The Ascent of Money (2008) – Episode 1 – Dreams of Avarice [Transcript]

Professor Ferguson explains the origins of credit and debt and why credit networks are indispensable to any civilization.
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Shylock

From Shylock’s pound of flesh to the loan sharks of Glasgow, from the “promises to pay” on Babylonian clay tablets to the Medici banking system. Professor Ferguson explains the origins of credit and debt and why credit networks are indispensable to any civilization.

 

 

Welcome to the world of money, bread, cash, dosh, dough, loot, lucre, moolah, the readies, the wherewithal. Call it what you like, money can break us or it can make us. In the past year, it’s certainly broken more than a few of the biggest names on Wall Street and in the City of London. And while former masters of the universe crash and burn, the rest of us are left worrying if our savings would be safer in a mattress than in a bank.

[Professor Niall Ferguson] The great financial crisis that began in the summer of 2007 has most of us utterly baffled. How on earth could a little local difficulty with sub-prime mortgages in the United States unleash an economic tsunami big enough to obliterate some of Wall Street’s most illustrious names, to force nationalisations of banks on both sides of the Atlantic and to bring the entire world economy to the very brink of recession, if not downright depression? Shouldn’t this series be called The Descent Of Money? Well, I want to explain to you just how money rose to play such a terrifyingly dominant role in all our lives.

What’s more, I want to reveal financial history as the essential back story behind all history. Banks financed the Renaissance while the bond market decided wars. Stock markets built empires… and monetary meltdowns made revolutions.

From Ancient Mesopotamia right down to present day London, the ascent of money has been an indispensable part of the ascent of man. But money’s rise has never been a smooth, upward ride. As we’ll see, financial history has repeatedly been interrupted by gut-wrenching crises of which today’s is just the latest.

From the fluctuating prices of the homes we own to the high-speed industrialisation of China, the power of finance is everywhere we look and it affects all of our lives.

But are you in on the secret? Do you know what causes a bank run or a monetary meltdown or a stock market crash? Can you tell the difference between a sub-prime loan and a prime loan? Well, I think these financial technicalities only really make sense once you know where they came from. And that’s why financial history is of more than merely academic interest. Not knowing this stuff can seriously damage your wealth.

Dreams of Avarice

Crisis or no crisis, the amount of money sloshing around planet finance still boggles the mind. By one measure, the US stock of money is now $8, 700,000,000,000, up 12% since last year. And some people are still pocketing a huge share of that cash. Last year, despite the onset of the biggest financial crisis since the Depression, his hedge fund paid George Soros a cool $2.4 billion. That’s roughly 41,000 times more than the average American family earned. As they say on Wall Street, “Way to go”.

Now, however, imagine a world with no money.

500 years ago, the most powerful society in South America, the Inca Empire, had no real concept of money. The Incas appreciated the aesthetic qualities of rare metals – gold was the sweat of the sun, silver the tears of the moon – labour was the unit of value in the Inca Empire, just as it was later supposed to be in a communist society. But in 1532, the Incas ran into a man whose hunger for money had led him across an ocean. Francisco Pizarro and his fellow Conquistadores had come from Spain to what they called Upper Peru inspired by the legend of El Dorado, the realm of the gold-covered king. After defeating the Inca army at the Battle of Cajamarca their quest began in earnest. At Potosi, in what is now Bolivia, the Spaniards struck it rich. They discovered the Cerro Rico, literally the Rich Hill. Towering nearly 16,000 feet above sea level, it was a money mountain.

In their 250 years of Spanish rule, more than two billion ounces of silver were extracted from mines like this one, 14,000 feet up in the Andes. What the Incas couldn’t grasp was why the Europeans had such an insatiable lust for gold and silver. They couldn’t understand that to Pizarro and the Conquistadores, silver was much more than just shiny metal. It could be made into money… a store of value, a unit of account, portable power.

I must say, I find this place pretty harrowing. The Spaniards had a system of forced labour which meant that every able-bodied male in the native population had to do a stint down these mines. And you can see why one in eight of them didn’t survive the ordeal.

Today, 500 years later, conditions for miners in the Cerro Rico haven’t improved much. But at least they get paid for the work they do. In those days, it was a way of making money that verged on genocide.

The silver ore was ground up, refined with mercury and then shipped to Europe as bars and coins. Empire, it seemed, had made the Spanish crown rich beyond the dreams of avarice.

And yet, all the silver in the mines of Potosi couldn’t halt the inexorable economic and political decline of Spain’s empire. Why was that, when Pizarro seemed to have struck it so incredibly rich? The answer is that the Spaniards had dug up so much silver to finance their wars of conquest, that the metal itself suffered an extraordinary decline in value. More silver coins didn’t make Spain richer. They simply made prices higher as an increased quantity of money chased the same amount of goods. What the Spaniards didn’t get was that money is only worth what other people will give in exchange for it.

British Museum – London

And, whether money takes the form of silver coins, seashells, bars of gold or bank notes, that’s been true from ancient times right down to the present day. Even lumps of clay can work better than silver coins, if people have enough confidence in them.

