Niall Ferguson: The Free Market Still Works

Niall Ferguson's new book, The Ascent of Money: A Financial History of the World, documents tumultuous swings in the evolution of capital. The Harvard historian defends the rise of finance as a force for good through the ages (though he has some warnings for its future, too). Excerpts from a chat:

Were you working on the book before the financial collapse?
The whole thing was researched and composed in anticipation of this crisis. It's really a history of crises and an attempt to understand why the system is inherently crisis-prone despite its long-run benefits.

Is this credit crisis a hiccup in money's historical ascent or something bigger?
This is somewhere between a very large hiccup and heart failure. It's certainly the biggest economic crisis since 1973-74. I don't think it's going to have the appalling economic consequences of the Great Depression because governments are doing everything they can to repress the crisis. I call it the "Great Repression." They're repressing it with vast trillions of dollars of liquidity.

High debt is blamed for the crisis. Are we really more leveraged now than ever?
It's not wholly unique. If you go back to the early 19th century, the costs of the Napoleonic wars created a burden of debt for Britain that was comparable with the total debt burden the United States faces. The same goes for World War II. The difference is, of course, that that debt in the 19th and 20th centuries was entirely public debt. What we've witnessed in our age of leverage has been an explosion of private, household, and bank debt in particular.

What else should be done to restore financial stability?
We've already taken a critical step in the right direction by injecting capital in the banks. The critical things are for the Federal Reserve to get [interest] rates down in the economy as a whole, and, crucially, politicians have to avoid letting this crisis go to their heads. We're already looking at an enormous deficit next year. There is going to have to be very prudent management by the next treasury secretary to avoid the nightmare scenario where foreign investors say the U.S. dollar and bonds are not what they want to own. If the U.S. reputation for financial probity goes and there's a sell-off worldwide, our recession would start to look like a Great Depression.

How do you defend the positive impact of finance's evolution?
If you take the 4,000-year perspective, the financial system in the western world that became global in our lifetime has, in fact, delivered more benefits than costs. If it's inherently crisis-prone, I think that just reflects that we as human beings are prone to swings of moods. The markets magnify that, but they don't create it. They are really nothing more than products of our own ingenuity and sometimes our own folly. We have some serious issues to address when it comes to regulation, but I don't think anybody is talking about the abolition of the free market. Most of the technical changes that need to be made don't require us to throw the baby out with the bath water.