Lords of Finance: The Bankers Who Broke the World Hardcover – January 22, 2009
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Amazon Exclusive: Liaquat Ahamed on the Economic Climate
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.
From Bookmarks Magazine
- Item Weight : 1.89 pounds
- Hardcover : 576 pages
- ISBN-10 : 159420182X
- Product Dimensions : 6.5 x 1.65 x 9.5 inches
- Reading level : 18 and up
- ISBN-13 : 978-1594201820
- Publisher : Penguin Press; Later prt. Edition (January 22, 2009)
- Language: : English
- Best Sellers Rank: #50,515 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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This book reads like a fascinating novel – but with real-life biographies, and real history, as the background. Ahamed writes for the masses – he does not assume a financial or economic background on the part of the reader. This book is so exceptionally well written that it becomes a page-turner – you just can’t wait to see what happens next! Commendably, the author does not suggest a conspiracy theory among, or incompetence on the part of, the main actors. As indicated below, they were merely further casualties of WWI. Each of the central banks (U.S. Britain, Germany and France) pursued different paths to recovery following the war, and none of them found the right answer. This is probably the result of three main problems: (i) the lack of coordination by the Central Banks in developing a global policy for economic recovery following the war; (ii) a failure on the part of Britain to acknowledge that the global economic landscape had been fundamentally altered by the war; and (iii) a failure on the part of the central actors to understand what was going on. As Maynard Keynes said in 1930 (pg. 374), “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”
While not a course book on international finance, the author does provide enough details to educate the reader about some of the basics (e.g., the gold standard, international lending, devaluation of currency, and international transfers of capital).
As for my 4-star rating, and the title of this review (about the narrative being incomplete), I recommend reading the following in order to gain a broader perspective: “Hidden History” (Docherty and Macgregor), which suggests (with considerable convincing evidence) that the British manipulated France and Russia into war with Germany in 1914 in order to remove Germany as an economic competitor to Britain. My guess is that the architects behind this scheme (Lord Alfred Milner, in particular) had no clue as to what the economic consequences of war would be – they just had a narrow-focused goal of removing a commercial competitor. Thus, the central characters of “Lords of Finance” were probably just historical casualties of those with deeper, and darker, long term motives. Britain sowed the wind leading up to WWI, and the world reaped the whirlwind afterwards (with Britain refusing to acknowledge that there was, in fact, a whirlwind, trying vainly to reestablish their place of prominence in world finance by going back to an unrealistic pre-war gold-based exchange rate). All of the financial machinations (on the part of all parties) to rebuild the world economy after WWI failed to appreciate one fundamental concept – i.e., at some point creditors stop providing credit when they suspect that they might not be able to get repaid. Once credit stops, the economy flops. This holds true unless the creditors have a source they can tap to continue their bad lending practices – see next paragraph.
I also gave this book a 4-star review because the author never asks – or answers- the fundamental question, “who eventually pays when central banks bail out other banks and nations who have made poor decisions?” The answer is “individual investors and savers.” Case in point: in 2007 an IRA or 401K worth $1 million likely took a 40% hit – i.e., a $400,000 “tax”. Multiply that by say three million such accounts, and suddenly you have $1.2 trillion gone from people’s retirement accounts. Where did all of that wealth go? Answer: to pay for loans by the Fed to bail out Greece, Spain, and bad real estate loans in the U.S. It was basically just a redistribution of wealth – socialism conducted under the guise of “central banking”. Read “The Creature from Jekyll Island” (regarding the establishment, and workings, of the U.S. Federal Reserve system) and you will have any eye-opening education on the truth behind “central banking”.
But it has some problems.
First, it focuses on the life of 4 men that, back then, were the central bankers of the 4 most influential countries on Earth. But, despite the author's effort, this were not really very interesting people.
Second, the author's thesis is that these 4 bankers were responsible for the crash because they failed to respond adequately to the successive crisis. But the author himself exhaustively describes the economic difficulties the western war faced after the World and how the governments of the US, Britain, France and Germany were unable to work together to solve them. So, at the end, these 4 bankers weren't as central to the Crisis as the author suggest (which makes focusing on them even more irrelevant).
