"His thesis is that state policy determines the development of finance, not vice versa. This reverses the usual Marxist argument that finance controls governments.
"England's rise to world power in the eighteenth century was based on the ability of the British government to borrow larger sums at cheaper rates than any of its rivals; hence the importance for the nineteenth-century public mind of maintaining the state's creditworthiness by balancing the government budget. In the twentieth century it was the eagerness of democratic governments to extend home ownership—as an antidote to revolution—that later led to the practice by which home mortgages are converted into securities and sold around the world.
"Ferguson points out that property "is a security only to the person who lends you money.... By contrast, the borrower's sole security against the loss of his property to such creditors is his income." This is not quite true. The lender's security also depends on the income—actual or expected—of the borrower, because, although the property cannot "run away," it may lose its value, or it may be costly, and even impossible, for the creditor to get possession of it. Ferguson might have told the story of the costly mistake made by France's Credit Lyonnais, which set up its own proprietary credit-rating agency in the late nineteenth century. Its mistake was to rate the credit-worthiness of governments not on their debt-to-income but on their debt-to-property ratios. The imperial government of Russia got top rating, because, despite its disordered finances, of all governments it owned the most property. On the basis of this rating, French investors snapped up tsarist bonds. They lost all their money, not because the property disappeared but because the government did. Credit Lyonnais failed to take into account "political risk."
"Ferguson's last chapter, "From Empire to Chimerica," argues convincingly that it was the investment of billions of dollars of Chinese savings in US Treasury bonds that fueled the US debt binge, by enabling Greenspan to keep money so cheap for so long. In a bravura passage that rounds off his story of money's ascent, Ferguson writes:
""Chimerica"—China plus America—seemed like a marriage made in heaven. The East Chimericans did the saving. The West Chimericans did the spending. [Cheap] Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labour kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profitable to run a corporation. Thanks to Chimerica, global real interest rates...sank by more than a third below their average over the past fifteen years. Thanks to Chimerica, US corporate profits in 2006 rose by the same proportion above their average share of GDP....
"The more China was willing to lend to the United States, the more Americans were willing to borrow. Chimerica, in other words, is the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge fund population explosion. [It] was the underlying reason why the US mortgage market was so awash with cash in 2006 that you could get a 100 per cent mortgage with no income, no job or assets.
"England's rise to world power in the eighteenth century was based on the ability of the British government to borrow larger sums at cheaper rates than any of its rivals; hence the importance for the nineteenth-century public mind of maintaining the state's creditworthiness by balancing the government budget. In the twentieth century it was the eagerness of democratic governments to extend home ownership—as an antidote to revolution—that later led to the practice by which home mortgages are converted into securities and sold around the world.
"Ferguson points out that property "is a security only to the person who lends you money.... By contrast, the borrower's sole security against the loss of his property to such creditors is his income." This is not quite true. The lender's security also depends on the income—actual or expected—of the borrower, because, although the property cannot "run away," it may lose its value, or it may be costly, and even impossible, for the creditor to get possession of it. Ferguson might have told the story of the costly mistake made by France's Credit Lyonnais, which set up its own proprietary credit-rating agency in the late nineteenth century. Its mistake was to rate the credit-worthiness of governments not on their debt-to-income but on their debt-to-property ratios. The imperial government of Russia got top rating, because, despite its disordered finances, of all governments it owned the most property. On the basis of this rating, French investors snapped up tsarist bonds. They lost all their money, not because the property disappeared but because the government did. Credit Lyonnais failed to take into account "political risk."
"Ferguson's last chapter, "From Empire to Chimerica," argues convincingly that it was the investment of billions of dollars of Chinese savings in US Treasury bonds that fueled the US debt binge, by enabling Greenspan to keep money so cheap for so long. In a bravura passage that rounds off his story of money's ascent, Ferguson writes:
""Chimerica"—China plus America—seemed like a marriage made in heaven. The East Chimericans did the saving. The West Chimericans did the spending. [Cheap] Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labour kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profitable to run a corporation. Thanks to Chimerica, global real interest rates...sank by more than a third below their average over the past fifteen years. Thanks to Chimerica, US corporate profits in 2006 rose by the same proportion above their average share of GDP....
"The more China was willing to lend to the United States, the more Americans were willing to borrow. Chimerica, in other words, is the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge fund population explosion. [It] was the underlying reason why the US mortgage market was so awash with cash in 2006 that you could get a 100 per cent mortgage with no income, no job or assets.
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