Niall Ferguson on entrepreneurial freedom and innovation

I am presently watching Niall Ferguson speak on entrepreneurial freedom in the global financial system, a presentation given at the St. Gallen Symposium 2010.

According to Professor Ferguson, the innovations brought about during the industrial revolution not only increased the efficiencies of goods manufacturing, it also made it easier for the very people who made those goods to buy more. These advances in economic ingenuity and processes are at the heart of rising living standards and economic growth.

Ferguson begins this lecture with some frank talk about Americans' delusions over their rapidly rising wealth twice over a ten year period (first in the dot com bubble, followed by the real estate boom); he then moves on to address the realities of economic decoupling, as seen in the recession in the developed world vs. slowing growth in developing economies.

He then offers a quick rundown of the factors which brought on the recent financial crisis, leading up to a historical overview of the industrial revolution and the efficiencies created by the "entrepreneur-driven process". Where industrial technologies and industrial processes were successfully spread, they came about mainly as a result of risk taking by entrepreneurs.

Relentless innovation and competition from entrepreneurs have driven down the costs of manufactured goods ever since. Schumpeter's description of the process of "creative destruction" speaks to the realities of economic survival; according to the evolutionary mode of thought, there are businesses and business models that, not unlike a species doomed to extinction, are not supposed to survive.

Unfortunately, we seem to face some very real threats to the workings of this spontaneous cycle of innovation and renewal. The long-term economic prosperity that has come about as a result is also in danger, says Ferguson.

What are the principal threats to entrepreneurial freedom and innovation? Let's tune in and find out.

Niall Ferguson on Fiscal Crises and Imperial Collapse

Niall Ferguson recently spoke on "Fiscal Crises and Imperial Collapses" at the Peterson Institute for International Economics.

The event summary, presentation transcript and slides, as well as audio and video of the talk and Q&A session, are all available at the PIIE link above.

I happened to watch Niall's historical overview of government debt crises last night, and it certainly put the current problems we are facing with sovereign debt into perspective. On a day when we are greeted with news of Spain losing its AAA rating through a Fitch downgrade, Niall's speech certainly comes at a pressing moment and the lessons he imparts are profound.

Listen closely to Ferguson's conclusion on the historical impact of the bond vigilantes in each public debt crisis. Each time, he points out, interest rates on government debt skyrocketed when bond holders saw an unsustainable fiscal program threaten the viability of a nation's debt repayment and market participants delivered their verdict by driving up interest rates on public debt.

The current crisis period is no different, despite the ravings of politicians who go on about evil speculators "attacking" their poor country's debt. As Ferguson shows, there is a time honored manner "in which financial markets voted on the credibility of a government’s fiscal policy", and the striking feature of public debt crises is the sudden loss of confidence that might befall any nation's public debt.

Enjoy the video and the insights offered in Ferguson's timely historical analysis.

Ira Sohn Conference notes: Marketfolly

Marketfolly has put together a nice, detailed post on the recent Ira Sohn Conference and the investing ideas offered up by some leading hedge fund managers and investors at this event.

If you haven't heard the chatter about this event, we can tell you that there were some very notable speakers present, including investors David Einhorn (Greenlight Capital), Bill Ackman (Pershing Square Capital), David Tepper (Appaloosa Management), Seth Klarman (Baupost Group), Jeremy Grantham (GMO), and historian Niall Ferguson.

Jay has summarized some of the main points and highlights from the speaker presentations, with the help of some Marketfolly readers who were good enough to share their notes from the conference. You'll also find links to additional coverage on Twitter and at Barron's.

Update: new Marketfolly posts highlighting David Einhorn's presentation and Steve Eisman's presentation, "Subprime Goes to College", have been added.

Also, if you'd like to find out more about the Ira Sohn Research Conference Foundation, which is "dedicated to the treatment and cure of pediatric cancer and other childhood diseases", have a look at the conference home page. You can learn more about their mission and make a donation to the foundation from their website.

How far will Greece's problems spread?

So just to follow up on our last post about debt problems in Greece and the EU, I'm hearing that some people are having a hard time making sense of this crisis and what it means for the whole of Europe.

To that end, I've decided to highlight a few helpful articles that will further our understanding of these sovereign risk issues.

We're seeing a growing worry that problems in Greece, UK, Spain, et. al, will spread throughout the eurozone and signal problems for other developed nations as well. Are these fears justified? Let's take a quick look and see what we find.

First off, The Economist reported yesterday that the EU summit on Greece yielded only "vague promises of solidarity" and no concrete plans for how a bailout of Greece by larger EU nations might come about.

