sunnuntai 7. lokakuuta 2012

Niall Ferguson: The Ascent of Money

To work in a financial sector is not the most popular place to be these days. I guess that politicians and bankers are the most to be blamed about the financial crisis at hand. Well, this is nothing new. Throughout the history, people working in "real economy", doing "real work", have seen finance and financiers somehow less valuable to society. However, it can be said, that the development of finance has been the most important reason for the increase of human wealth and the improvement of living conditions all over the world.

Professor Niall Ferguson

Finance is the most important innovation in mankind's history

In order to understand the role of finance in the development of world's well-being, I highly recommend to read Niall Ferguson's The Ascent of Money - A Financial History of The World. Professor Ferguson gives a historical insight into monetary innovations and explains practically why the role of money is - and has always been - crucial in different societies. Ferguson highlights, for example, the importance of credit and limited liability company stating that these are perhaps the most remarkable innovations in mankind's history. It's easy to agree with him. Without financial structures, many other innovations wouldn't have developed. 

Must read for bankers and politicians

Ferguson's book is a must read for everyone working in the financial sector. More importantly, it should be read by politicians in order to understand that blaming financial sector about the crisis is like shooting your own leg. The financial sector is a solution, not a problem for the political (not financial!) crisis we are living. 

Movie on Youtube

Niall Ferguson The Ascent of Money 4 hours documentary movie

In addition, Ferguson's homepage includes a lot of interesting material for further reading. 

