Review of Open Lecture with Liaquat Ahamed
Lords of Finance
October 14, 2009
12:30-1:30 p.m.
 Liaquat Ahamed |
Central banks are mysterious institutions, the full details of their inner workings so arcane that very few outsiders, even economists, fully understand them.
Boiled down to its essentials, a central bank is a bank that has been granted a monopoly over the issuance of currency. This power gives it the ability to regulate the price of credit - interest rates - and hence to determine how much money flows through the economy.
Some crises have originated in the stock market, some in the credit market, some in the foreign exchange market, occasionally even in the world of commodities. Sometimes they have affected a single country, sometimes a group of countries, very occasionally, the whole world. All, however, share a common pattern: an eerily similar cycle from greed to fear.
The parallels between what happened in 1929 and what happened in the lead up to the current financial crisis are eerie. Just like our current crisis, the Great Depression that began in 1929 was brought about by a malfunction of the international financial system. It is commonly believed that it happened beyond any one person’s or government’s control. In fact, as Liaquat Ahamed reveals, it was the decisions taken by a small number of central bankers that were the primary cause of the economic meltdown, namely Montague Norman of the Bank of England, Emile Moreau of the Banque de France, Hjalmar Schacht of the Reichsbank, and Benjamin Strong of the Federal Reserve Bank of New York. These four men were as prominent in their time as Mervyn King, Jean-Claude Trichet, Alan Greenspan or Ben Bernanke King are today. Contrary to the latter, the central bankers of the 1920s and 30s, though, acted in relatively isolated national environments with limited ways of postal communication, primitive tools and sources of information, united only by their fear of inflation and their decision to prevent it by returning to the gold standard. For a brief period in the mid-1920s, they appeared to have succeeded. The world’s currencies were stabilized and capital began flowing freely. But beneath the veneer appeared a kind of boom-town prosperity. Cracks started to appear in the financial system, and eventually the world economy began a downward spiral into the Great Depression.
Just like today, the 1920s were an era when central bankers were invested with unusual power and extraordinary prestige. As in the 1920s, the current crisis began innocently with a surge of healthy optimism among investors, cavalier attitudes towards risk among bankers, optimism turning into overconfidence, and sometimes mania. Then there were the shock, bankruptcy, amazingly large losses, financial scandal, and the blaming of financial officers.
Drawing on these similarities, Liaquat Ahamed discusses the insights we can gain from the Great Depression about the forces that cause global financial crises, the actions economic officials have taken to mitigate the disaster, and the changes that will be necessary in the domestic regulatory structure and the global financial system to avoid a repeat of the financial meltdown.
About Liaquat Ahamed
Liaquat Ahamed is the author of the critically acclaimed best-seller Lords of Finance: The Bankers who Broke the World, a book about the lead-up to the Great Depression of 1929-1932. Niall Ferguson praised it in the Financial Times as “highly readable” while Time described it as “the rich and charming story of the end of the world.” The New York Times called the book “a magisterial work” and described Ahamed as “a writer of great verve and erudition” who “easily connects the dots between the economic crises that rocked the world during the years his book covers and the emergencies that beset us today.” Many financial officials, including Ben Bernanke and Paul Volcker, have publicly recommended the book for its insights into the current economic crisis. The book was short-listed for the 2009 BBC-Samuel Johnson Prize for Non-Fiction and won the Spears Book Award for the Best Financial History Book of the Year.
Ahamed has been a professional investment manager for twenty-five years. He has worked at the World Bank in Washington, D.C., and the New York-based partnership of Fischer Francis Trees and Watts, where he served as chief executive. He is currently an adviser to several hedge fund groups, including the Rock Creek Group and the Rohatyn Group, is a director of Aspen Insurance Co., and is on the board of trustees of the Brookings Institution and the New America Foundation. In addition he produced the movie The Situation, a political thriller set in Iraq and released in 2007, starring Connie Nielsen and Damian Lewis. Ahamed holds degrees in economics from Harvard and Cambridge universities.
About the ESMT Open Lectures
Starting in Autumn 2009 ESMT will continue its series of lectures focusing on questions of current intellectual concern. The lectures showcase speakers, who through their achievements and expertise are recognized leaders in their fields and have pushed the frontiers of public discussion. The lectures cover a wide spectrum of fields ranging from business, economics, politics, and philosophy to the arts. While speakers are authorities in their particular area, their insights have broad relevance and wide-ranging applications. The ESMT Open Lectures provide a forum in which their ideas can be communicated to a wider audience.
ESMT European School of