Wealth, by Natural Selection

A feisty history of the world till the financial crisis, but remember to carry your own primer

A feisty history of the world till the financial crisis, but remember to carry your own primer
Much like the links Niall Ferguson teases out from the world8217;s financial history 8212; for example, cotton-backed bonds were at the heart of Confederacy8217;s defeat in the American Civil War 8212; his book8217;s good and not-so-good parts are counterintuitive, given the history of this volume. Conceived when a bet on Lehman Brothers8217; extinction would have found no counterparty, the book was finished in May this year. So you would expect that the history part of the book to be AAA-rated given history writing of Ferguson8217;s calibre. You would also expect the book8217;s contemporary finance bit to be BB at best, thanks to the fact that global finance, to put it mildly, has changed between May and now. You would be wrong on both counts.

Ferguson8217;s analysis of current global finance may have been written in May but it holds up well in November. True, he does say in his Afterword that 8220;the only species that is now close to extinction in the developed world is the state-owned bank8221;. His analysis seems fatally outmanoeuvred by events. But he does parenthetically note the nationalisation of Northern Rock. And he buys insurance by noting that state-ownership may be making a comeback.

The substantive point is that Ferguson gives a clear account of the origin of mortgage-mad species the reviewer8217;s Darwinian metaphor is deliberate; the author uses natural selection as a tool to understand financial change, more of this later. Houses are excellent collateral for bankers, Ferguson notes, because they the houses don8217;t move about and, therefore, can be repossessed and sold easily in the case of a loan default. So in a rising market, bankers8217; risk seems very little. More loans are given, demand for houses goes up, house prices go up, and everyone is happy. More so since a house loan given to an African-American low-income earner in

Detroit can be taken off the bank8217;s books by repackaging it into financial assets and sold to, say, a bank in Germany. Ferguson8217;s explanation of the subprime crisis and the financial engineering that brought it on is one of the better ones available for the general reader. He is heterodox in his analysis of house ownership and its virtues for capitalism, arguing that the strong desire to own and, therefore, sell residential property may not be as much of an unmitigated good as it is cranked up to be. This could be an interesting departure point for further analysis of what8217;s called Anglo-Saxon capitalism 8212; what8217;s so bad for the system if more Americans live in rented houses and house ownership lost some of its lustre?

Ferguson is successfully addressing the general reader when he8217;s arguing all this. The same applies when he highlights the conflict between capitalism8217;s need for unfit firms financial firms, in this context to die out versus political economic demands for rescue in a big crisis. The writer is clear in a fashion that a reader, better-informed thanks to the writer, can choose to disagree with him. Inexplicably, some of these qualities are not consistently present in the book8217;s main focus 8212; the history of finance. Even if one ignores the somewhat off-putting, quasi-self advertisement 8212; 8220;read this book and you will understand8230;8221; particularly stands out 8212; Ferguson8217;s attempt to make history of finance comprehensible is belied by his impatience with explaining everything. But that effort needed to be made. His account of bond pricing and its relationship with interest rates will not be readily comprehensible to a lay reader. When he recounts the first developments in share trading 8212; in the Netherlands in the 17th century 8212; he introduces the concept of forward trading in a manner that presupposes foreknowledge. The lack of such foreknowledge is why, he says, he wrote this book. Do you know what sterilisation means in the context of central banking? If you don8217;t, Ferguson won8217;t help you. He just talks about it as if you know it. There have been clearer, layperson-friendlier accounts than Ferguson8217;s of the fiasco that involved bond traders and Nobel-winning economists the LTCM bankruptcy.

Of course, the author still informs, explains, entertains and provokes as he time travels with money. His strengths are in American/European history. Some the best parts of this book, like the story of the Rothschild dynasty or British imperial finance, are derived from his fine works earlier 8212; The House of Rothschild and Empire. But there8217;s a patchy quality to how he arranges his narrative despite or because of the link sentences at the end of each chapter. He ends Chapter 2, on bond markets, by saying the failure of bond yields to respond to short-term interest rates 8212; again, that8217;s not a sentence he has adequately prepared a lay reader for 8212; can8217;t be understood without understanding stock markets, the subject of Chapter 3. But in Chapter 3 he never quite explains the 8220;conundrum8221;. He ends the stock market chapter by asking what we can do to protect ourselves from capital market bubbles. His answer is insurance, which neatly sets up the topic for Chapter 4. But insurance, as his account shows, is not really a response to share price bubbles. Then why force a link in such a fashion?
These are the reasons this is not a great book. They are also the reasons why, if you are finance concepts-innocent, you cannot depend only on Ferguson to explain all the things that baffle you.