In Ancient Mesopotamia, nearly 4,000 years ago, people used clay tablets like these ones to commit themselves to particular financial transactions. For example, this one, found a little south-west of Baghdad, specifies that a debtor will repay a lender 330 measures of grain on the harvest day. But this one’s even more fascinating, because what is says is that a debt of four measures of barley should be repaid to the bearer of the clay tablet and it’s that idea of repayment to the bearer that really fascinates me.

If the phrase sounds familiar, then it should. Just take a look at a £20 note. Bank notes have next to no intrinsic worth. They’re simply promises to pay, just like the clay tablets of ancient Babylon four millennia ago. On the back of the $10 bill it says, “In God We Trust”. But it’s not really God you’re trusting in.

By swapping your goods or your labour for a fistful of these things, you’re trusting the US Treasury Secretary not to repeat Spain’s mistake and produce so many of the damn things that by the time you come to spend them, they’re worth even less than the paper they’re printed on. Today we’re quite happy with paper money. Even more amazingly, we’re happy with money we can’t even see. Millions of dollars pass through this woman’s hands every day… or rather, across her computer screen. She’s a foreign exchange dealer, whose business is literally buying and selling money. Each day around $3 trillion changes hands in transactions like these around the world. And it’s all built on trust. it has to be when you can’t even touch the stuff.

That’s what the Conquistadores got wrong. They failed to see that money is about trust – even faith. Trust in the person paying you the money, trust in the central bank issuing the money, trust in the commercial bank that honours the cheque. Money isn’t metal. It’s trust inscribed. And it doesn’t much matter what it’s inscribed on – paper, silver, clay, or a screen – provided the recipient believes in it.

There was one huge possibility created by the emergence of money as a system of mutual trust – a possibility that would revolutionise world history. It was the idea that you could rely on people to borrow money from you and pay it back at some future date. That’s why the root of “credit” is “credo”, the Latin for “I believe”. Without the invention of credit, the entire economic history of our world would have been impossible.

Because we take it for granted, we tend to underestimate the extent to which our entire civilisation is based on the borrowing and lending of money. No, it doesn’t literally make the world go round. But it does makes vast quantities of people, goods and services go around the world from Babylon to Bolivia.

The puzzle is that the early moneylenders got so little thanks for their services. On the contrary, they were widely reviled as pariahs. Why was that?

Welcome to Northern Italy in the year 1200AD. A land divided into multiple feuding city states. A land where trust was in rather short supply. Among the many remnants of the defunct Roman Empire was a numerical system singularly ill-suited to complex mathematical calculation, let alone the needs of commerce. Nowhere was this more of a handicap than in Pisa, where merchants struggled to do business with seven different forms of coinage in circulation. Even the simplest transaction could be a headache, requiring the use of an abacus. By comparison, economic life in the Eastern world – in the Muslim caliphate or the Sung Chinese Empire – was far more advanced. To discover modern finance, backward Europe needed to import it.

Enter a young mathematician called Leonardo of Pisa or Fibonacci. The son of a Pisan customs official based in what is now Algeria, Fibonacci is best remembered today for his sequence of numbers that mimic the properties of nature.

But the famous sequence was only one of many Eastern mathematical ideas that Fibonacci introduced to Europe with his path-breaking book the Liber Abaci – The Book of Calculation. Even more important was his demonstration of the superiority of Arabic numerals over Roman numerals. And crucially, nearly all Fibonacci’s examples related to business.

Since Roman times, Europeans had been struggling to do simple arithmetic with these… The Hindu or Arabic numerals made all kinds of calculation easier. In particular, Fibonacci showed how the new methods of calculation could be applied to commercial bookkeeping, to currency conversions and, crucially, to the computation of interest. Just imagine trying to work out percentages in Roman numerals. Fibonacci’s Liber Abaci made it child’s play.

This was to be the application of mathematics to making money.

The most fertile soil for such financial seeds proved to be the Italian city states. Fibonacci’s home town of Pisa was one. But it was above all Venice – more exposed than any of the others to Oriental influences – that became the great money-lending laboratory… and the home of literature’s most notorious moneylender – Shylock, in William Shakespeare’s The Merchant of Venice.

[Bassanio] May you stead me? Will you pleasure me? Shall I know your answer?

Crucially, Shylock’s only prepared to lend the money if Bassanio’s friend, the merchant Antonio, is providing the security.

[Shylock] Three thousand ducats for three months and Antonio bound.
[Bassanio] Your answer to that.
[Shylock] Antonio is a good man.

By “good”, Shylock doesn’t mean virtuous, he means “good” for the money he’s about to lend Bassanio. In other words, creditworthy.

[Bassanio] Have you heard any imputation to the contrary?
[Shylock] Oh, no, no, no, no. My reason in saying that he’s a good man is to have you understand me that he is sufficient. Three thousand ducats. I think I may take his bond.

With any loan, things can go wrong. Ships can sink. And that is precisely why anyone who lends money to a merchant – if only for the duration of an ocean voyage – needs to be compensated. We usually call the compensation “interest” – the amount paid to the lender over and above the sum lent or “principal”. Overseas trade of the sort that Venice depended on couldn’t operate without such transactions. And they remain the foundation of international trade to this day.

