‘There will be blood'
Harvard financial guru Niall Ferguson predicts prolonged financial hardship, even civil war, before the ‘Great Recession' endshttp://www.theglobeandmail.com/servlet/story/RTGAM.20090223.wferguson0223/BNStory/crashandrecovery/home">globeandmail.com
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: 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.”
(snip)
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
. 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.”
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