Niall Ferguson: 'There will be blood'

[John]

My constant complaint about mainstream media, including such people
as Nouriel Roubini, is that people write articles describing how dire
the financial situation is, but then fail to draw the obvious
conclusions. They play it safe by saying that, "This means that the
recession will be very deep, and we won't come out of it till next
year." In fact, that's what Ben Bernanke said today in testimony to
Congress.

Even those who are more realistic about the future still stop short.
I can't recall anyone but myself who's predicted anything worse than a
few years of deep recession or depression. In particular, no one has
realistically appraised the geopolitical changes that will follow
from this financial crisis.

That's why I'm calling attention to this article by Harvard economist
Niall Ferguson. He predicts destabilization of populations and
several "civil wars," and explains how they'll come about.

At the end, however, he's just like all the others. He doesn't see
WW III, since China and America need each other economically. (The
"war is bad for business" argument why war won't occur.) If he
understood generational theory, and the fact that populations today
are much more "attracted to war" than they were ten years ago, he
wouldn't be so sure.

The rest of this posting is the article:

'There will be blood'

Harvard economic historian Niall Ferguson predicts prolonged financial
hardship, even civil war, before the ‘Great Recession' ends


HEATHER SCOFFIELD

Globe and Mail Update

February 23, 2009 at 6:45 PM EST

Harvard author and financial crisis guru Niall Ferguson has landed
with a thud in Ottawa, spreading messages that could make even the
most confident policy makers squirm.

The global crisis is far from over, has only just begun, and Canada is
no exception, Mr. Ferguson said in an interview before delivering a
presentation to public-policy think tank, Canada 2020.

Policy makers and forecasters who see a recovery next year are
probably lying to boost public confidence, he said. And the crisis
will eventually provoke political conflict, albeit not on the scale of
a world war, but violent all the same.

The Buy America penchant pushed by the U.S. Congress in passing the
recent stimulus bill was only the tip of the iceberg.

Abu Dhabi buying Nova Chemicals at bargain-basement prices on Monday
is a sign of things to come, with financial power quickly being
transferred over to the world's creditors – namely sovereign wealth
funds – and away from the world's debtors.

And much of today's mess is the fault of central bankers who targeted
consumer-price inflation but purposefully turned a blind eye to asset
inflation.

The Laurence A. Tisch professor of history at Harvard University, and
author of The Ascent of Money, A Financial History of the World, sat
down with The Globe and Mail's economics reporter, Heather Scoffield.

Heather Scoffield: Canadian leaders frequently argue that Canada is in
better financial shape than elsewhere in the world, and therefore
should fare better during this crisis. Do you agree?

Niall Ferguson: Canada is [considered] a winner because its banks are
less leveraged, bank regulation here has been tighter, because its
housing market hasn't been in a bubble quite the same way. It's
tempting to conclude from that ... that Canada will be less hard hit
in the crisis than the United States. But that is unfortunately wrong.
Because this is a very unfair crisis. The epicentre is the United
States, but the rest of the world, and particularly America's trading
partners, will get hit harder than the U.S.”

“It suggests virtue is its own reward. You don't get any reward beyond
the self-satisfaction of having been virtuous. This is a crisis of
globalization. Therefore, the more an economy depends on the global
system, the harder it hurts. Canada is not finding the worst. Asian
economies are going to be really slammed this year. But it's an unfair
world. The U.S. won't be as badly affected as most countries.”

Heather Scoffield: Is the U.S. able to escape with less pain because
it has more resources to throw at its problems?

Niall Ferguson: “Partly because they can throw so much at it, and they
can do it at a lower cost than anybody else, because the U.S. retains
the safe-haven status, which makes the world so unfair. Here is the
world's biggest economy, which gave us subprime mortgages, rampant
securitization, the collateralized debt obligation, Lehmann Brothers,
Merrill Lynch. It is, in a sense, the fons et origo of this crisis.
And yet, because it retains safe-haven status, in a global crisis,
investors want to increase their exposure to the U.S. Hence, the
dollar rally. Hence 10-year Treasuries down below 3 per cent yields.
It's almost paradoxical that an American crisis ... reinforces the
status of the United States as a safe haven.”

Heather Scoffield: Surely that safe-haven status would be revoked if
China loses faith in the U.S. ability to finance its debt?

