October 26th, 2009
03:15 PM GMT
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Hong Kong, China - As long as there are free markets and humans remain emotional creatures, there will always be financial crises.

So says renowned British historian Niall Ferguson. The Harvard University professor and I had a chance to meet in Hong Kong at a recent investors' conference. He shared his observations on the current economic crisis.

CNN: Is there anything unique about this recession?

Ferguson: This isn't a recession is the first point to make. It's a near depression. In fact, I am calling it the Slight Depression to distinguish it from the Great Depression of 1929 to 1933. And the unique thing is that we nearly repeated history. In other words we nearly repeated the Great Depression, but we avoided it with massive monetary and fiscal stimulus. So we are in new territory.

CNN: When does government intervention work?

Ferguson: We need to be very careful when we talk about government intervention. That covers a multitude of sins. There was a lot of government intervention in the Soviet Union and we know how that story ended. So we are talking very specifically here about two policies: one is the use of central bank money creating power to avoid a liquidity crisis that crunches the entire banking system. So intervention by the (U.S.) Federal Reserve beginning in 2007 and escalating in September of 2008 was primarily designed to avoid massive bank failures of the sort that made the Depression so serious in the early 1930s. And I think there is no question that we have learned from history and Ben Bernanke, as chairman of the Fed, has learned from history, that it's a good idea to avoid a generalized collapse of the banking system.

CNN: When does government intervention not work?

Ferguson: The other kind of government intervention, which is slightly more problematic, is the sort in which the government runs a large deficit in order to stimulate the economy by building roads and building bridges in order to get people back to work in the hope that in doing that, it will generate a recovery. This is the model developed by John Maynard Keynes back in the 1930s and it's been used by countries around the world to varying degrees. And to some extent, this has been effective. But the problem is, in the United States, you are adding a stimulus on top of an already huge structural deficit in the public finances, and the prospect of a trillion dollars of new borrowing every year for the decade ahead, that scares me and it should scare everybody.

CNN: There's been a backlash against the financial world, especially Wall Street. Have we seen the same level of fury after past crises and where does that vitriol lead?

Ferguson: It's not, by any means, the first time that people have felt furious of what they have seen going on in Wall Street: a financial speculative bubble that bursts and causes a recession which drives other people, ordinary folks out of jobs. The question is just how far this populous backlash is going to go in the United States and indeed around the world now. My suspicion is that it's got a ways to go. Each time an American loses his or her job, not surprisingly, he or she looks around and asks who's to blame for this. And when they see on Wall Street, the banks paying out million-dollar bonuses with what appears to be, and in some cases is, taxpayer money from the TARP fund, I am not at all surprised that people feel mad. And when they feel mad, they turn around and they say, 'How can I express this anger? Who can I vote for who is going to articulate my feelings of frustration?' And I wouldn't be at all surprised to see, as we approach the mid-term elections, more and more politicians, particularly Republicans, trying to articulate that sense of popular grievance.

What lessons have you learned from the current economic crisis? Tell us what your experiences are.

soundoff (9 Responses)
  1. Tim Clarke

    Niall clearly knows what he is talking about and expresses himself very clearly. His concern about the overburgeoning government debt is palpable, let alone the effect of any further economic stimuli that may be forthcoming.
    Unfortunately the questioning did not get as far as to obtain his thoughts on exactly what effect this is likely to have on the economy generally or on the government bond markets in particular. Presumably , not good?

    October 28, 2009 at 9:08 am |
  2. marcjay

    Professor Ferguson, of course, has it right. Too much for two few, and this mess, whatever it is labelled, is the predictable result.
    Sadly, I still don't hear any viable suggestions about what could have been done differently, or what should be done from now on, as the bills continue to mount up, the bonuses continue to be paid and the layoffs continue as well. You can't legislate a conscience. It's frightening when there are no good answers or tangible results to show for the effort.

    October 29, 2009 at 7:22 pm |
  3. Hugh

    If the government's role in economics is to level the playing field, and promote fair and robust competition, then the best way to do that is through checks and balances. Over time we have removed too many of these. If one believes such institutions are "too big to fail" then you have removed the most significant check and balance from the system. Either you allow the businesses to fail, or you restrict their ability to take significant risk. Don't allow companies, or individuals, to leverage themselves to such a ridiculous degree. Check and balance, again, have failed when executives bear no personal legal responsibility when their company fails. In many cases- even when the stockholders win- there are other consequences for the larger industry and the current corporate law allows those consequences to go without anyone being held accountable.

