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In December 1930, the great economist Maynard Keynes published an article in which he described the world as living in “the shadows of one of the greatest economic catastrophes in modern history.” The world was then 18 months into what would become the Great Depression. The stock market was down about 60%, profits had fallen in half and unemployed had climbed from 4% to about 10%.
If you take our present situation, 16 months into the current recession, we're about at the same place. The stock market is down 50 to 60 percent, profits are down 50 percent, unemployment is up from 4.5% to over 8%.
Over the next 18 months between January 1930 and July 1932 the bottom fell out of the world economy. It did so because the authorities applied the wrong medicine to what was a very sick economy. They let the banking system go under, they tried to cut the budget deficit by curbing government expenditure and raising taxes, they refused to assist the European banking system, and they even raised interest rates. It was no wonder the global economy crumbled.
Luckily with the benefit of those lessons, we now know what not to do. This time the authorities are applying the right medicine: they have cut interest rates to zero and are keeping them there, they have saved the banking system from collapse and they have introduced the largest stimulus package in history.
And yet I cannot help worrying that the world economy may yet spiral downwards. There are two areas in particular that keep me up at night.
The first is the U.S. banking system. Back in the fall, the authorities managed to prevent a financial meltdown. People are not pulling money out of banks anymore—in fact, they are putting money in. The problem is that as a consequence of past bad loans, the banking system has lost a good part of its capital. There is no way that the economy can recover unless the banking system is recapitalized. While there are many technical issues about the best way to do this, most experts agree that it will not be done without a massive injection of public money, possibly as much as $1 trillion from you and me, the taxpayer.
At the moment tax payers are so furious at the irresponsibility of the bankers who got us into this mess that they are in no mood to support yet more money to bail out banks. It is going to take an extraordinary act of political leadership to persuade the American public that unfortunately more money is necessary to solve this crisis.
The second area that keeps me up at night is Europe. During the real estate bubble years, the 13 countries of Eastern Europe that were once part of the Soviet empire had their own bubble. They now owe a gigantic $1.3 trillion dollars, much of which they won’t be able to pay. The burden will have to fall on the tax payers of Western Europe, especially Germany and France.
In the U.S. we at least have the national cohesion and the political machinery to get New Yorkers and Midwesterners to pay for the mistakes of Californian and Floridian homeowners or to bail out a bank based in North Carolina. There is no such mechanism in Europe. It is going to require political leadership of the highest order from the leaders of Germany and France to persuade their thrifty and prudent taxpayers to bail out foolhardy Austrian banks or Hungarian homeowners.
The Great Depression was largely caused by a failure of intellectual will—the men in charge simply did not understand how the economy worked. The risk this time round is that a failure of political will leads us into an economic cataclysm.
--This text refers to an out of print or unavailable edition of this title.
This is a very well written book.
I highly recommend that anyone interested in learning more about what lead up to the Great Depression and how the financial leaders handled it - must read this book.
According to Ahamed, this was the central flaw in the financial system that led to the Crash of 1929 and the subsequent Great Depression.
excellent work of research and scholarship. well written. analytical,absorbing and entertaining must read for policy makers as lessons apply to current complex financial systemPublished 28 days ago by Arnold E. Galvez
Very interesting portrait of what central banking was a the beginning of the XXth century. It shows how much progress economics and central banking have made since...Published 1 month ago by Marc
Excellent book that gives the reader a good knowledge of the economic environment involving the greater nations in post world war I. Read morePublished 1 month ago by Ricardo A Araujo
This is an excellent analysis of the factors that lead up to the great depression and ultimately WW2. Read morePublished 2 months ago by anest5hdoc
Thoroughly enjoyable. "Lords of Finance" is a history, drama, and lesson in economics all rolled into one. Read morePublished 2 months ago by Michael Hughes
“Central bankers can be likened to the Greek mythological character Sisyphus,” writes Liaquat Ahamed in Lords of Finance. Read morePublished 2 months ago by Stephan Campbell
It is a very informative and well written book. One of the best in finance in 20th century. Loved it.Published 2 months ago by dheeraj