Here's an opening excerpt from that piece:

"“PRETTY catastrophic”. That was the verdict of a depressed-looking diplomat, at the end of a Brussels summit on Thursday February 11th that saw European Union leaders issue a ringing, but alarmingly vague, pledge of “determined and co-ordinated action” to preserve the euro zone from the risk of a Greek sovereign default.

The vagueness of the bail-out promise was no mystery. After years of footing the bills for successive Euro-crises, Germany is in a truculent mood. Of the 16 countries that share the single currency, most came to Brussels ready to spell out, in some detail, how they might come to the aid of Greece, without breaching “no bail-out” rules that prevent the EU from assuming the debts of countries in the euro zone."

Would a bailout of Greece accomplish much? According to SocGen strategist, Albert Edwards, it would only serve to delay what he sees as the inevitable: a Eurozone breakup.

Meanwhile, Niall Ferguson writes in a recent FT piece that the "Greek crisis is coming to America". He argues, as we (and others) have, that the US seems to be taking false comfort in its temporary "safe haven" status, when in fact it should be looking at the longer-term effects of its own debt explosion.

"For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941..."

So I think we have enough here to highlight the risks that investors and economic thinkers are currently mulling over. The question remains: will fiscal problems in places like Greece, Spain, and Dubai spread to established financial institutions and larger economies?

A new form of Glass-Steagall?

As noted on Twitter, FT Alphaville is abuzz today with news of Obama's plan to limit the "size and scope" of large US banks.

Here's an excerpt from the administration's press release:

"“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama.

“My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.”

The proposal would:

1. Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

2. Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits."

It goes on to say that the President will work very closely with others (the illustrious Chris Dodd and Barney Frank, to name a few) to benefit consumers, close loopholes, and end the "Too Big to Fail" mentality.

This is tragically hilarious when you consider that these same large banks attained their TBTF status with the help of government bailouts and their ensuing moral hazard risks. So once again, government wants to "solve" the very problems they helped create in the first place.

For more insight on this proposed "Glass-Steagall II" legislation, and the rise of "too big to fail" banks, see our related articles section below.

Related articles and posts:

1. Obama gets tough on Wall Street banks - FT.com

2. Banks are bigger problem now: Niall Ferguson - Finance Trends.

3. Obama moves to restrict big banks - WSJ.com

Pivot Capital report: China's Investment Boom

We mentioned a possible divergence of opinion between Niall Ferguson and Jim Chanos on the future of China's economic path in Monday's post, "Niall Ferguson: world tilts towards Asia" (although Niall does hedge quite a bit on possible outcomes for Asia & China towards the final paragraphs of his article).

Is China's economy sailing along thanks to a skillful implementation of government-directed "stimulus", or is the country's current prosperity and stated economic output merely a mirage?

Jim Chanos is on record saying that China is "Dubai times 1000" and that the government-directed economy is being propped up with phony GDP statistics. His firm, Kynikos Associates, has also been influenced by a report on China's economy from Pivot Capital Management:

"The Pivot Capital report was extremely popular in Chanos’s office and concluded, “We believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom.” "

I thought it would be insightful to follow-up Monday's post with a look at this research, so I'm currently reading Pivot Capital's report, "China's Investment Boom: the Great Leap into the Unknown" (pdf).

If you're inclined to read along and share your thoughts on China's economy with us, we'd appreciate it.

Niall Ferguson: world tilts towards Asia

Niall Ferguson is out with a new opinion piece in the FT that discusses China, America, and "the decade the world tilted east".

"I am trying to remember now where it was, and when it was, that it hit me. Was it during my first walk along the Bund in Shanghai in 2005? Was it amid the smog and dust of Chonqing, listening to a local Communist party official describe a vast mound of rubble as the future financial centre of south-west China?

That was last year, and somehow it impressed me more than all the synchronised razzamatazz of the Olympic opening ceremony in Beijing. Or was it at Carnegie Hall only last month, as I sat mesmerised by the music of Angel Lam, the dazzlingly gifted young Chinese composer who personifies the Orientalisation of classical music?

I think maybe it was only then that I really got the point about this decade, just as it was drawing to a close: that we are living through the end of 500 years of western ascendancy."

Ferguson has been thinking and writing about the rise of China and the shaky state of the US' undeclared empire quite a bit lately. He now points out, citing economic research from Goldman Sachs, that China could surpass the US economy in terms of GDP by 2027.

The long-term trends of rapid industrialization in developing nations and the gradual transfer of wealth and economic influence towards Asia are undeniable. However, one has to wonder if the current strength of the Chinese economy and the effectiveness of its stimulus efforts are as solid as Ferguson seems to believe. On these points, he and hedge fund manager, Jim Chanos may disagree.

Niall Ferguson: An Empire at Risk

Niall Ferguson on the Debt Bomb, or, "An Empire at Risk":

"In the great scheme of things—let's be frank—it does not matter much if Iceland teeters on the brink of fiscal collapse, or Ireland, for that matter. The locals suffer, but the world goes on much as usual.