    October 30, 2009 at 10:59 pm |
  4. Jorge Aponte

    In my book, How to Fix the Economy (ISBN 978-0-9729719-9-7
    Library of Congress Control Number: 2009902139), I propose that "...We may blame government. The industry was not being watched over close enough. Symptoms remained undetected while problems were spreading. Simultaneously, the government’s privately-run regulatory scheme also failed. The so-called independent auditors, being them certified or chartered public accountants (CPA), failed naked.

    Professional associations have their share of the fiasco; for decades, they have been covering the wrongdoings of their members. In my jurisdiction, the CPA society looks the other way. They know and tolerate that the audit committee member (a CPA) that authorized issuing a bank’s fraudulent financial statements, regularly publish articles in newspapers as if that person were a role model.

    Failure has wrapped the famous credit-rating firms of Wall Street. Some bureaucrats forgot their stewardship role, behaving superficial! Government has allowed too much, being passive as the famous credit-rating firms become a diversified business in conflict within them. For instance, one credit-rating firm is subsidiary to a non-related business.

    Do you remember any corporate failure in the past ten years? Did the so-called public interest watchdogs blow the whistle about similar prospective incidents? Was there any warning in advance? Of course they did not! These are the “guardians” of the public interest! Where were they really? They are to speak out, to explain and admit."

    November 2, 2009 at 12:54 am |
  5. Tonya Widger

    For sometime now , I have been informing my friends about the Class Steagall Act of 1933. I wish more americans would under stand what this instrument did to avoid the claps of our market. In 1999 the GOP delivered to President Clinton's desk a bill , to take apart the act of 1933. We need regualations again. The banking and Insurance industries are getting wealth off the backs of middle class americans. Our government is ran by the people , not corporate america. The GOP,is placing blame of this 21 century depression on the current adminstration. What are they doing to help? They , should be rolling up their sleeves and working together. Please help educate the country. Bring this subject up for national conversation. Maybe, AIG, and Wall street will pull back those bonuses from executives, and pay it back to the people. Shame on all of them. They all knew what they were doing. You don't put all your eggs in one corporation. Thank you Tonya W. Auburn Wa.

    November 3, 2009 at 9:36 pm |
  6. gogo

    it is very simple. if you control money, which is not your own, you tend to do some crazy things , which you would never do if the money is your own. it is the reason why politics all around the world do some stimulous packages and similar crazy shit. it is very easy to print and waste milions bukcs if you know, that you never will have to pay them back.

    November 8, 2009 at 11:26 pm |
  7. Mike C.

    And after trillions of dollars of Porkulus money, we still have banks failing and unemployment at 10%.

    We would have been better off letting the economy correct itself.

    Ever heard of the Great Depression of 1920?

    Of course not, because it was a huge recession, and left alone, corrected it self within 3 years. However, the Great Depression of 1929 was extended out to 10 years because of the governments involvement in trying to correct a natural business cycle.
    Left alone, it too would have corrected it self in a shorter time.

    November 12, 2009 at 1:38 pm |
  8. Jim P

    Nearly a year into Obamanomics we continue to have a massive failure of government leadership to recognize, let alone, deal with the fundamental structural problems of our economy. As Professor Ferguson correctly points out, just spending money on a long wish list of traditional Democratic pork barrel projects does not deal with that. (That's not to speak of the massive mismanagement of that spending that is now coming to light.) It's time for our national leadership of both parties, led by the President, to sit down and figure out practical, bipartisan approaches to growing the productivity and competitiveness of our economy. The current spending spree and grandiose attempt to solve all of our health care industry issues in one scheme is counterproductive to the best interests of our nation.

    November 19, 2009 at 12:27 am |
  9. phon sophat (Cambodia,Preyveng province)

    Nowaday,the economic crisis is spreaded around the world and our countries should think carefully to own economic before helping other countries .this means are refered to all developed and developing countries and they should think of demand and supplies in domestic and not domesti supplies and demands too.if they want to make the better economic ,they should reform the refrastrature connecting with own economic and tourism and the big point is Technologies in developing own country.to make the all people to understand and know clearly about the advantage of technologies.Cos i see that from now on if the technoligical countries are going to be best economic and reducing poors in country.if the technology is high ,so competitive ne is initial and efficiency.by absorbing all the markets in the world for doing the business,for example in China is better economic cos own Technologies and policies of their government.

    December 29, 2009 at 3:49 am |

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