Niall Ferguson: As you know, Chimerica – the fusion of China and
America – is one of my big ideas. It's really the key to how the
global financial system works, and has been now for about a decade. At
the end of The Ascent of Money, I speculate about whether or not that
relationship will survive. If it breaks down, then all bets are off,
for the U.S. and indeed for Asia. I think that's really the key point.
Both sides stand to lose from a breakdown of Chimerica, which is why
both sides are affirming a commitment to it.”

“It's very interesting that the Chinese in the last week were saying
such soothing things around the [Secretary of State Hillary] Clinton
visit. This was only days after Treasury Secretary Tim Geithner used
the dreaded ‘m' word – currency manipulation.

Heather Scoffield: Why would the U.S. administration poke a stick in
China's eye like that?

Niall Ferguson: “You obviously have to recognize that Democrats have
been more hawkish on China for some time, than the Republicans ... But
I think Tim Geithner is smart enough to know that this is a very
dangerous game to play and I would be very surprised if you heard that
word again pass his lips.”

Heather Scoffield: Did the Clinton visit improve the China-U.S.
relationship?

Niall Ferguson: It looks like it....The line is very clear from China.
They've consistently made their position clear. They want the status
quo. They do not want this thing to break down. They were kind of
appalled when Geithner said the ‘m' word. And they took full advantage
of Hillary Clinton's visit to smooth ruffled feathers and restate
their commitment. It's a very good bilateral relation. That bilateral
will is important here. The Chinese believe in Chimerica maybe even
more than Americans do.

“They have nowhere else to go. They have no other strategy that they
can adopt in time to cushion the blow. Their exports are contracting
at a terrifying speed. They want at all costs to avoid any kind of big
shift in policy. They want to keep, as far as possible, the U.S.
importing Chinese goods. They want to keep currencies stable. They are
still buying dollars … At least officially, Chimerica is intact. But I
stress ‘officially' because there's considerable public disquiet.”

“This is a crisis of globalizaiton that is destroying global trade.
This poses the biggest challenge that the Chinese administration has
faced since they embarked on reforms 30 years ago.

Heather Scoffield: Will globalization survive this crisis?

Niall Ferguson: It's a question that's well worth asking. Because when
you look at the way trade has collapsed in the world in the last
quarter of 2008 – countries like Taiwan saw their exports fall 45 per
cent – that is a depression-style contraction, and we're in quite
early stages of the game at this point. This is before the shock has
really played out politically. Before protectionist slogans have
really established themselves in the public debate. Buy America is the
beginning of something I think we'll see a lot more of. So I think
there's a real danger that globalization could unravel.

Part of the point I've been making for years is that it's a fragile
system. It broke down once before. The last time we globalized the
world economy this way, pre-1914, it only took a war to cause the
whole thing to come crashing down. Now we're showing that we can do it
without a war. You can cause globalization to disintegrate just by
inflating a housing bubble, bursting it, and watching the financial
chain reaction unfold.”

Heather Scoffield: Is a violent resolution to this crisis inevitable?

Niall Ferguson: “There will be blood, in the sense that a crisis of
this magnitude is bound to increase political as well as economic
[conflict]. It is bound to destabilize some countries. It will cause
civil wars to break out, that have been dormant. It will topple
governments that were moderate and bring in governments that are
extreme. These things are pretty predictable. The question is whether
the general destabilization, the return of, if you like, political
risk, ultimately leads to something really big in the realm of
geopolitics. That seems a less certain outcome. We've already talked
about why China and the United States are in an embrace they don't
dare end. If Russia is looking for trouble the way Mr. Putin seems to
be, I still have some doubt as to whether it can really make this
trouble, because of the weakness of the Russian economy. It's hard to
imagine Russia invading Ukraine without weakening its economic plight.
They're desperately trying to prevent the ruble from falling off a
cliff. They're spending all their reserves to prop it up. It's hardly
going to help if they do another Georgia.”

“I was more struck Putin's bluster than his potential to bite, when he
spoke at Davos. But he made a really good point, which I keep coming
back to. In his speech, he said crises like this will encourage
governments to engage in foreign policy aggression. I don't think he
was talking about himself, but he might have been. It's true, one of
the things historically that we see, and also when we go back to 30s,
but also to the depressions 1870s and 19980s, weak regimes will often
resort to a more aggressive foreign policy, to try to bolster their
position. It's legitimacy that you can gain without economic disparity
– playing the nationalist card. I wouldn't be surprised to see some of
that in the year ahead.

It's just that I don't see it producing anything comparable with 1914
or 1939. It's kind of hard to envisage a world war. Even when most
pessimistic, I struggle to see how that would work, because the U.S.,
for all its difficulties in the financial world, is so overwhelmingly
dominant in the military world.”

