13 Dec 2010 | News & Promotions

Ask the Author - Your Questions Answered by Liaquat Ahamed 

Ask the Author – your Questions Answered by Liaquat Ahamed

You may remember our previous article when we invited Trust Online readers the opportunity to ask author Liaquat Ahamed a question on global finance or the global economy.

With degrees in economics from Cambridge and Harvard universities, Liaquat Ahamed has witnessed at close hand, as a professional economist at the World Bank during the 1980s, the way in which countries' economic policy is made and executed. He has since worked as an investment manager, with a ring-side seat at a sequence of financial crises, from the collapse of the European Monetary System in the 1990s to the 'sub-prime' economic downturn.

Liaquat attended The Times Cheltenham Literature Festival on 14 October 2010 with his first book ‘The Lords of Finance: 1929, The Great Depression, and the Bankers who Broke the World’.

Thank you to all the readers who submitted questions.  Those that have had their question answered below will each receive a copy of the ‘Lords of Finance’.

The questions and Liaquat’s answers can be viewed below:

1. I was reminded of the first few lines of Yates’ poem, The Second Coming after reading Lords of Finance.  It seems to me that the world is, time and again, sacrificed on the wheel of global finance and economics.  Booms and busts come and go, despite best efforts by governments and central bankers.  In your view, are we all destined to remain strapped to this “widening gyre” or, will we one day be able to act before things get critical and "fall apart"?

“The answer is no. Firstly booms, and the financial bubbles they give rise to, are caused by euphoria. They are part of human nature and we will never be able to get rid of them completely. Secondly in the initial stages it is impossible to distinguish between a market which is rising because the fundamentals are improving and one which is on the verge of spiraling out of control. Central bankers and regulators are no more able to see into the future than you or I. They will never have sufficient confidence to act aggressively until it is too late.

What I think we can do—and have done—is to protect the economy from the worst effects of a bursting bubble”.

2. To what extent did the level of repatriations forced upon Germany after the end of WWI contribute to the rise of Hitler and Nazi Germany?

“Reparations on Germany, imposed after the First World War were fixed at a gigantic $30 billion, some 250% of GDP, though they were eventually negotiated down to $12 billion. Reparations left a terrible legacy of bitterness among Germans for the way they were treated. Initially to try to pay for reparations the German central bank printed money on a massive scale. The result was the German hyperinflation of 1922-1923 when over a period of two years, prices rose by 400 billion percent. The middle class was completely impoverished. Finally Germany resorted to foreign borrowing to pay for reparations. After the crash of 1929 this foreign capital suddenly dried up and as consequence Germany in particular was severely hit by the Depression. Unemployment rose above 30%. It was the combination of the collapse of the middle class, but most importantly high unemployment that brought the Nazis to power. In the elections of 1928, the Nazis won a bare 2.6% of the vote and only 12 seats in the Reichstag. During the elections of September 1930, after the Depression had begun, the Nazis, playing on the fears and frustrations of the unemployed increased their seats in the Reichstag to 107, making them the second largest parliamentary party after the Social Democrats. By August of 1932 they had 230 seats. The rest of the story, as they say is history”.

3. It is easy looking back on this period of history to see the mistakes made. At the time do you think the Bankers had the knowledge and skills to avoid The Great Depression or would their intervention been powerless to stop it happening?

“During the 1920s the global economy faced a major imbalance between the U.S. and Europe, which was largely the result of the First World War and the Versailles Peace Treaty, and which central bankers could do nothing about. They did mismanage things in the 1920s but probably could not have forestalled some sort of depression after 1929. Their big mistake was to take what was already a very sick economy in 1931, in the aftermath of the Crash and banking crises and apply precisely the wrong medicine, in effect killing the patient. That was simply ignorance. They were like 18th century doctors who thought the cure for disease was to draw blood from the patient”.

4. What role do you think institutions like the Bank of England or US Federal Reserve should play in today’s economy?

“Central banks have two functions: to determine the price and availability of credit in the economy by setting interest rates with a view to controlling inflation and during downturns combating unemployment : and to protect the integrity of the financial system by acting as a lender-of-last resort. While they may make mistakes—that unfortunately goes with the territory—we are far better off with them. We would have a much more unstable financial system and economy without them”.

The views expressed in this article are based on personal opinion and may not necessarily be the views of Baillie Gifford.  The views expressed should not be taken as statements of fact nor should reliance be placed upon on them when making investment decisions. No representation or warranty, express or implied, is made to the accuracy or completeness of the answers.

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