Writing Worth Reading
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Writing Worth Reading
You’ve chosen the financial crisis as your topic, but I can’t help but start by asking how it fits in with your famous essay, “The End of History”? Given the crisis and the responses to it, do you still believe liberal democracies are the be-all and end-all, as you argued in 1989?
I don’t think that the financial crisis is really relevant to the general conclusion that liberal democracy is the only plausible form of government for a modern society. The financial crisis had a lot of causes – in particular, policy decisions and institutional choices that were made by different countries – but it doesn’t represent some of kind of necessary by-product of the system. There are plenty of countries that really didn’t suffer the crisis, and certainly didn’t suffer it to nearly the extent that the United States did. So it’s more a reflection of policy choices, rather than systemic issues.
With this choice of books, are you suggesting that if people read all of them they’ll get a good sense of the financial crisis in general, or is there a specific point you’re trying to make?
The crisis is obviously a big issue in itself, but the bigger question is what it tells you about the nature of the political system and the economic system that we’re living in. This has an ongoing relevance for how we elect presidents, and what kinds of policies presidents and Congress set in the future. In particular, the crisis has pointed to some interesting aspects of the American political system. One of the really big issues, which is most forcefully raised by Simon Johnson in his book, 13 Bankers, is whether we are actually living in a kind of oligarchy of the sort we attribute to places like Russia or Kazakhstan. The direct role concentrated wealth plays in blocking needed reform then merges, in my mind, into the larger question, which is the impact of interest groups and the way that distorts the political choices that we face – a general crisis for all modern democracies.
So in a way, the financial crisis was a good thing, because it has forced us to concentrate on this issue?
Yes – while nobody wants to have a crisis, it does serve as an opportunity for reform. I would say that one of the big tragedies is that in many respects this was a completely wasted crisis. It wasn’t deep enough. No one wants a crisis on the scale of the Great Depression, but because policymakers acted quickly to put a floor under the collapse of the system, a lot of the political actors were able to shake off the implications of the crisis. That really comes through in the dissenting Republican view of the Financial Crisis Inquiry Commission Report – to pretend, in a way, that nothing actually happened that would undermine a belief in the self-regulating nature of markets.
Before we get to that, let’s go through your other books. Your first choice is by Carmen Reinhart and Ken Rogoff and it’s called This Time is Different.
Reinhart and Rogoff are two macroeconomists who have done a marvellous job in bringing together a lot of historical and international data about how unstable financial systems are. The title of their book, This Time is Different, tells you the whole theme. In many respects, the Wall Street crisis was not at all different from Argentina or Britain in the early 1990s or any number of other crises that have been fuelled by credit bubbles and mismanaged macroeconomic policy. The reason that it was so surprising is that a lot of Americans in the 2000s believed that the US financial system was so deep and well developed that it would never be subject to the kind of instability that happened in Latin America during the 1980s. In a way they were victims of complacency. The other thing that is disturbing about the book is that it really shows how long it takes for a country to recover from this kind of a crisis. This suggests that the US and Europe, which is involved in a separate financial crisis of its own, are in for a prolonged period of low growth and stagnation.
I’ve had the book on my shelf for a while, but I’ve found it quite hard to get through. It has this wonderful empirical data to dip into, but it’s pretty dry economics, isn’t it?
That’s one of its advantages. It’s written by two academic economists, it’s got a lot of data and you’ve got to plough through that. It’s a good reference, but it’s not the easiest book to read and it presupposes a certain amount of knowledge of macroeconomics.
How does the book tie into the bigger question that you raised earlier? One thing you homed in on in an article in The American Interest last year is that hasty liberalisation of the financial sector is very dangerous.
One of the great ironies that the book points to is the fact that a lot of the Asian governments were a lot wiser than the US. The US – through the US Treasury and its proxies, like the International Monetary Fund – put very heavy pressure on a lot of the emerging economies in Asia in the 1990s to liberalise. That had the effect of leading to a big influx of liquidity into Asia as a result of the Asian miracle, which then flowed out again in the mid-1990s and led directly to the Asian crisis in 1997. The American reaction to that was to say, “Oh, this shows that the Asian governments are involved in crony capitalism! There’s not enough regulation, they don’t have mature institutions.” They patted themselves on the back that our system was much better than that. But in fact, in many respects, the financial crisis was simply a repeat of the Asian crisis. Instead of the money coming from the outside world into Asia, it flowed from Asia into the US, particularly from surplus countries like China. So there has been a certain amount of poetic justice. Just like these Asian governments, we didn’t have an adequate regulatory system in place, and we got into even bigger trouble than they did as a result. I don’t think there’s ever been a full acknowledgement of that on the part of Western policymakers. What’s happened in Asia is that all of those countries have gotten much more cautious about allowing free financial flows into their economies since 1997. That history – which we’ve managed to forget – is one that is pretty well covered in the Reinhart-Rogoff book.
Also, you mention that the Asians were accused of crony capitalism, but wasn’t a lot of the pressure for Asia to liberalise coming from Wall Street?
Yes, it was coming from the IMF, but the real pressure behind that was Wall Street. So, for example, in Korea, what we call the Asian financial crisis they labelled the IMF crisis. There is still a lot of bitterness. They believe that essentially the IMF took advantage of their liquidity crisis – that’s really what it was, it wasn’t fundamentally an economic crisis – and used that as an excuse to force open capital markets in Korea to the benefit of all the Goldman Sachses, Citigroups and so forth that wanted access to that market. All the American policymakers – Larry Summers, Bob Rubin – still swear that they had very pure motives in doing all of this, that this was just what was good for Korea. But behind that was, in fact, a tremendous amount of lobbying on the part of these big banks that had a direct self-interest in Asian financial liberalisation.
Let’s go on to your next book, which is highly readable and quite hard to put down: Michael Lewis’s The Big Short.
Michael Lewis is terrific both at picking topics and in his exposition. What I thought was most interesting about this book was that there is, to this day, a view about the whole pathology of collateralised debt obligations (CDOs) – these highly complex, packaged mortgage securities – as well as the credit default swaps – the insurance contracts written on those securities – that Wall Street created them and they simply got out of hand. They didn’t anticipate it would be hard to value them, how they would be misused, and so forth. What Michael Lewis points out very forcefully is that they were deliberately created by Wall Street banks in order to produce non-transparent securities that could not be adequately evaluated by the rating agencies, which then could be sold to less sophisticated investors, who would buy the idea that this junk debt actually had triple A ratings. So what this book does quite brilliantly is show that there was actually a high degree of intentionality in creating the crisis. The worst of all these securities are the so-called synthetic CDOs. A CDO is a bond that represents maybe a couple of thousand mortgages; a synthetic CDO is a group of hundreds of CDOs, all packaged into a single security. When you get to that level of complexity, no one can evaluate what this thing is worth. You can come up with sophisticated rationales for why this might actually follow some kind of market logic, but I think Lewis shows that the reason this happened is that they didn’t want anyone to be able to rate it.
Francis Fukuyama is an American political scientist and author. He is a Senior Fellow at the Center on Democracy, Development and the Rule of Law at Stanford University. Fukuyama writes widely on issues relating to democratisation and international political economy, and is best known for his book The End of History and the Last Man. His most recent book, The Origins of Political Order, was published in April 2011
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