11-14-2008, 11:05 AM
This is a sobering read...amd Ferguson is an EXTREMELY smart dude when it comes to financial history:
DOBBS: Well Mayor Daley saying the country hasn't seen anything like this, at least in Chicago, since the Great Depression. Our economy, of course, is the most pressing challenge facing this nation and the president-elect. Joining me now, Harvard University professor, Niall Ferguson, he's author of the new book just out today, "The Ascent of Money: A Financial History of the World." Good to have you with us.
NIALL FERGUSON, AUTHOR: Nice to be back, Lou.
DOBBS: "The Ascent of Money." The timing could not be more impeccable. The idea that we could be in this kind of a mess. It obviously occurred to you, or you wouldn't have begun writing this. What was the warning sign that you saw?
FERGUSON: Two years ago I was at a conference of investment bankers and hedge fund managers. And I suggested that they should watch out for a liquidity crisis that was coming their way, and they kind of pooh-poohed and jeered me. And I went away thinking, you know, people are not ready for this and ordinary folks aren't ready for it. They're not ready for the shock that's going to hit them and they need to see this in historical context because it's going to be as big, as Mayor Daley said, as big as the Great Depression.
DOBBS: This is as big as the Great Depression. Whatever the dimensions of this ultimately turn out to be, there's no question that the federal response is massive. We're talking about at least right now, $2 trillion injected through the Federal Reserve itself. Approaching $1 trillion, once the $700 billion bailout is, is completed. What is, what are your thoughts about the, this bailout and the response of the government?
FERGUSON: Well this is the big difference between now and the Great Depression. Because back then, the Fed did next to nothing. In fact, if anything it made matters worse and the U.S. government simply wasn't in the position to borrow $2 trillion at the drop of a hat. I call this the Great Repression. We're trying to repress a depression, by pouring trillions of dollars into the financial system. And you know, it's not yet clear that it's going to work. We're certainly stuck with a big recession. And it's a still a possibility that we could end up with something worse.
DOBBS: Something worse. And that nod, as one watches these markets, as volatile as they've been, the sell off. Hank Paulson, the treasury secretary, going back to late September, as they're pushing for this bailout, saying we could have an absolute meltdown, a disaster.
Obviously the stock market has sold off to a five-year low already. Despite all of this money, this injection of liquidity into the economy, and then we have people talking about the Obama administration to be, talking about a large stimulus package in addition.
FERGUSON: There are two big worries here. One is that you can pour money into banks that are near-dead. But you can't force them to lend it out and to create new credit. It's a little bit like Japan in the 1990s. The banks are on life support, but they're not actually generating any new loans. They're just trying to stay alive. The other big worry is the bond market. How much can the international bond market absorb of new 10-year treasuries? If it's $2 trillion, the deficit could be as big as that next year. At some point, I think foreign investors, including the Chinese are going to say, enough, already. And then it could get very ugly in the bond market.
DOBBS: How ugly?
FERGUSON: Well ugly enough to drive yields up. And if yields go up, the cost of government borrowing going up and the thing begins to spiral out of control. Then you have to worry about the dollar. That's been propped up by Asian central banks, has been for years now. It's rallied recently, rather like the stock market rallied today. But these rallies are illusory. They're bumps on the way down. And I think none of your viewers should be in any doubt about just how serious this is. That's why you need the historical perspective because this is beyond our memory, really. We have to go back to the '30s to encounter something quite this scary.
DOBBS: How long, the economic crisis? We won't characterize it as either a depression or a recession. How long the crisis before we begin to see growth return, some vigor in this economy?
FERGSUSON: Well we're used to recessions lasting maybe a quarter or two quarters, but this is going to be something that lasts years. Japan had a lost decade if you remember in the 1990s. There was next to no growth in that period. And the situation is similar. It begins with a real estate crash. It ends with the banks in desperate difficulty. Huge government bail outs, zero interest rates. The Japanese tried all this in the 1990s and didn't get much of a response. So this is for the long haul.
And I think we have to hope to get away with just low growth, rather than the catastrophe of the depression. That's what we're going to try to avoid. But I must say, I get more and more pessimistic, particularly about the international coordination. I mean, I don't expect much of this G-20 meeting that's coming up, except talk. But it was that absence of international coordination that caused a lot of the trouble in the '30s.
