More on this book
Community
Kindle Notes & Highlights
Read between
November 13 - December 21, 2013
It is not too much to say that in mid-2008 we witnessed the inflationary symptoms of a world war without the war itself. Anyone who can read a paragraph like the preceding one without feeling anxious does not know enough financial history.
There was in fact no reason other than historical happenstance that money was for so long equated in the Western mind with metal.
Had that principle been adhered to, and had the money supply of the British economy genuinely hinged on the quantity of gold coin and bullion in the Bank of England’s reserve, the growth of the UK economy would have been altogether choked off, even allowing for the expansionary effects of new gold discoveries in the nineteenth century.
let's go back to the gold standard derp
The evolution of finance was quite different in the United States. There the aversion of legislators to the idea of over-mighty financiers twice aborted an embryonic central bank (the first and second Banks of the United States), so that legislation was not passed to create the Federal Reserve System until 1913. Up until that point, the US was essentially engaged in a natural experiment with wholly free banking.
The ability to walk away from unsustainable debts and start all over again is one of the distinctive quirks of American capitalism. There were no debtors’ prisons in the United States in the early 1800s, at a time when English debtors could end up languishing in jail for years. Since 1898, it has been every American’s right to file for Chapter VII (liquidation) or XIII (voluntary personal reorganization). Rich and poor alike, people in the United States appear to regard bankruptcy as an ‘unalienable right’ almost on a par with ‘life, liberty and the pursuit of happiness’.
The people in the Memphis Bankruptcy Court are not businessmen going bust. They are just ordinary individuals who cannot pay their bills - often the large medical bills that Americans can suddenly face if they are not covered by private health insurance.
because big governments are regarded as the most reliable of borrowers, it is the bond market that sets long-term interest rates for the economy as a whole. When bond prices fall, interest rates soar, with painful consequences for all borrowers.
‘bond markets have power because they’re the fundamental base for all markets. The cost of credit, the interest rate [on a benchmark bond], ultimately determines the value of stocks, homes, all asset classes.’
The bond market began by facilitating government borrowing. In a crisis, however, it can end up dictating government policy.
wealthier citizens were effectively obliged to lend money to their own city government. In return for these forced loans (prestanze), they received interest. Technically, this was not usury (which, as we have seen, was banned by the Church) since the loans were obligatory; interest payments could therefore be reconciled with canon law as compensation (damnum emergens) for the real or putative costs arising from a compulsory investment.
It was not only the Italian city-states that contributed to the rise of the bond market. In Northern Europe, too, urban polities grappled with the problem of financing their deficits without falling foul of the Church.
funny how many creative financial instruments were created to get around religious law #usury
After his abdication in April 1814, Napoleon had been exiled to the small Italian island of Elba, which he proceeded to rule as an empire in miniature.
With success came ever greater wealth. When Nathan died in 1836, his personal fortune was equivalent to 0.62 per cent of British national income.
Nathan Rothschild *was the Top 1% son #recognize
If the South had managed to hold on to New Orleans until the cotton harvest had been offloaded to Europe, they might have managed to sell more than £3 million of cotton bonds in London. Maybe even the risk-averse Rothschilds might have come off the financial fence.
In many ways, it was true that the bond market was powerful. By the later nineteenth century, countries that defaulted on their debts risked economic sanctions, the imposition of foreign control over their finances and even, in at least five cases, military intervention.
In 1822 this income - the interest on the national debt - amounted to roughly half of total public spending, yet more than two thirds of tax revenue was indirect and hence fell on consumption. Even as late as 1870 these proportions were still, respectively, a third and more than half. It would be quite hard to devise a more regressive fiscal system, with taxes imposed on the necessities of the many being used to finance interest payments to the very few.
Expressed in terms of dollars, the public debts of Britain, France and the United States increased much more between April 1914 and March 1918 than that of Germany.
Yet it would be wrong to see the hyperinflation of 1923 as a simple consequence of the Versailles Treaty. That was how the Germans liked to see it, of course.
a combination of internal gridlock and external defiance - rooted in the refusal of many Germans to accept that their empire had been fairly beaten - led to the worst of all possible outcomes: a complete collapse of the currency and of the economy itself.
permanent relations between debtors and creditors, which form the ultimate foundation of capitalism,
So successful did Argentina’s default prove (economic growth has since surged while bond spreads are back in the 300-500 basis point range) that many economists were left to ponder why any sovereign debtor ever honours its commitments to foreign bondholders.
the kind of discipline he associated with the bond market in the 1990s has been conspicuous by its absence under President Clinton’s successor, George W. Bush. Just months before President Bush’s election, on 7 September 2000, the National Debt Clock in New York’s Times Square was shut down. On that day it read as follows: ‘Our national debt: $5,676,989,904,887. Your family share: $73,733.’ After three years of budget surpluses, both candidates for the presidency were talking as if paying off the national debt was a viable project.
paying off the national debt, remember that? #goodtimes
the vaulting ambition of modern capitalism, were made possible by the invention of one of the most fundamental institutions of the modern world: the company. 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.
