Men and markets in the global financial crisis

Globalisation Bookshelf

BY Dr Richard Bernal

Wednesday, April 27, 2011

THERE are a variety of approaches to the explanation of causality in history. They differ in the identification of the determining factor. At one extreme are mono-causal approaches which are an oversimplification and at the other pole are those dense multi-dimensional discourses which point to several interacting influences.

A lot of history falls between the two extremes and ends up as largely descriptive based on empiricism in search of a theory and then there are mechanically applied theoretical models which force reality to conform to support predetermined conclusions.

A frequent dichotomy in the study of economic history is that between the role of great men and that of markets. Undoubtedly both are important, but Liaquat Ahamed in Lords of Finance emphasises the role of the four most powerful central bankers, hence the apposite sub-title The Bankers Who Broke the World.

The key personas are the head of the Federal Reserve Bank of England, Banque de France and the Reichsbank. Ahamed's argument is that the primary cause of the Great Depression was the decisions, often arbitrary, of a few key central bankers. Their countries dominated global finance in the era preceding the meltdown of the Great Depression. He therefore makes markets and financial institutions secondary although this was the period of the automaticity of the Gold Standard.

This book is immaculately researched and written in a fluid and engaging style which makes it read like a financial thriller. These crises are not "black swan events" and therefore history is important because if the lessons are learnt, then repetition can be avoided.

It requires some exposure to financial history and has too much detail to hold the attention of the non-specialist. It is a most enjoyable read for those with the background and appetite, but is not required reading for those interested in current globalisation.

The background for Ahamed's book can be acquired from listening to or perusing Niall Ferguson, The Ascent of Money - A Financial History of the World (2008) which is an easily digestible tract that explains the origins, evolution and functions of money.

Lords of Finance does reveal some curious parallels with the recent global financial crisis. The decisions of bankers and financiers have been surprisingly uninformed and there is an unwillingness to submit to the advice of governments. Like several books on the current global financial crisis Ahamed implicitly suggests that financial institutions cannot be relied on to self-regulate, therefore financial markets must be regulated.

Several recent books highlight the greed-driven recklessness of heads of private financial institutions, while another stream of literature points to the faulty decisions of monetary authorities and the incompetence and complacency of regulators.

Personalities in key public and private capacities are important, but there is the lingering question of why markets are assumed to operate efficiently when there is minimal oversight and regulation despite the fact that there have been numerous financial crises. The regularity of crisis is such that Hyman Minsky (Stabilising an Unstable Economy) argues that crises are systemic in financial markets. Whether it is John Kenneth Galbraith's "financial euphoria" or Robert Shiller's "irrational exuberance", markets do experience volatility -- the mortgage market in the US being a recent example.

The availability of detailed financial histories is in sharp contrast to the absence of scholarship on financial crisis in the Caribbean such as those in Jamaica and more recently in Trinidad. Perhaps the material generated by the Finsac Commission of Enquiry in Jamaica will prompt some research which will improve the understanding of the operations of financial markets and institutions in the Caribbean.

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Men and markets in the global financial crisis