Lords of Finance: The Bankers Who Broke the World
by Liaquat Ahamed
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Book Summary Information
Author: Liaquat AhamedEdition: Paperback
Audio: English (Unknown); English (Original Language); English (Published)
Published: 2009-12-29
ISBN: 0143116800
Number of pages: 576
Publisher: Penguin (Non-Classics)
Product features:
- ISBN13: 9780143116806
- Condition: New
- Notes: BRAND NEW FROM PUBLISHER! 100% Satisfaction Guarantee. Tracking provided on most orders. Buy with Confidence! Millions of books sold!
Book Reviews of Lords of Finance: The Bankers Who Broke the World
Book Review: The Dark Ages
Summary: 5 Stars
Economics is a tough subject to render palatable and creating an interesting and informative economic history is a more daunting effort still. Liaquat Ahamed has succeeded admirably on both counts. "Lords of Finance" (LoF) is a genuinely fascinating, detailed and compelling history of the economic foundations of 21st Century international banking and its 4 primary actors: Norman (Bank of England), Strong (US), Moreau (France) and Schacht (Germany).
The 4 LoF were frankly bizarre characters and by relating their biographies and recapping both the domestic and international scenes, Ahamed nicely sets the stage for the far-reaching financial decisions they made, some of which resulted in the economic turmoil that eventually lead from the First World War to the Great Depression to the Second World War. The eventual "rationalization" of international finance, undertaken in light of the debacles of the late 19th and early-through-middle 20th centuries have, evidently, failed to avert another catastrophe.
If one is searching for the "hero" of the tale, that role has been given to three men: First is John Maynard Keynes. From Ahamed's perspective, Keynes appeared to be almost invariably right in his analysis over the years of turmoil, although his prescriptions (and proscriptions) were rarely accepted (than as now). He characterized the Depression era as "The Dark Ages". Second is FDR. Roosevelt is credited with taking the bold steps required to reverse the Depression beginning in March, 1933 (abandoning the gold standard through a "small" amendment to the AAA that allowed the president to devalue US currency, thereby driving up prices and lowering the cost of borrowing). Third is the lesser-known Eugene Meyer who, at one time, was in charge of both the Fed and the Reconstruction Finance Corporation. His 1932 efforts to convince Congress to allow government securities to serve as eligible assets to back currency permitted the Fed to "...embark on a massive program of open market operations, injecting a total of $1 billion of cash into banks". These were bold moves by bold men, often acting against conventional wisdom. They are contrasted starkly by the author with the many bad decisions and indecisive maneuvers undertaken by the economic "establishment".
I suspect that many readers are drawn to this book not in search of an economic history, but rather in quest of parallels to the "Less Great Depression" which began with the collapse of Lehman and Bear Stearns in 2007-2008. You'll find those nicely catalogued in the epilogue. The bulk of the text was, however, written well before the recent financial upheaval. The author's introduction was written in October, 2008, during which time he notes, "...the world is in the middle of one such panic-the most severe for seventy-five years, since the bank runs of 1931-1933 that feature so prominently in the last few chapters of this book. The credit markets are frozen, financial institutions are hoarding cash, banks are going under or being taken over by the week, stock markets are crumbling." While historical analogy is a crude instrument in the hands of moral certainty, especially when applied retrospectively, one cannot help but regard the current situation through the lens of past mistakes. Ahamed's book is a brilliant, understated, elegant recounting of events, adroitly interlaced with analysis that is always pithy and never pedantic.
The author notes that then as now, a search for the "villains" was undertaken. In March, 1933 the US Senate Banking and Currency Commission recruited New York Assistant DA Ferdinand Pecora as Chief Council investigating the cause of the 1929 crash. The Pecora investigation resulted in reforms and, as Ahamed notes, "The public was soon rivieted by the tales of financial skullduggery in high places." I should state that, although not mentioned by Ahamed for obvious reasons, lessons were learned by modern economists, including as prominent examples, Ben Bernanke, Joseph Stiglitz and Paul Krugman. Unfortunately, these lessons have also been forgotten by many leaders over many years many times, right through the present.
As I understood the text, the most egregious blunders leading to the Great Depression were:
1) fantastic speculative "bubbles" (e.g., the US stock market, Florida real estate),
2) adherence to the gold standard,
3) unsound financial speculation by several large banks,
4) WW-I reparations (and, most significantly, the War itself),
5) lack of a coherent national (and international) financial policy,
6) the actions of the 4 LoF, themselves
Of course, the bankers and economists of the era were no more or less smart (or dumb) than their present day counterparts and they recognized these issues and more. However, dealing with the matter in a rational manner sometimes eluded them, this for a variety of reasons. A few salient events which Ahamed indicates further aggravated matters are worth noting. For example, in mid-1927, the US Federal Reserve cut interest rates (by only 0.5%, which was then reversed within 6 months). Ahamed believes that, "The Fed's move was the spark that lit the forest fire (of stock market speculation)." The author also notes that rising interest rates in the US "...functioned as a magnet, drawing money from all corners of the globe, evey country in Europe, except France, struggled to prevent its gold from escaping across the Atlantic...With the steady erosion in commodity prices, the effect of the rate hikes was to raise the real cost of money in many places to over 10%, bringing with it the first signs of worldwide economic slowdown...The US stock market meanwhile refused to pay attention to either the rising cost of money around the world or the first signs of slowdown abroad."
In 2011, the economy remains in precarious condition, domestically and worldwide. Voltaire has been credited with the acerbic observation that, "History never repeats itself; men always do." That pithy axiom seems to hold true today and the consequences may still prove economically cataclysmic. For instance, emerging from some quarters are calls to "re-establish the gold standard", "abolish the Fed", "curtail government spending", "no more bail-outs", "cut taxes on the wealthy (presumed "job creators")", etc, etc. The errant stupidity of these cure-all nostrums (falling under the general catchphrase of "fiscal conservatism") could not be better illustrated than the recounting given in LoF. These mistaken notions have been further reinforced by the hallowed "myth of the market", reinforced by legislative blocking of prudent regulatory controls, possibly beginning with the 1999 repeal of Glass-Steagal). In some circles, these shibboleths have achieved the near-religious status accorded gold in the not too distant past. Ahamed offers the following terse summary: "...while most of the time the economy works very well left in the care of the invisible hand, during panics, that hand seems to lose its grip...To reestablish sanity and restore some sort of equilibrium in these circumstances required a very visible head to guide the invisible hand." Let's hope the next heads perform better than those of the 4 Lords.
Summary of Lords of Finance: The Bankers Who Broke the World
It is commonly believed that the Great Depression that began in 1929 resulted from a confluence of events beyond any one person's or government's control. In fact, as Liaquat Ahamed reveals, it was the decisions made by a small number of central bankers that were the primary cause of that economic meltdown, the effects of which set the stage for World War II and reverberated for decades. As yet another period of economic turmoil makes headlines today, Lords of Finance is a potent reminder of the enormous impact that the decisions of central bankers can have, their fallibility, and the terrible human consequences that can result when they are wrong.
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.
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