...their vision was blurred by a mixture of abundant liquidity and the passage of time... the lights in financial markets were flashing green, not red, until the very eve of destruction.
So ends Niall Ferugson's subchapter on the reactions of the European financial markets in 1914, with regards to the outbreak of the Great War. And it is perhaps a sign of the times that I reflexively find such apocalyptic exposition apropos of the year that was, and will perhaps be.
Ferguson's book "The Ascent of Money" could have just as well been titled "The Ascent of Leveraging". The evolution of fractional reserve banking system, bond market, stocks, insurance funds all increase wealths of nations by leveraging and deploying money in ever-efficient manner. The ability to take on massive debts in an organized manner allowed the Dutch to defeat the Spanish, who literally sat on a mountain of silver, the British to best the French, and for the South to succumb to the North- for what is war but a contest of logistical coordination?
And yet the ascent of money is not without its drawbacks- some leveraging is good, too much blows the whole thing up. A bank with 10% reserve will be more profitable than a bank with 20% reserve, but a bank with 1% reserve is more likely to fail than a bank with a 10% reserve. And here Ferguson assiduously documents various historical episodes when greed and cosmic foolishness pushes men too far towards that edge- LTCM, John Law, Argentina. A little inflation greases the wheels of capitalism; too much drowns it. And the evolution of financial history is a narrative where we stumble, in bouts of booms and busts, towards that happy optimality.
The book, while at times filled with financial arcana, is nonetheless very approachable. The author did a pretty good job to ensure that the minutiae does not drown out the narrative, and this results in a pretty fast and informative read (I finished it on my flights to and from DC). For non-finance geeks who want a good overview of the innards of capitalism, this is a pretty good book.
The book, while at times filled with financial arcana, is nonetheless very approachable. The author did a pretty good job to ensure that the minutiae does not drown out the narrative, and this results in a pretty fast and informative read (I finished it on my flights to and from DC). For non-finance geeks who want a good overview of the innards of capitalism, this is a pretty good book.
1 comment:
I agree that this is an excellent book. I have very little exposure to the finance industry as a whole other than my dealings in the mortgage world. Although the equations seemed a little much to me, so far, the book is an easy, informative and interesting read. I highly recommend it as well.
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