The following is an excerpt from The Ascent of Money: A Financial History of the World, by Niall Ferguson.
Looking back ten years, I have been struck by two things. First, the analytical framework of The Ascent of Money served readers well. The book correctly foresaw that, bad as things already were in the summer of 2008, they were about to get a great deal worse. A US recession was not just coming; it had already begun. Banks all over the world were indeed about to shrink their balance sheets; many shadow banks were about to be swept away. I was right, too, that Europe would be at least as badly affected as the United States. And I was right to foresee a ‘great dying’ in the financial world. I argued that this deepening financial crisis could not be explained simplistically, but required a consideration of six different pathologies of the international system of payments and investments:
- The excessive leverage or inadequate capitalization of the banks of the Western world;
- The contamination of the short-term debt market with toxic securities of the sort depicted in ‘The Subprime Primer’;
- Errors of monetary policy by the Federal Reserve System, which turned a blind eye to signs of overheating in the American real estate market;
- The emergence of the new forms of financial life known as derivatives, which added an opaque layer of complexity to the system;
- The politically motivated campaign to increase the homeownership rate in the United States (and some other countries that also experienced housing bubbles); and
- The unbalanced relationship that had developed between the United States and China, which Moritz Schularick and I gave the name ‘Chimerica’.
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