This book is a "blow by blow" account of the 1929 stock market crash and the aftermath, and the events that lead to it, starting with the Treaty of Versailles at the end of World War I. It is like seeing the world economies collapse in slow motion. The author has done a masterful job of covering multiple decades of financial market evolution, and how the strict adherence to the gold standard profoundly influenced the onset of the crisis.
This is the period the lead to the ascendency of Keynesian economic ideas, but Keynes himself is only a small part of the story. I wish the author had given Keynes a larger role in the book. The author rightly points out the although Keynes, through his writings, had been opposed to many of the conventional ideas pursued by the team of four, his treatise on employment was only published well after the recovery was on its way.
Overall a very good book!
Top reviews from other countries
Nevertheless, it is a fascinating book, extremely well written ( if not extremely well proofed) and very approachable even if you don't understand clearly some of the cause/effect relationships it talks about. Essentially it is a history of central banking and the growth of the effects of the Gold Standard during the inter war years, told through the roles played by the 4 chief protagonists, the Governors of the central banks of U.K., Germany, France and the New York Fed. Maynard Keynes features prominently and is shown as a key player in the increasing awareness of the limitations of the gold standard. The story focuses on the struggles of these four Governors in trying to deal with the fallout of the post-war reparations imposed on Germany, and the near-bankruptcy of both the UK and French governments during the depression. The US suffered enormously from the post-crash depression, but I never realised just how much it profited from the Allies from its war loans, to the extent that I can't help suspecting that the US took deliberTe action to accelerate the demise of the British Empire to impose its own hegemony. The French national stereotypes are played out again, both in its negotiations of the Reparations and its refusal to countenance meaningful reductions in the face of evidence that Germany would be unable to pay (consider that in today's terms relative to the size of the German Economy, reparations amounted to $2.4 trillion dollars !). The French position on Brexit negotiations (no discussion on Trade without settlement of the "divorce bill") came to mind several times as I read this book.
Anyone looking for a history of the growth of the role and expertise of Central Banks will find this a very useful read. Equally, it presents a very readable history of the main characters, especially the governor of the Central Banks and New York Fed, but also of the roles of FDR, Herbert Hoover and Winston Churchill, as well as John Maynard Keynes in this seminal period in Western economic history. A great read.
As Greece is now facing shocking financial challenges and everyone is asking how at the beginning the EU allowed Greece to fund its social agendas with borrowed money; I thought about revisiting this book and rereading the part where the then German Kaiser and his parliament decided to fund the war with borrowed money, which contributed to the financial challenges and hyperinflation that Germany faced after the war. Hence, i bought this book again in kindle format! What happened to the paper copy that i bought few years ago? I kept sneezing when I try to read it!
The other issue is what will be the end game for Greece and the EUR club, who allowed Greece to borrow more than it could handle? Do we need to punish the ill-fated borrow or do we need to allow them go insolvent for short period of time?
How the remnants of African dictators now feel about the idea of silly borrowing and the doubting fact of repaying both the principle and the interest of what they had borrowed? Is Greece in the same situation than they and the Germans of post WWI were?
Should we come up with a new concept where, when a nation faces what the Germans of WWI , most of 1990s African nations and now Greece is facing, the borrowing politicisations and the lending bank managers are sent to the International Criminal Court; Instead of punishing the an entire nation?
I have no idea if the author is right about everything he says here. I looked in vain for Smoot-Hawley and could not find any mention. But I don't care. If this book was fiction it would still be a strong candidate for the best book I've ever read. The fact that it takes you through the history of the Great Depression through the lives of arguably four of its biggest protagonists (the heads of the four most important central banks) is a nice bonus.
I went through this doorstop of a tome in less than three days. As an added bonus I found out what happened in the Great Depression in the view of an author who may not be a celebrated economist but is clearly totally engrossed by his subject. I was so excited about it, I sat down my poor dad to tell him the story. That bit did not go so well, he stopped me an hour into my trance.
But I digress. This book is AWESOME.
Makes you want to ask for a sixth star.