DOBBS: Well Mayor Daley saying the country hasn't seen anything like this, at least in Chicago, since the Great Depression. Our economy, of course, is the most pressing challenge facing this nation and the president-elect. Joining me now, Harvard University professor, Niall Ferguson, he's author of the new book just out today, "The Ascent of Money: A Financial History of the World." Good to have you with us.
NIALL FERGUSON, AUTHOR: Nice to be back, Lou.
DOBBS: "The Ascent of Money." The timing could not be more impeccable. The idea that we could be in this kind of a mess. It obviously occurred to you, or you wouldn't have begun writing this. What was the warning sign that you saw?
FERGUSON: Two years ago I was at a conference of investment bankers and hedge fund managers. And I suggested that they should watch out for a liquidity crisis that was coming their way, and they kind of pooh-poohed and jeered me. And I went away thinking, you know, people are not ready for this and ordinary folks aren't ready for it. They're not ready for the shock that's going to hit them and they need to see this in historical context because it's going to be as big, as Mayor Daley said, as big as the Great Depression.
DOBBS: This is as big as the Great Depression. Whatever the dimensions of this ultimately turn out to be, there's no question that the federal response is massive. We're talking about at least right now, $2 trillion injected through the Federal Reserve itself. Approaching $1 trillion, once the $700 billion bailout is, is completed. What is, what are your thoughts about the, this bailout and the response of the government?
FERGUSON: Well this is the big difference between now and the Great Depression. Because back then, the Fed did next to nothing. In fact, if anything it made matters worse and the U.S. government simply wasn't in the position to borrow $2 trillion at the drop of a hat. I call this the Great Repression. We're trying to repress a depression, by pouring trillions of dollars into the financial system. And you know, it's not yet clear that it's going to work. We're certainly stuck with a big recession. And it's a still a possibility that we could end up with something worse.
DOBBS: Something worse. And that nod, as one watches these markets, as volatile as they've been, the sell off. Hank Paulson, the treasury secretary, going back to late September, as they're pushing for this bailout, saying we could have an absolute meltdown, a disaster.
Obviously the stock market has sold off to a five-year low already. Despite all of this money, this injection of liquidity into the economy, and then we have people talking about the Obama administration to be, talking about a large stimulus package in addition.
FERGUSON: There are two big worries here. One is that you can pour money into banks that are near-dead. But you can't force them to lend it out and to create new credit. It's a little bit like Japan in the 1990s. The banks are on life support, but they're not actually generating any new loans. They're just trying to stay alive. The other big worry is the bond market. How much can the international bond market absorb of new 10-year treasuries? If it's $2 trillion, the deficit could be as big as that next year. At some point, I think foreign investors, including the Chinese are going to say, enough, already. And then it could get very ugly in the bond market.
DOBBS: How ugly?
FERGUSON: Well ugly enough to drive yields up. And if yields go up, the cost of government borrowing going up and the thing begins to spiral out of control. Then you have to worry about the dollar. That's been propped up by Asian central banks, has been for years now. It's rallied recently, rather like the stock market rallied today. But these rallies are illusory. They're bumps on the way down. And I think none of your viewers should be in any doubt about just how serious this is. That's why you need the historical perspective because this is beyond our memory, really. We have to go back to the '30s to encounter something quite this scary.
DOBBS: How long, the economic crisis? We won't characterize it as either a depression or a recession. How long the crisis before we begin to see growth return, some vigor in this economy?
FERGSUSON: Well we're used to recessions lasting maybe a quarter or two quarters, but this is going to be something that lasts years. Japan had a lost decade if you remember in the 1990s. There was next to no growth in that period. And the situation is similar. It begins with a real estate crash. It ends with the banks in desperate difficulty. Huge government bail outs, zero interest rates. The Japanese tried all this in the 1990s and didn't get much of a response. So this is for the long haul.
And I think we have to hope to get away with just low growth, rather than the catastrophe of the depression. That's what we're going to try to avoid. But I must say, I get more and more pessimistic, particularly about the international coordination. I mean, I don't expect much of this G-20 meeting that's coming up, except talk. But it was that absence of international coordination that caused a lot of the trouble in the '30s.