But if the United States succumbs to a fiscal crisis, as an increasing number of economic experts fear it may, then the entire balance of global economic power could shift. Military experts talk as if the president's decision about whether to send an additional 40,000 troops to Afghanistan is a make-or-break moment.

In reality, his indecision about the deficit could matter much more for the country's long-term national security. Call the United States what you like—superpower, hegemon, or empire—but its ability to manage its finances is closely tied to its ability to remain the predominant global military power. Here's why..."
Of course, some of us in the US might welcome an end to our militaristic global empire; maybe it will help bring about a return to our founding principles and a refocusing on national defense (in the the true sense of the word) and securing our borders.

Hat tip to The Weekly Standard blog.

Links: history, present, and future

Sharing some of the more interesting links and stories that I've come across (or revisited) this week.

We've got Paolo Pellegrini on US debt, an honest and brief overview of the global energy picture, a comparative look at China and the US, and much more. Enjoy the links.

1. Paolo Pellegrini says shorting US debt "attractive bet" - Bloomberg.

2. Capitalism, Socialism, or Fascism? - Washington's blog.

3. Leonard Kleinrock: Mr. Internet (interview) - LA Times.

4. The Truth about Energy - Puru Saxena.

5. The "democratization of credit" is over - John Rubino.

6. Why the Dreyfus Affair Matters: Louis Begley interview with Bloomberg.

7. Niall Ferguson: US on collision course with China.

8. Gore Vidal thinks the US is headed for dictatorship.

9. Milton Friedman makes the case for limited government (PBS).

Banks are bigger problem now: Niall Ferguson

Niall Ferguson joined Bloomberg TV this week to discuss everyone's favorite "too big to fail" firms, the major US banks.

Key takeaways from this interview? The government bailouts and rescue interventions have resulted in an even greater concentration of assets in the banking sector, while leaving us with the larger problem of moral hazard, as the large banking firms are even more "too big to fail" now.

Lots more to hear from Niall in this interview; see especially his comments on the taxpayer guaranteed backstop provided to the "too big to fails" ("TBTFs") and the problems this will present down the road.

Related articles and posts:

1. Why a Lehman deal would not have saved us - Niall Ferguson.

2. Jim Rogers: more banks should have failed - Finance Trends.

Governments push up trade barriers

Interesting to note that a new WTO report shows governments across the world have increased barriers to trade in recent months.

FT has the details in, "WTO sees increase in barriers to trade":

"Governments around the world have continued to push up trade barriers in spite of high-profile pledges at the G20 summit and other forums to resist protectionism, according to a World Trade Organisation report to be published today.

Over the past three months, the WTO recorded 83 trade-restricting measures undertaken by 24 countries and the European Union - more than double the number of trade-liberalising measures enacted during the same period. However, the report noted that the worst abuses had largely been contained...

...The WTO warned that a surge of new anti-dumping investigations could materialise as the economic crisis dragged on. It also lowered its forecast for world trade; it is now predicting that the volume for goods and services will contract 10 per cent this year as opposed to the 9 per cent previously expected. "In the past three months there has been further slippage towards more trade restricting and distorting policies," the report concludes."

As the global economic outlook remains uncertain (despite the oft-heralded announcements of economic "green shoots" in the mainstream press), protectionism is on the rise.

For more perspective on the global economy and the workings of globalization, see our notes on Niall Ferguson's recent interview with Bloomberg TV, and (as always) feel free to add your two cents in here.

Bloomberg interview with Niall Ferguson

Niall Ferguson speaks with Bloomberg TV in Aspen, CO. A few important points from Niall in this discussion:

· We're living through one of the great financial crises in history, comparable in magnitude to the Great Depression of 1930s or any of the crises of the 19th century.

· After a banking crisis such as this, government debt "has a tendency to explode". Historically, financial crises have seen a debt crisis, followed by inflation.

· Danger of overdoing the parallel with 1930s. We (USA) now have a huge structural deficit and a "mounting public debt". The bigger danger is with longer term inflation and higher interest rates due to reckless efforts to stimulate the economy.

· We still have functioning globalization, and yet this global financial crisis has been met with fragmented, national efforts to thwart the economic fallout.

· Generals are famous (historically) for fighting the last war; similarly, regulators will try to solve the last crisis. These attempts may prevent a repeat of this exact style of crisis, but will give rise to a new set of problems leading to another style crisis. You can't regulate financial crises out of existence.

Enjoy the interview, and see our related posts for more commentary and interviews with Niall.