Heather Scoffield: You speak about the crisis being in its early days,
but most policy makers and the International Monetary Fund are
predicting a quick end to it. Where do you differ with them?

Niall Ferguson: “I do think they're wrong. I think the IMF has been
consistently wrong in its projections year after year. Most
projections are wrong, because they're based on models that don't
really correspond to the real world. If anything good comes of crisis,
I hope it will be to discredit these ridiculous models that people
rely on, and a return to something more like a historical
understanding about the way the world works.”

“I mean most of these models, including, I'm told, the one that policy
makers here use, don't really have enough data to be illuminating …
You're going to end up assuming that this recession is going to end up
like other recessions, and the other recessions didn't last that long,
so this one won't last so long. But of course this isn't a recession.
This is something really quite different in character from anything
we've experienced in the postwar era. That's why these projections
give positive numbers for 2010. That's the default setting. And it
just seems to me ostrich-like, to bury one's head in the sand and
assume this has to end this year because, well, that's what recessions
do.

“It's obvious, surely we know by now, that this is something quite
different. It's a crisis of excessive debt, the deleveraging process
has barely begun, the U.S. consumers are not going to suddenly bounce
back and hit the shopping malls just because they get a tax cut. The
savings rate is going to continue to rise. These processes have
tremendous momentum that quite clearly differentiates them from
anything that we've seen, including the early 80s, including 73, 74,
75. Those big crises, the ones that we have lived through, were bad.
But seems certain to be deeper, and more protracted.”

Heather Scoffield: Forecasters say they can adjust their projections
as things change, but households, companies and governments are basing
their decisions today on what the experts tell them to expect in the
future. So how should decisions be made if the forecasts are wrong?

Niall Ferguson: “One possibility is that they don't believe these
numbers either. They feel that it's good for morale. The truth about
the crisis is that it is in large measure psychological. We're not
dealing here with mathematics. We're not dealing here with human
beings as calculating machines. We're dealing with real people whose
emotions influence their individual decisions, and the swing from
greed to fear is a very spectacular thing when it happens on this
scale.

“One possibility is that policy makers are lying in order to encourage
people and prevent depression from become a self-fulfilling
psychological conditions. That's why it's called a depression … Maybe
they don't really believe this, but they're saying it in order to
cheer people up, and if they're sufficiently consistent, perhaps
people will start to believe it, and then it will magically happen.”

“The other way of looking at that is to say every time a politician
uses a word like ‘catastrophe' or ‘depression' to pressurize
legislators into passing a stimulus package, for example, the signal
goes out to the public that this is bad. And it gets worse. That's one
of the interesting things that both President Bush and President Obama
have done. Bush used that wonderful phrase, “this sucker's going
down.” Obama talks about catastrophe at the critical moment when he
wanted Congress to pass the package. It reminds me of a wonderful
headline that the Onion had last year, in about October. The headline
was, Bush calls for panic. I love it because it completely called the
situation. There he was calling for panic ... to make people come out
of denial. I've been talking a while about this being the Great
Repression. It took ages, ages, for people to realize this thing had
fallen apart.

“August, 2007, was when this crisis began. And if you were really
watching the markets carefully, April is when it began, when the
various hedge funds started to hemorrhage. The stock markets carried
on until October of that year. And in many ways, consumer behaviour in
the U.S. did not change until the third quarter of 2008. So there was
a massive denial problem. It was like Wile E. Coyote running off a
cliff, and they'd run off a cliff and they didn't look down so they
didn't start falling. As soon as people realized it was bad, the
behaviour switched. Now, people have to try to unscare them before
this thing becomes a self-perpetuating downward spiral. I think that's
why you have to say ‘growth will return in 2010' with your fingers
crossed behind your back.”

Heather Scoffield: Will property ownership continue to be central to
our economy's functioning?

Niall Ferguson: Property ownership is something that our societies,
particularly English-speaking societies, seem to be drawn towards. The
notion that the majority of people should own their own homes dated
from the 30s. It didn't really become a reality until the 50s. We've
sort of pushed the home ownership rate up to what seems to be its
maximum, and beyond. It will clearly come down. The lesson of the
subprime crisis is that you shouldn't give mortgages to people who
can't afford them. Duh …

I don't think we're going to see a radical shift back to the rental
society of the pre-Second World War era. That sort of exists in
Germany. Germany has had none of this. German households are less
indebted now than they were 20 years ago. The property ownership rate,
if anything, has been completely stable. Why the English-speaking
world has this fixation is kind of interesting and hard to explain.
That Englishman home-is-his-castle mentality. We privilege this asset
class. And in the U.S., the tax code privileges this asset class to
take out mortgages and invest in property. I think that's a mistake.
I'd like to see us at least achieve fiscal neutrality, so that
different kinds of investments are treated the same. But even if we do
that, Canada doesn't have mortgage interest relief, and the home
ownership rate is the same as the U.S.”

