'There will be blood'Submitted by Rhonda15 on Wed, 02/25/2009 - 14:17
Harvard economic historian Niall Ferguson predicts prolonged financial hardship, even civil war, before the ‘Great Recession' ends
His views on the US:
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.”
Heather Scoffield: Surely that safe-haven status would be revoked if China loses faith in the U.S. ability to finance its debt?
Niall Ferguson: As you know, Chimerica – the fusion of China and America – is one of my big ideas. It's really the key to how the global financial system works, and has been now for about a decade. At the end of The Ascent of Money, I speculate about whether or not that relationship will survive. If it breaks down, then all bets are off, for the U.S. and indeed for Asia. I think that's really the key point. Both sides stand to lose from a breakdown of Chimerica, which is why both sides are affirming a commitment to it.”
“It's very interesting that the Chinese in the last week were saying such soothing things around the [Secretary of State Hillary] Clinton visit. This was only days after Treasury Secretary Tim Geithner used the dreaded ‘m' word – currency manipulation.
His views on Europe:
Niall Ferguson: “European banks are far more leveraged than American banks. I don't see Europe as offering up any particularly good model in any respect. In fact, I think Europe's prospects could get a whole lot worse this year, to the extent that it could be very, very hard indeed to keep the Euro zone together. I think it will be possible because the costs of leaving will be so high.
"There will be howling anguish, all kinds of pain, conflict between Germans and the others. It's going to get very uncomfortable indeed. No, I wouldn't look to Europe for inspiration. You could, I guess, look at Spain...
“I definitely think some type of tighter regulation of banking capital adequacy is needed. Basel I and Basel II have not worked. In many ways, they're the great failures. I think Canada's somewhat straightforward, mechanical definition looks like one the rest of the world should be adopting.”