ideas often succeed wildly in the short term, only to do lasting damage to existing markets in the long term.
I’m guessing that’s not the message that Ferguson wants us to get from his book. As I said before, his thesis is that financial institutions, while often willing to use other people’s money for what turn out to be risky endeavors, actually help people by providing financial stability. For example, though the first insurance companies definitely made money, they also provided a needed safety net for widows; a service that the government couldn’t really provide. On this broad point, I agree: developments in the field of finance have generally made people better-off. But the connections between credit, debt, and wealth creation can’t be ignored. Even when the system is at its most efficient, there will be winners and losers, and when the system becomes unbalanced, there may all of a sudden be many, many more losers.
Again, I’m grateful that Ferguson acknowledges this truth; it makes his argument for the necessity of financial institutions that much stronger. Michael Lewis, in Boomerang, muses that people are justifiably angry about the way their financial futures were disappeared in the Great Recession, despite the lack of a natural vent for that anger. Ferguson, while willing to accept that people aren’t really sold on the glorious benefits of finance right now, essentially wrote Ascent to argue the opposite case. Rather than bemoaning a lack of easy targets for our ire, he readily identifies the responsible parties, and then proceeds to make a solid case in their defense.
As much as I complained about it, I didn’t actually hate The Ascent of Money. Ferguson clearly sees his role as defending the financial world from the wrath of the hoi polloi- but that’s fine, because he’s even-handed, and he never implies that finance has the ability to create a perfect world. Ascent can be pretty dry, but if you’re interested in the subject matter, go for it.