Heather Scoffield: Abu Dhabi has just bought Nova Chemical because the
company couldn't get credit. Is this the way of the future?

Niall Ferguson: “There are some fantastic investment opportunities
that pretty soon are going to start attracting buyers. The returns on
the super-safe, highly-liquid U.S. Treasury portfolios are next to
nothing. The potential returns from buying distressed assets or from
buying companies that can't roll over their debt, are double digit. So
any individual institution liquid enough and not leveraged can start
playing this game, and will play this game. This is going to be the
beginning of a whole new investment strategy in which companies that
can't roll their debt over end up being sold at bargain basement
prices, or broken up and their assets sold at bargain-basement prices,
in very, very large numbers. And it doesn't take a lot of imagination
to see that the buyers will be sovereign wealth funds or other
entities in surplus countries. The world divides in two, the debtors
and the creditors. The debtors … (U.S., Europe) ... are going to have
to sell of their assets. Call it the global foreclosure. They're going
to be selling their assets cheaply to those who have the surpluses.
This is not going to be like the Chinese buying Blackstone at the top
of the market.

“It's revenge of the sovereign wealth funds. They got burned. And this
time, no more Mr. Nice Guy.”

Heather Scoffield: Does the fixing of one bubble create another?

Niall Ferguson: “We kind of have had a bubble in the sense that we've
seen such a rally in U.S. government bonds. It's tempting to say that
will burst and we'll see yields go back up. Because, you know,
$2-trillion worth of debt is going to hit the market this year, maybe
more. Supply is exploding just when demand is contracting. You don't
need to be a Nobel laureate to see that that has to impact on the
price. The difference is there is this thing called the Fed that can
step in and start buying the stuff if the foreign demand fades. So
it's not completely guaranteed that we'll see bonds sell off in
price.

“There is still this inertia that prevents the dollar from falling off
a cliff, that keeps the Treasury market from falling off a cliff.
That's really important to bear in mind. I don't think we'll see a
bubble distressed assets, because I think the price of these assets
has started to fall. Anybody who comes into the market now is
essentially paying a premium. There will be better bargains in the
middle of this year, and maybe even better bargains later on. If I
were in the market to buy distressed assets, I would wait, I would
wait a bit longer until they're really desperate. And it might even be
better to wait until they're bankrupt.”

Heather Scoffield: You've written that many financial crises are the
result of excesses due to a belief that governments will bail out the
financial sector. Do we need to get rid of this moral hazard through
tighter regulations?

Niall Ferguson: “In the Ascent of Money, I argue that you can't really
have a bubble if you don't have a monetary authority that has been
excessively generous. From John Law in 1719 to Alan Greenspan in the
late 90s, there's always a banker, there's always a central banker
making credit too readily available. The second thing is, though, that
regulation may not prevent that.”

“Monetary policy evolved in a peculiar way in the 1990s towards de
facto or de jure targeting of inflation, an increasingly narrow
concept of inflation – core CPI. I thought it was a mistake at the
time because it seemed to me crazy to ignore asset prices. Why
differentiate? What's the difference between pricing a loaf and
pricing a house? Why do we care about one and not the other? In fact,
we should probably care more about the price of a house than the price
of a loaf, certainly in developed societies. I think there was a flaw
in the theory there, that essentially you could call the Jackson Hole
consensus. When the central bankers got together at Jackson Hole, the
view that emerged from the debate in the late 90s was, we shouldn't
really pay attention to asset prices in the setting of monetary
policy.”

Heather Scoffield: And more regulation?

Niall Ferguson: “European banks are far more leveraged than American
banks. I don't see Europe as offering up any particularly good model
in any respect. In fact, I think Europe's prospects could get a whole
lot worse this year, to the extent that it could be very, very hard
indeed to keep the Euro zone together. I think it will be possible
because the costs of leaving will be so high.

“There will be howling anguish, all kinds of pain, conflict between
Germans and the others. It's going to get very uncomfortable indeed.
No, I wouldn't look to Europe for inspiration. You could, I guess,
look at Spain...

