Sunday 22 October 2017

Inability to learn from past proves costly

Yalman Onaran

A Nation of Deadbeats: An Uncommon History of America's Financial Disasters

In this book, Scott Reynolds Nelson presents a good case that the US was founded by bankers who used their insider knowledge and political connections to make lots of money. And their influence hasn't diminished much despite having caused dozens of financial crises since.

The book belongs to the lessons-from-past-crises genre, which has been booming since the 2008 financial meltdown.

One of the most influential entries has been 'This Time Is Different' by Carmen Reinhart and Kenneth Rogoff, who analysed episodes of financial trouble from 66 countries over eight centuries to show how this crisis actually wasn't that different from earlier ones.

Nelson, meanwhile, has compiled dozens of interesting episodes from 19th-century US history involving the interactions of politicians and bankers and shows how they all culminated in financial troubles as well as, eventually, solutions.

'A Nation of Deadbeats' is fun to read; it gleans interesting tidbits from the past and puts today's troubles in perspective.

For example, I had no idea that the Democratic Party was founded by politicians opposing a big bank's influence on finance and politics. Or that Democrats then established their own bank, which went on to finance land purchases in undeveloped regions.

The land speculation financed by easy money caused a crisis when prices collapsed and loans couldn't be paid back.

Of course, despite having taken place in 1819, this sounds similar to the housing crash we just went through.

Then, as now, the banks played a crucial role in financing a bubble, ended up almost collapsing when the bubble popped and relied on government support to survive.

"The bank was saved and the people were ruined," wrote a political economist at the time. Not much has changed on that front either.

Banks in the 1800s were also engaged in pretending that they'd gotten rid of risk by passing it on to other players, though it never truly left their balance sheets.

This imaginary risk elimination made it possible to place bigger bets but also exacerbated the damage when the bets soured.

The securitisation, derivatives and off-balance sheet entities that were supposed to lower risk made the latest crisis much more harmful to the global economy for the same reason.

Nelson can't hide his disappointment with the Democratic Party, which was founded two centuries ago to attack "vested privilege".

Following in Bill Clinton's footsteps, President Barack Obama has embraced Wall Street and didn't, he writes, "reach for the broom stick" to clean up the mess the banks had created.

Available with free P&P on www.kennys.ie or by calling 091-709350.

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