One of my first acts when I wake up in the morning is to check the latest with BBC news on my iPhone. As most mornings this summer, I woke up with headline news about the Greek debt crises. Not surprisingly, the European Union´s finance ministers could not agree on a new Greek bailout last night.
Of course they could not. It it is far too late and a far too complex matter to solve on a Saturday evening, and as the EU consists of sovereign countries, first all finance ministers, and then all heads of state and then several national parliaments need to vote to agree in consensus on any new solution.
If we recall, the first bailout package to Greece five years ago took months to hammer out in technical details. Now the problem is, as the screen from this mornings article below right shows, there is a lack of trust that Greece really will implement what they promise.
We have a classic situation of game theory, the complex analytical framework that describes how we take and keep decisions which the recently deceased John Nash won Nobel Prize for, and which Yanis Varoufakis, the now fired Greek finance minister is an academic expert on, which is described very well in this BBC article.
The risky option for the European Unions national leaders and Greeks creditors is to foreclose on the loans, and force Greece out of the Eurozone, leading to a repudiation of debt. The possible outcomes involve several interdependent sources of uncertainty.
One result might be that the Greek economy does so badly that the Greek public regrets their choice and throws the government out at the next opportunity, which would bring new uncertainly about implementation of an agreement, just as the current Syriza Government backed down on implementation of the previous bailout package terms, just as the Greek economy showed signs of recovery last year.
One result, almost certain, would be that an exit from the Eurozone is followed by a Greek exit from the EU. After all, how could Greece stay in the EU and benefit from the EU´s Horizon 2020 and territorial cohesion policy, without being a member of the common currency? The other poor nations in the EU would not accept this and claim it is unfair.
A third result might be that the Greek exclusion process will initiate a broader financial crisis and lack of trust in the European Union and the Euro currency.
From the European leaders viewpoint, all of these outcomes except one would clearly be worse than an immediate back down. If Greece leaves the euro and recovers, the whole austerity project will be shown up as the failure it is. This would become obvious to the general public.
If Greece leaves the EU (and especially if the United Kingdom also does after their upcoming referendum), then the European Union´s credibility as an independent and stable political union is done for. Europe will not have any more credibility than a shaky trade alliance or temporary interest group, and this will push extremist political parties in the European countries to push for even more economically bad populist solutions.
Populism appeals to the self-interests, hopes and fears of the general people, especially contrasting those interests with the beliefs and interests of the educated most often more rational minority, and a failure to solve the Greek debt crises and keep Greece in the Euro will for sure fuel this.
In an article last year, I wrote on this blog:
I think to a large extent, the populist movements gain traction because of a disconnect between the abstract concepts and explanation models that explain economic growth, unemployment, recessions and in general the complexities in modern society. To counter this, more responsible politicians will need new concepts and tools to describe reality in ways that can be understood by the general public, and we also need to look at development and government more on the smaller scale, in the regions, cities and towns where the mayors and other elected leaders can have a more personal connection with their electorates.
At the moment, the European institutions (ECB, IMF, EC) and the political leaders seem to have convinced themselves there won’t be a financial crisis, however history´s past track record gives little ground for confidence.
And with this message, I would like to come to the main point of this article, to provide a summer reading list of books about past financial crises in the world.
This may sound dry and not so interesting for the beach, the lounge chair or the evening read under the garden tree, but trust me on this, these books read as well and retell stories just as exciting as a techno-thriller by Tom Clancy or Michael Crichton, and you will learn more about reality than by reading fiction.
I have read these books one by one over the past 20 years or so, and this morning as I read the BBC news, I realised they together form a good storyline and backdrop to understanding the Greek debt crises.
Peter L. Bernstein – Against the Gods
Published in 1996, Against the Gods – The Remarkable Story of Risk is an outstanding book about the evolution of risk and man’s attempt to understand it. Bernstein begins with ancient times and traces the history of numbers and probability leading eventually to today’s seemingly complex financial world of portfolio theory, derivatives, and risk management techniques.
Readers will learn about revolutionary thinkers including John von Neumann (inventor of game theory), Isaac Newton, Harry Markowitz (grandfather of portfolio theory), and the late Fischer Black (Black Scholes option formula) among others. Readers will also find enlightening stories about game theory, Fibonacci numbers, chaos theory, the bell curve of normal distribution, regression analysis, and much more.
Yet despite all the intelligence, computer power, and sophisticated techniques, Bernstein presents us with the growing body of evidence discovered by researchers that "reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty." Against the Gods was chosen as one of Business Week’s top 10 books in the year it was published. It is a very good and quite easy read on a complex topic.