Key points:
  • Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the "real" economic activities of agriculture and manufacturing. This hostility has three causes. It is partly because debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter. It is partly because financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability. And it is partly because, for centuries, financial services in countries all over the world were disproportionately provided by the members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust. 
  • The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong. 
  • Paradoxically, the people who live in the world's safest country are also the world's most insured. 
  • If the last four millennia had witnessed the ascent of man the thinker, we now seemed to be living through the ascent of man the banker.
  • The financial sector has also become the most powerful magnet in the world for academic talent. 
  • A 2008 survey revealed that two thirds of Americans did not understand how compound interest worked. 
  • Poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence. Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channelled from the idle to the industrious of from the rich to the poor. 
  • If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. 
  • Hunter-gathers do not trade. They raid. Nor do they save, consuming their food as and when they find it. They therefore have no need of money. 
  • For Incas, gold was the "sweat of the sun".
  • Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account, which facilitates valuation and calculation; and a store of value, which allows economic transactions to be conducted over long periods as well as geographical distances. To perform all these functions optimally, money has to be available, affordable, durable, fungible, portable and reliable. Because they fulfil most of these criteria, metals such as gold, silver and bronze were for millennia regarded as the ideal monetary raw material. 
  • Value of precious metal is not absolute. Money is worth only what someone else is willing to give you for it. An increase in its supply will not make a society richer, thought it may enrich the government that monopolizes the production of money. Other things being equal, monetary expansion will merely make prices higher. 
  • When human beings first began to produce written records of their activities they did so not to write history, poetry or philosophy, but to do business. 
  • Banknotes, which originated in seventh-century China, are pieces of paper which have next to no intrinsic worth. They are simply promises to pay. 
  • What the conquistadors failed to understand is that money is a matter of belief, even faith: belief in person paying us; belief in the person issuing the money he uses or the institution that honours his cheques or transfers. Money is not metal. It is trust inscribed. And it does not seem to matter much where it is inscribed: on silver, on clay, on paper, on a liquid crystal display. Anything can serve as money, from the cowrie shells of the Maldives to the huge stone discs used on the Pacific islands of Yap. And now, it seems, in this electronic age nothing can serve as money too. 
  • The central relationship that money crystallizes is between lender and borrower. 
  • Without the foundation of borrowing and lending, the economic history of our world scarcely have got off the ground. And without ever-growing network of relationships between creditors and debtors, today's global economy would grind to halt. Contrary to the famous song in the musical Cabaret, money does not literally make the world go round. But it does make staggering quantities of people, goods and services go around the world. 
  • Who were Medici? They were foreign exchange dealers: members of the Arte de Cambio (the Moneychangers' Guild). They came to be known as bankers (banchieri) because, like the Jews in Venice, they did their business literally seated at benches behind tables in the street. ... Prior to the 1930s, it might be legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan, notable more for low violence than for high finance. 
  • In finance small is seldom beautiful.
  • The ability to finance war through a market for government debts was, like so much else in financial history, an invention of the Italian Renaissance. "The fighting is possible only if you can raise the money to pay for it".
  • Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output. - Milton Friedman
  • There are essentially five steps to high inflation: 1) War led not only to shortages of goods but also to 2) short-term government borrowing from the central bank, 3) which effectively turned debt into cash, thereby expanding the money supply, 4) causing public expectations of inflation to shift and the demand for cash balances to fall 5) and prices of goods to rice. 
  • Hyperinflation is always and everywhere a political phenomenon, in the sense that it cannot occur without fundamental malfunction of a country's political economy. 
  • Inflation has come down partly because many of the items we buy, from clothes to computers, have got cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. 
  • In a greying society, there is a huge and growing need for fixed income securities, and for low inflation to ensure that the interest they pay retains its purchasing power.
  • It is the company that enables thousands of individuals to pool their resources for risky, long-term projects that require the investment of vast sums of capital before profits can be realized. After the advent of banking and the birth of the bond market, the next step in the history of the ascent of money was therefore the rise of the joint-stock, limited-liability corporation: joint-stock because the company's capital was jointly owned by multiple investors; limited-liability because the separate existence of the company as a legal "person" protected the investors from losing all their wealth if the venture failed. Their liability was limited to the money they had used to buy a stake in the company. Smaller enterprises might operate just as well as partnerships. But those who aspired to span continents needed the company. 
  • Stock markets are mirrors of the human psyche. 
  • The biggest challenge of VOC, the first company in the world, was the principal-agent problem: the tendency of its men on the spot to trade on their won account, bungle transactions or simply default the company. 
  • In perhaps the most important work of American economic history ever published, Milton Friedman and Anna Schwartz argued that it was the Federal Reserve System that bore the primary responsibility for turning the crisis of 1929 into a Great Depression. 
  • The history of risk management is one long struggle between our vain desire to be financially secure - as secure as, say a Scottish widow - and the hard reality that there really is no such thing as "the future" singular. There are only multiple, unforeseen futures, which will never lose their capacity to take us by surprise. 
  • Most primitive societies at least attempt to hoard food and other provision to tide them over hard times. And our tribal species intuitively grasped from the earliest times that it makes sense to pool resources, since there is genuine safety in numbers. Appropriately, given our ancestors' chronic vulnerability, the earliest forms of insurance were probably burial societies, which set aside resources to guarantee a tribe member a decent interment. 
  • Saving in advance of probable future adversity remains the fundamental principle of insurance, whether it is against death, the effects of old age, sickness or accident. The trick is knowing how much to save and what to to with those savings to ensure that there is enough money in the kitty to cover the costs of catastrophe when it strikes. 
  • Insurance, in other words, is where the risks and uncertainties of daily life meet the risks and uncertainties of finance. 
  • Before the dawn of modern probability theory, insurers were the gamblers: now they are the casino. 
  • The origin of hedging, appropriately enough, are agricultural. 
  • A pure hedge eliminates price risk entirely. 
  • The world is divided in two: those who are (or can be) hedged, and those who are not (or cannot be). You need money to be hedged. 
  • When we play Monopoly we can dream of buying whole streets. What the game tells us, in complete contradiction to its original inventor's intention, is that it's smart to own property. The more you own, the more you make. 
  • Nothing beats bricks and mortar as an investment. 
  • "Safe as houses": the phrase tells you all you need to know about why people all over the world yearn to own their own homes. But that phrase means something more precise in the world of finance. It means that there is nothing safer than lending money to people with property. Why? Because if they default on the loan, you can repossess the house. Even if they run away, the house can't. As the Germans say, land and buildings are immobile property. 
  • Home ownership was for most of history, the exclusive privilege of an aristocratic elite. Even the right to vote in elections was originally a function of property ownership. In rural England before 1832, according to statutes passed in the fifteenth century, only men who owned freehold property worth at least forty shillings a year in a particular county were entitled to vote. 
  • If the old class system based on elite property ownership was distinctively British, the property-owning democracy was made in America. 
  • Those who ran Saving and Loans at Freddie Mac could live by the comfortable 3-6-3 rule: pay 3 per cent on deposits, lend money at 6 per cent and be on the golf course by 3 o'clock every afternoon. 
  • The best way to rob a bank is to own one!
  • "We want everyone in America to own their home". - George W. Bush in October 2002. 
  • "It is in our national interest that more people own their home". - George W. Bush in December 2003
  • "People who own property feel a sense of ownership in their future and their society. They study, save, work, strive and vote."
  • NINJA loan: No Income No Job or Assets
  • Property rights will eventually lead to democracy. - Hernando de Soto
  • Today you can tell the owner-occupied houses from the rest by their better fences and painted walls. The houses whose ownership remains contested are, by contrast, seedy shacks. As everyone knows, owners generally take better care of properties than tenants do. 
  • There is no doubt that home ownership has changed people's attitudes in Quilmes. Arrording to one recent study, those who have acquired property titles have become significantly more individualist and materialist in their attitudes than those who are still squatting. 
  • It is not owning property that gives you security: it just gives your creditors security. Real security comes from having a steady income. For that reason, it may not be necessary for every entrepreneur in the developing world to raise money by mortgaging his or her house. In fact, home ownership may not be the key to wealth generation at all. 
  • Roughly two fifths of the world's population is effectively outside the financial system, without access to bank accounts, much less credit. 
  • The success of the Quantum Fund was staggering. If someone had invested USD 100 000 with Soros when he established his second fund in 1969 and had reinvested all the dividends, he would have been worth USD 130 million by 1994, an average annual growth rate of 35 per cent. 
  • "In a crisis, markets can remain irrational longer than you can remain solvent" - John Maynard Keynes
  • If Warren Buffet had charged investors in Berkshire Hathaway a typical 2 and 20 fund fees, he would have kept for himself USD 57 billion of the USD 62 billion his company has made for its shareholders over the past forty-two years. - John Kay
  • Republic China has become banker to the United States of America.
  • Economies that combined all these institutional innovations - banks, bond markets, stock markets, insurance and property owning democracy - performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation or resources than, say, feudalism or central planning. 
  • The ascent of money has been one of the driving forces behind human progress: a complex process of innovation, intermediation and integration has been as vital as the advance of science or the spread of law in mankind's escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap. 
  • The financial system is the brain of the economy... It acts as a coordinating activity that allocates capital, the lifeblood of economic activity, to its most productive uses by businesses and households. If capital goes to the wrong uses or does not flow at all, the economy will operate inefficiently, and ultimately economic growth will be low. 
  • Macroeconomists have successfully predicted nine of the last five recessions. 
  • Finance has a Darwinian quality. 
  • Of the world's 100 largest companies in 1912, 29 were bankrupt by 1995, 48 had disappeared, and only 19 were still in the top 100. 

1 kommentti:

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