It was in these heady times that the word millionaire was first coined. (Like entrepreneurs, millionaires were invented in France.)
Not surprisingly, some people began to anticipate a depreciation of the banknotes, and began to revert to payment in gold and silver. Ever the absolutist, Law’s initial response was to resort to compulsion. Banknotes were made legal tender. The export of gold and silver was banned as was the production and sale of gold and silver objects. By the arrêt of 27 February 1720, it became illegal for a private citizen to possess more than 500 livres of metal coin. The authorities were empowered to enforce this measure by searching people’s houses. Voltaire called this ‘the most unjust edict ever
...more
The losses to France, however, were more than just financial. Law’s bubble and bust fatally set back France’s financial development, putting Frenchmen off paper money and stock markets for generations.
‘A prime reason for expecting future earnings to be greater,’ argued Yale’s Irving Fisher, ‘was that we in America were applying science and invention to industry as we had never applied them before.’
We tend to think of the welfare state as a British invention. We also tend to think of it as a socialist or at least liberal invention. In fact, the first system of compulsory state health insurance and old age pensions was introduced not in Britain but in Germany, and it was an example the British took more than twenty years to follow. Nor was it a creation of the Left; rather the opposite.
the origins of the welfare state
The state stepped in, virtually nationalizing merchant shipping in the case of the United States,29 and (predictably) enabling insurance companies to claim that any damage to ships between 1914 and 1918 was a consequence of the war.
the costs of benefits like Medicare are out of control, rising at double the rate of inflation. The 2003 extension of Medicare to cover prescription drugs only made matters worse.
That means that most big corporations can afford to be hedged against unexpected increases in interest rates, exchange rates or commodity prices. If they want to, they can also hedge against future hurricanes or terrorist attacks by selling cat bonds and other derivatives. By comparison, most ordinary households cannot afford to hedge at all and would not know how to even if they could.
In the flood of acronyms the New Deal produced, it is easy to miss the fact that its most successful and enduring component was the new deal it offered with respect to housing. By radically increasing the opportunity for Americans to own their own homes, the Roosevelt administration pioneered the idea of a property-owning democracy. It proved to be the perfect antidote to red revolution.
For American taxpayers, the Savings and Loans debacle was a hugely expensive lesson in the perils of ill-considered deregulation.
I went to Detroit because I had the feeling that what was happening there was the shape of things to come in the United States as a whole and perhaps throughout the English-speaking world.
Greenspan was not the principal proponent of wider home ownership. Nor is it credible to blame all the excesses of recent years on monetary policy. ‘We want everybody in America to own their own home,’ President George W. Bush had said in October 2002. Having challenged lenders to create 5.5 million new minority homeowners by the end of the decade, Bush signed the American Dream Downpayment Act in 2003, a measure designed to subsidize first-time house purchases among lower income groups. Lenders were encouraged by the administration not to press sub-prime borrowers for full documentation.
...more
houses are pretty illiquid assets - which means they are hard to sell quickly when you are in a financial jam. House prices are ‘sticky’ on the way down because sellers hate to cut the asking price in a downturn; the result is a glut of unsold properties and people who would otherwise move stuck looking at their For Sale signs. That in turn means that home ownership can tend to reduce labour mobility, thereby slowing down recovery. These turn out to be the disadvantages of the idea of property-owning democracy, appealing though it once seemed to turn all tenants into homeowners.
The great revelation of the microfinance movement in countries like Bolivia is that women are actually a better credit risk than men, with or without a house as security for their loans.
Yet the gold standard was no more rigidly binding than today’s informal dollar pegs in Asia and the Middle East; in the emergency of war, a number of countries, beginning with Russia, simply suspended the gold convertibility of their currencies.
the role of financial policing had to be played by two unarmed bankers, the International Monetary Fund and the World Bank. Their new watch-word became ‘conditionality’: no reforms, no money. Their preferred mechanism was the structural adjustment programme. And the policies the debtor countries had to adopt became known as the Washington Consensus, a wish-list of ten economic policies that would have gladdened the heart of a British imperial administrator a hundred years before.
Even those countries that have experienced some limited growth have seen the benefits accrue to the well-off, and especially the very well-off.’
he deduced from Israeli complaints about the quality of US-supplied hardware in the Yom Kippur War that there would need to be some heavy investment in America’s defence industries.
screens. It couldn’t be happening. But it was. Suddenly all the different markets where Long-Term had exposure were moving in sync, nullifying the protection offered by diversification.
But a quite mediocre conman could make a good deal of money by setting up a hedge fund, taking $100 million off gullible investors and running the simplest possible strategy:
The difference is once again that there is an element of endogeneity in regulatory changes, since those responsible are often poachers turned gamekeepers, with a good insight into the way that the private sector works.
I might equally well have paid homage to Charles Darwin by calling the book The Descent of Finance, for the story I have told is authentically evolutionary. When we withdraw banknotes from automated telling machines, or invest portions of our monthly salaries in bonds and stocks, or insure our cars, or remortgage our homes, or renounce home bias in favour of emerging markets, we are entering into transactions with many historical antecedents.
