The current U.S. originated housing slump and subsequent global recession has exposed the extraordinary extent to which the world is connected through money. The housing market was the basis for a sustained period of economic growth, most especially in the U.S. but in most other advanced capitalist countries as well. Home ownership dramatically increased, one effect of which was to propel the growth of home building related industries. As demand for homes accelerated, so too did the increase in their value. Meanwhile wages and money earned by a growing portion of homeowners remained stagnant. This was the first sign of a flaw that would eventually strike at the heart of the industry: many people were buying homes that they could not really afford. In such a scenario if a homeowner lost his or her job, the capacity to pay their monthly mortgage payments was lost and foreclosure the likely outcome. However, the value of that home would not necessarily fall. If millions of people, however, undergo the same downward spiral of job loss and home foreclosure an additional consequence will be the collapse in housing values. The viscous spiral is then intensified. A shrinking job market and growing unemployment depresses the market for homes further. Shrinking demand, in turn, further depresses housing prices. Fewer new homes are thus built and fewer renovations of existing housing stock are undertaken. With so much of the economy tied to housing, the industry’s collapse still ripples far and wide.
Notwithstanding our collective capacity to forget, this sort of boom and bust cycle is hardly unique. There are, however, added elements that have intensified the scope of this particular economic crisis. In his new book The Ascent of Money: A Financial History of the World, Niall Ferguson writes of a growing disconnect between ‘planet finance’ and ‘planet earth.’ The disconnect in question revolves around the increasingly sophisticated tools of financial engineering used by lending agencies and investment firms to transcend the conventional economic cycle and thereby generate profit and minimize financial risk. Witness the accelerated growth of the ‘subprime’ housing market. Mortgage lending agencies and banks were financing mortgages to homeowners with stagnant incomes and poor credit histories (often with initial tantalizing low interest rates, followed by unsustainably high rates) and in turn packaging those loans and selling them as “collateralized debt obligations” (CDOs) to other agencies the world over. Indeed pension funds, banks, and municipal governments in places as far-flung as Iceland and Norway used CDOs as investment vehicles. It was a financial engineering model predicated on the perpetual rise in home values. No one it seemed – certainly not on Wall Street – pondered the simple question: what will happen if home prices start to fall? Contrary to the promise of arcane formulas used to generate staggering profits, financial risk had been spread far and wide. When the house of cards did finally fall in the U.S. much of the world fell with it.
Although Ferguson repeatedly highlights the role of such crises in the evolution of finance, money’s ascent continues unabated. In explaining why, The Ascent of Money expertly traces the development of the first banks, the introduction of bonds and the creation of companies and stock markets. But Ferguson’s greatest strength is his ability to uncover the hidden relationships between money and a country or region’s political evolution. To take one example, he tells the story of how England’s strategy of using the bond market to finance their military effort was a decisive factor in their ultimate victory over France during the Napoleonic wars. Nevertheless Ferguson’s judgment must sometimes be called into question. To take another example, he comes perilously close to rationalizing Pinochet’s authoritarian rule in Chile for nearly two decades. Pinochet, it will be recalled, orchestrated the coup against the democratically elected socialist government of Salvador Allende in 1973. According to Ferguson, the state of Chile’s finances is sounder today than it would have been had Allende been allowed to rule.
Ferguson ultimately insists that money is a progressive agent of change. His thesis is seemingly confirmed through simple comparison: societies, where money assumes a minimal role or is non-existent, are closed, authoritarian and fail to meet the basic material needs of its citizens. North Korea comes to mind. In the wealthiest societies, by contrast, money is the fuel driving the economy and improving living standards for the vast majority of citizens. Ferguson’s contention, to my mind, only points to a partial truth. Money is so much more than its conventional definition would suggest. As Ferguson demonstrates, it is indeed a source of liberty: those who possess it are often able to pursue dreams and live life with a quiet dignity. But one does not need to be a Marxist to recognize that the profit motive can fuel greed and exploitation. Similarly, one does not have to be Christian or otherwise religious to know that money can drive individuals to evil. Money, from this perspective, is many things at once. Ferguson’s book, for all its learning and erudition, only begins to uncover money’s mysterious power.