Related articles and posts:

1. Barron's interview with Niall Ferguson - Finance Trends.

2. Niall Ferguson: "What Price Liberty?" - Finance Trends.

Barron's interview with Niall Ferguson

For those who missed it, Niall Ferguson was the featured interview in the latest issue of Barron's magazine.

Ferguson shared his thoughts on the global economy and offered a historically reasoned view on whether or not we face another Great Depression-style downturn. Here are some excerpts from that interview:

"Barron's: Is the worst over for the global stock markets and the economy?

Ferguson: It may look that way, but appearances can be deceptive. The stock market has actually tracked almost perfectly its downward movements between 1929 and 1931. Now that doesn't mean that we are going to repeat the Great Depression. I don't think we will, because the policy responses have been different.

It would be excessively optimistic, however, to conclude from a relatively small set of green shoots in the economic data that we are all going to live happily ever after. It is certainly way too early to say the Obama administration is right that the economy is going to grow at 3% next year and 4% in 2011. I find that scenario as implausible as a rerun of the Great Depression...

When will the recovery come?

Nobody has the faintest idea what next year is going to look like. It isn't clear yet that this is just a common recession. This is probably more like a slight depression. We won't see a big V-shaped bounce. Much of the consumption growth in the decade up to 2007 was fueled by things like mortgage-equity withdrawal. That game is clearly over. Strip that out, and you are looking at an annual economic-growth rate in the U.S. closer to 1½% to 2% than 4%."

Check out the full interview (non-subscribers can look for the full piece next week) for more of Niall's thoughts on the economy, arguments over banking regulation and deregulation, gold, and investing the Rothschild way.

Related articles and posts:

1. Niall Ferguson: The Ascent of Money (PBS) - Finance Trends.

2. Niall Ferguson: Paul Krugman is wrong - Business Insider.

3. European nations "as bad as Argentina": Ferguson - Bloomberg.

Niall Ferguson on "What Price Liberty?"

One of the best things I read over the Memorial Day weekend was Niall Ferguson's review in the Financial Times of Ben Wilson's new book, What Price Liberty?. I'd like to share some of it with you.

Here's an excerpt from that review:

"“The privileges of thinking, saying, and doing what we please, and of growing as rich as we can, without any other restrictions, that by all this we hurt not the public, not one another, are the glorious privileges of liberty.”

These are the words of “Cato” (the nom de plume of John Trenchard and Thomas Gordon), writing in the early 1720s. For the better part of two centuries, that view was widely held in England, and Englishmen were not wrong to believe that it set them apart from continental Europeans and “Orientals”.

Also integral to the English conception of liberty was John Locke’s linkage of freedom and private property. In the landmark Entick v Carrington case (1765), Lord Camden ruled against the government for raiding the home of the radical journalist John Entick. “The great end for which men entered into society was to secure their property,” declared Camden. “By the laws of England, every invasion of private property, be it ever so minute, is a trespass.”

Almost as important was the principle of minding your own business. “The taste for making others submit to a way of life which one thinks more useful for them than they do themselves,” John Stuart Mill explained to the French liberal Alexis de Tocqueville, “is not a common taste in England.”

Do what you like as long as you do no harm. An Englishman’s home is his castle. And mind your own bloody business. When did these three great principles of liberty cease to be sacrosanct in England? Wilson has little doubt that it was the two world wars that began the process...".

Do check out the full piece, especially if you're interested to know how an English writer's discussion of liberty pertains to those of us living in the good ole' USA.

As Ferguson notes in his review, you can also download Wilson's book, What Price Liberty?, for any price you wish.

Related articles and posts:

1. Ben Wilson: What Price Liberty? - What Price Liberty? Blog.

2. Niall Ferguson: The Ascent of Money (PBS) - Finance Trends.

Features of the week

Get set for our, "Features of the week".

1. European stocks fall to nearly six-year lows.

2. Roubini says Europe's banking system faces growing risks.

3. Fear of US bank nationalization drives debt insurance higher.

4. Dow breaks through its November lows; all eyes on S&P 500.

5. Comment: The end of Swiss banking secrecy?

6. Buffet's Berkshire hits five-year low on derivatives worries.

7. Gold hits record against Euro on fears of Zimbabwe-nomics.

8. Frank Barbera charts discretionary spending and the art market.

9. Banks' latest writedown woe - their art.

10. Ron Paul on reinstating the draft and forced "volunteerism".

11. Home loans in the US: the biggest racket since Capone?

12. Rick Santelli calls for a "Chicago Tea Party" in July.

13. Baseball and the financial markets have a lot in common.

14. Roma bear brunt of Hungary's downturn.

15. Judge orders new probe into Russian journalist's death.

16. Niall Ferguson on "The Axis of Upheaval".

Have a great weekend, and thanks for checking in with Finance Trends Matter (click to subscribe to our RSS feed). We'll see you all next week!