Niall Ferguson – The House of Rothschild
Niall Ferguson´s The House of Rothschild (volume 1 and 2) describes the emergence and influence of the Rothschild Bank in Europe. Founded in the late 18th century by expatriate German Jews, the London-based House of Rothschild was within decades the largest banking enterprise in the world. Its principals controlled a vast portion of the industrial world’s wealth, more so, Ferguson writes, than any family has since, and as a result enjoyed tremendous political influence in the major capitals of Europe, counting as allies such important figures as Metternich and Wellington. They were together with the House of Baring the central bankers of their times.
The Rothschild Bank influence would provoke countless anti-Semitic tracts fulminating against Jewish usury and against the power of "Eastern potentates" in the empires of England and France. Although the Rothschild’s were well aware of their power and not reluctant to use it, they operated fairly, Ferguson notes. For example, whereas lending rates in the textile industry, in which the Rothschild’s got their start, were often 20 percent, the fledgling house charged 5 to 9 percent. Through shrewd, complex negotiations they helped promote peace and the beginnings of economic union throughout Europe.
Ferguson’s history covers much ground and involves a cast of hundreds of players. At the outset he notes that his book was commissioned by the modern descendants of the House of Rothschild; even so, he approaches his task with careful balance and a critical eye, pointing out the Rothschild’s’ failings as well as successes. The result is a fine, solid contribution to economic history, one that, unlike so many books in the field, is highly readable.
Philip Ziegler – The Sixth Great Power
I bought the book The Sixt Great Power – A History of One of the Greatest of all Banking Families at Foyles on Charing Cross Road maybe 15 years ago. I got curious when I saw the book, as Barings Bank is in infamy after the collapse caused by poor speculative investments, primarily in futures contracts, conducted by the banks employee Nick Leeson who worked as a low level manager at its office in Singapore. I bought the book as I wanted to know more about the banks great days and what it had achieved. It is currently out of print but I think you can find second hand copies.
Barings made its mark during the Napoleonic Wars, becoming the top merchant bank in England. Although Rothschild’s’ various branches perhaps were worth more pounds and francs and marks, Barings was considered to be the leading merchant bank in the world, hence it was talked about as the sixth great power after Britain, France, Prussia, Austria and Russia.
Barings Bank helped to finance the United States Government during the war of 1812, it was instrumental in supplying food to Ireland following the potato crop crises of 1845 and 1946 and it was dominant in the world in underwriting government debt, much like the IMF works today and as the European Central Bank acts in the Eurozone.
Murray N. Rothbard – A History of Money and Banking in the United States
Rothbard´s A History of Money and Banking in the United States is a 512 page book that is available for free from the Mises Institute, a research centre that is dedicated to supporting the intellectual tradition in economic and political theory, represented by Ludwig von Mises.
Murray N. Rothbard, a master teacher of American economic history covers money and banking in the whole of American history, to show that the meltdown of our times is hardly the first. And guess what caused them in the past? Paper money, loose credit, reckless lending standards, government profligacy, and central banking. When will we learn? When people understand the cause and effect in the history of these repeating calamities.
Rothbard traces times of inflation, bank runs and panics, and money meltdowns from the Colonial Period through the mid-20th century to show how government’s systematic war on sound money is the hidden force behind nearly all major economic calamities in American history.
Liaquat Ahamed – Lords of Finance
Ahamed´s Lords of Finance describes how four central banks caused the Great Depression in 1929, by a serious of in hindsight obvious mistakes.
In December 1930, the great economist John Maynard Keynes published an article in which he described the world as living in “the shadows of one of the greatest economic catastrophes in modern history.” The world was then 18 months into what would become the Great Depression. The stock market was down about 60%, profits had fallen in half and unemployed had climbed from 4% to about 10%.
It is commonly believed that the Great Depression resulted from a number of events beyond any one person’s or government’s control. In fact, as Ahamed reveals, it was the decisions made by a small number of central bankers that were the primary cause of that economic meltdown, the effects of which set the stage for World War II and reverberated for decades.
As the Greek debt drama plays out, this is maybe the most interesting book that I can recommend today. Lords of Finance is a potent reminder of the enormous impact that the decisions of central bankers can have, their fallibility, and the terrible human consequences that can result when they are wrong.
