It is a soap opera where young pretty starlets are replaced with old and often funny economists. This is how I think I can best describe the book I just read on my flight back from Ireland to college here in the US. The book is called the ‘Lords of Finance:The Bankers Who Broke the World’ and it is incredible. When you ask any college student majoring in history what the hell they are going to do with their degree in the real world, they are likely to reply that the present is only a ripple of the past, and thus some of the most important tools for the present can be found in the past (or something appropriately abstract along those lines).
This book can only be the best evidence to justify this reasoning. The US finds itself in a period of economic stagnation and has just emerged from the worst recession since the great depression, so where better to look for answers than the great depression itself. There are of course differences, during the great depression most countries were on or were trying to be on the gold standard where as now the US in particular is happy to print money without any backing by a physical good. Secondly, and interestingly because I did not know this at all, during the great depression the Federal Reserve was in its infancy. Its low salaries attracted few talented men and most economists who worked for it had no real grasp of the things they were working on. Its board was selected not for its expertise but for its geographical representation of all the regions of the US. One member of the board for instance, George Rosa James, thought the ‘basic foundation of the economy lay with the horse, the mule and the hay, and that the decay of the nation began with the advent of the automobile.’ This is clearly an absurd economic observation for any industrializing country. Nowadays the federal reserve could not be more different. It is an incredibly powerful organization which dominates our landscape and is happy to override congress.
Where the book really comes into its own is by describing the personalities of the central bankers from the US, France and the UK during the depression. There is a disturbing Déjà Vu about the image of a group of less than ten men deciding the economic fate of millions using back room deals and personal leveraging. That is because it resonates with how the current financial crisis was drawn out. The are many factors which culminated in the 2008 financial crisis, and PBS Frontline has done an excellent program called Breaking the Bank, free online, in drawing out some of those causes, however, what emerges more than anything else is the personality and ego of a small group of people in finance overriding logic to the detriment of millions of normal people; the financial fate of too many was put in an elite group of hands who did not really have the right incentives to carry out their responsibility. For a flashier picture of this history we can now look to Hollywood who has recently produced big budget movies and documentaries like Wall Street: Money Never Sleeps and Inside Job.
The Lords of Finance is worth reading. It shows differences between crises but more importantly shows the constancy of one human emotion: greed. Both the great depression and the 2008 recession were created by mass speculation, in the great depression it was stocks, recently it was property. This greed was enabled by lax regulations and the unwillingness of people to step in to put it out until it was too late. One quote used in the book, by Napolean Bonaparte, is particularly memorable:
Money has no motherland ; financiers are without patriotism and without decency; their sole object is gain.
It is an important lesson which carries through the new year with us and which may just justify that history major after all.