“I definitely think some type of tighter regulation of banking capital
adequacy is needed. Basel I and Basel II have not worked. In many
ways, they're the great failures. I think Canada's somewhat
straightforward, mechanical definition looks like one the rest of the
world should be adopting.”

Heather Scoffield: You mentioned that the Buy America tendencies of
Congress are probably only the beginning of protectionism. What do you
mean by that?

Niall Ferguson: “No administration with Larry Summers in the White
House is going to be a protectionist administration. Here's a man
whose commitment to free trade and free capital movements nobody
doubts. And I don't see the President following through to renegotiate
NAFTA or the things he said in the past. But one of the things that I
find troubling about the administration is the degree to which is has
ceded power to Congress. It's almost like it's a parliamentary
system.”

. “I felt a strange sense of familiarity in the air. Usually
Washington feels totally alien to me. It was just like being in
Westminster, where power was in the legislature. And the key issue was
whether the upper house and the lower house could make a deal. The
president wasn't even in town. If you give Congress that kind of power
– basically Congress wrote the deal – then you're half way to a
British or Canadian system in which the legislature makes the
decisions. And the legislature is much more likely to make
protectionist decisions. After all, these are pretty much the same
people who put all those anti-China bills into the works in the last
session of Congress … So I'm a little nervous about how this will play
out in the next one or two years … After all, this is the land of
permanent election campaigning. Congressmen are saying to themselves,
‘ how am I going to campaign? I don't want to lose my job. What's my
line going to be?' It's going to be very tempting to say ‘American
jobs for American workers.' It's a pretty good slogan. It worked well
in Britain.”

“That's out there. There's a lot of populist disgruntlement, and it's
going to get bigger.”

Heather Scoffield: We've discussed many possible nasty outcomes to
this crisis. Is there a way out?

Niall Ferguson: “We've discussed two reasons to non-suicidal. I'm
trying to stay cheerful. One is that Chimerica is holding up. The
Chinese don't seem to want to get divorced from their American
spouse.”

“The other is that this isn't leading to World War Three or Four,
depending on how many world wars you think there have been. There will
be instability, but I don't see that instability producing something
as huge as the 20th century conflicts. But it's hard to see a simple
and quick macroeconomic happy ending. That I really struggle to
visualize.

But the good news is only as good as this: the United States, which is
Canada's biggest trading partner, is not going to suffer as badly as
many other economies around the world. And that means that from
Canada's point of view, it's not standing right on top of the biggest
fault lines in the global system. The biggest fault lines in the
global system are in Asia. They may also be in Eastern Europe. That's
where things are going to be really unpredictable.”

“The two great zones of conflict in the 20th century were central and
eastern Europe, and a critical part of northeast Asia – Manchuria,
Korea. It makes me a little nervous that those are also places that
are going to take a very heavy share of the pain. But we're looking at
a Great Recession, not a Great Depression. We may be looking at a Lost
Decade.

There was a time when if you said the United States was going to
suffer a lost decade like Japan did in the 1990s, everybody would have
said you were a mad pessimist. That begins to look like quite a good
scenario. And I think it's a realistic scenario.

One of the facts is if you subtract mortgage equity withdrawal from
the Bush years, the real underlying rate of growth of the U.S. economy
was 1 per cent. So much of the consumption has been fuelled by
mortgage equity withdrawal. So that seems like a reasonable growth
rate for 10 years. … We just don't have an improvement of standard of
living of the sort we're grown used to. And indeed if you have a more
equitable redistribution through the tax system, which Obama is
committed to, it might actually be no discernible downside for middle
America and lower-class Americans. So many of the benefits of the boom
went to the elites. If you have a lost decade plus redistribution, it
may not be that dramatic a change for many, many people. People just
have to get over the fact that their wealth wasn't worth what they
thought it was in 2006. Whether it's their stock market portfolio or
their housing. If we simply go back to where we were, in 2005, that's
surely not the worst thing that could happen to us.”

http://www.theglobeandmail.com/servlet/ ... uested=all

[John]

From a web site reader:

> Just to let you know that world renowned Scottish historian Niall
> Ferguson joins Lateline to discuss the unpredictable patterns of
> financial markets throughout history and the lessons that can be
> learnt from the past.

> Lateline is a mainstream TV program on network TV in Australia,
> you may wish to link to it as it has relevance to your theory of
> generational dynamics.

> http://www.abc.net.au/lateline/content/ ... 502602.htm

John