Neil Irwin – The Alchemists – Inside the Secret World of Central Bankers
As the Lords of Finance describes what the central bankers after the first world war did wrong, The Alchemists presents an accessible account of the efforts made in 2007 to 2012 by Ben Bernanke of the United States Federal Reserve, Mervyn A. King of the Bank of England and Jean-Claude Trichet of the European Central Bank, in pulling the world financial system back from the brink of collapse.
As the preface says: “When the first rumblings of the coming financial crisis were heard in August 2007, three men who were never elected to public office suddenly became the most powerful men in the world. They were the leaders of the world’s three most important central banks: Ben Bernanke of the U.S. Federal Reserve, Mervyn King of the Bank of England, and Jean-Claude Trichet of the European Central Bank. Over the next five years, they and their fellow central bankers deployed trillions of dollars, pounds and euros to try and contain the waves of panic that threatened to bring down the global financial system.”
Few people have even the remotest understanding of how the world’s financial systems work, who pulls the strings, and why. This book provides the key facts and factors in a very readable manner.
Educated as an Economist in the 1980s and having worked in investment banks and having had my years as Director in Wall Street Systems in the 1990s, while we developed the systems and processes which powers the European Central Bank, I thought I had a reasonable understanding of the international financial system before I read this book. How wrong I was! The brilliance of the alchemists running the three key central banks during the global financial crises saved us this time, just as the incompetence of their predecessors in the 1920s pulled the world into the great depression.
Hopefully this book will become a standard text for all economic students, all politicians and all people interested in knowing how the world of finance works, and how it currently plays its game around the Greek debt crises. The Alchemist is an important book that is very worthwhile to anyone who wants to learn more about the international financial system, central banks and how the recent global financial crisis has been handled, from the inside.
Adam Lebor – Tower of Basel
In Basel in Switzerland is the head office of the Bank for International Settlements (BIS). Established in 1930, it is is an international organization of central banks which fosters international monetary and financial cooperation and serves as a bank for central banks. Yet to the general public it is almost completely unknown.
The book Tower of Basel is the first investigative history of this secretive global financial institution. Based on extensive archival research in Switzerland, Britain, and the United States, and in-depth interviews with key decision-makers, Tower of Basel tells the inside story of the Bank for International Settlements, including sad times as when The BIS accepted looted Nazi gold, conducted foreign exchange deals for the Reichsbank, and was used by both the Allies and the Axis powers as a secret contact point to keep the channels of international finance open during the second world war.
This is a lighter book than the other books in my summer reading list. However it is worth while reading as it tells the inside story of the intrigues and gambles that goes on behind the open stage of world finance. After all we are all humans and bankers dealing with huge sums sometimes tends to be even more human and maybe not so ethical as they should.
After 1945 the BIS, hidden behind the scenes, for decades before the establishment of the European Central Bank, provided the necessary technical and administrative support for the European currency project, from the first attempts to harmonize exchange rates in the late 1940s to the launch of the Euro in 2002. Today BIS stands at the centre of efforts to build a new global financial and regulatory architecture with the Basel I, II and III regulatory standardised frameworks, once again proving that it has the power to shape the financial rules of our world.
A Guide to the World Bank
A Guide to the World Bank is published by the World Bank itself, and tells the story of what it does and how it works. As it says in the preface:
“The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. Its mission is to overcome poverty by supporting an inclusive and sustainable development, enhancing growth with care for the environment, and creating individual opportunity and hope.
Through its five institutions and in partnership with more than 100 developing countries, the Bank Group strives to improve health and education, fight corruption, boost agricultural support, build roads and ports, and protect the environment. Other projects are aimed at rebuilding war-torn countries or regions, providing basic services such as access to clean water, and encouraging investments that create jobs.
In addition to this critical groundwork around the world, various parts of the World Bank Group are involved in activities ranging from conducting economic research and analysis to providing financial and advisory services to governments and private enterprises.”
This book is worth to read to understand the purpose of the World Bank and what it does, and how this helps to bring us into a more equal world with less poverty and misery in the worlds poor nations, among which one cannot count Greece.
By reading the above mentioned books this summer, the reader will almost for sure conclude that the only rational outcome to the Greek debt crises that could be counted as a win is the one when the Greek economy fails, but Greece stays in the EU and there is no immediate financial crisis. The safe option for the European institutions is to cave in, write off lots of debt and lose a lot of face.
Alexis Tsipras understands this very well, in his thuggish way, and if he succeeds to achieve his goals, he will be remembered as a brilliant politician in his country. After all, owing the bank a little money, you have a problem. Owing the bank a huge amount of money, the bank has the problem.
To end the summer 2015 book recommendations, below is Today’s Daily Telegraph cartoon on the Greek crisis.