But why does Shylock turn out to be such a villain, demanding literally “a pound of flesh” – in effect Antonio’s death – if he can’t fulfil his obligations? Why is Shakespeare’s moneylender so heartless – the original of that bloodsucking financier who recurs time and again in Western literature?

One clue is that Shylock is one of the many Jewish moneylenders in history. Jews who stayed in Venice for more than two weeks were supposed to wear a yellow “O” on their backs or a yellow hat. And they were confined to a special area which became known as the Ghetto Nuovo.

This is the entrance to the Jewish ghetto in Venice where Jews were obliged to live and indeed confined at night. Jews were tolerated in Venice, but for a reason. The key was that Jews could provide a service that Christian merchants were forbidden to do – they could charge interest on their loans. Fibonacci might have figured out the mathematics of lending, but it took Shylock to do the deal.

This is where the Venetian Jews used to do business. This building here was the old Banco Rosso and it was outside here that they used to sit behind their tables – their tavole – on their benches – their banchi, the root of the Italian word for banks. Now, there was good reason why merchants came here to the Jewish ghetto to borrow money. For Christians, what the Jews were doing, lending money at interest, was a sin.

The medieval Church’s laws against usury – charging interest on loans – were a major obstacle to the development of finance in Europe. After all, what God-fearing Christian merchant wished to risk the torments of Hell? This astonishing vision of eternal damnation was painted by Giorgio Vasari and Federico Zuccari on the inside of the great dome of Florence’s Cathedral, the Duomo. And below there’s another fresco by Domenico di Michelino of Florence’s greatest poet, Dante Alighieri, holding his masterwork, the Divine Comedy. According to Dante, there was a special part of the seventh circle of Hell that was exclusively set aside for usurers.

There the moneylenders were eternally tortured with scorching earth and freezing snow, their necks weighed down with bulging purses.

Jews, too, weren’t supposed to lend at interest. But there was a convenient get-out clause in the Old Testament book of Deuteronomy, chapter 23, you weren’t supposed to lend to your brother at interest, but to a stranger? Well, that was a different matter. In other words, a Jew couldn’t lend to a Jew, but he could lend to a Christian.

The price the Jews paid for performing this service was social exclusion. Hence the ghetto. And hence the centuries-long association between Jews and finance, one of the few forms of economic activity from which Jews were not once excluded.

In the end, of course, Shylock is thwarted. For although the court recognises his right to a pound of flesh, the law also prohibits him from shedding Antonio’s blood. And, because he’s a Jew, the law also requires the loss of his goods and life for so much as plotting the death of a Christian. He only escapes by submitting to baptism. It turns out to be a risky business to be a moneylender.

The Merchant of Venice raises profound questions about both economics and anti-Semitism. Why don’t debtors always default on their debts – especially when the creditors belong to unpopular ethnic minorities? Why don’t the Shylocks always lose out?

To get a better idea of how primitive moneylending works, you don’t need to travel back in time. There are plenty of modern-day Shylocks remarkably close to home. And they don’t need to be Jewish to suffer a similar fate to Shylock.

This is Shettleston in the East End of Glasgow. It’s actually where my grandmother used to live. And I think with its distinctive steel shuttering, it’s one of the grimmest places in the whole of Western Europe. In fact, average male life expectancy here is just 64, which is slightly worse than Bangladesh. That means that the average Shettlestonian doesn’t actually live long enough to collect his state pension. You might think nobody would be mad enough to try and provide financial services here. But someone does.

That someone is a loan shark. You give him your benefit card as security and he gives you a loan. On the day your benefit arrives, he gives you back the card and you go to the post office to get your money, repaying him the interest. it’s a modern version of Shylock’s business model. Usury is alive and well and living in Scotland.

These are some pages from the loan book of a Glasgow loan shark. And it’s kind of interesting to see how the business model works. You lend out maybe £10 to someone and you expect to be paid back £12.50 at the end of the week. Now that’s 25% a week, but if you work that out at an annual rate it comes to 11 million per cent.

So why do people scraping by on just £5.90 a day pay such horrendous interest on loans? These, surely, are loans you’d be mad not to default on. But here in Glasgow, defaulting on your loan is highly inadvisable. You won’t literally lose a pound of flesh, but grievous bodily harm isn’t an unknown consequence of letting down the loan shark. Quite simply, individual loan sharks have to be rapacious and ruthless because the costs to them of even a single defaulter are so high. And that explains why, from Renaissance Italy to modern Scotland, the moneylender is so often a hated figure. He’s providing a service, but at a socially unacceptable price.

So how did lenders learn to overcome this fundamental problem? If they were too generous, they didn’t make any money, but if they were too hard-nosed, borrowers would eventually default. The answer was to get bigger and more powerful. It was time to invent banks.

In 15th century Italy, the key financial service of providing credit moved out of the ghetto to become the legitimate preserve of banks. This transition was symbolised by the rise of one family – the Medici. With their ascent, credit came of age. Moneylending ceased to be disreputable. It became glorious – and the foundation of a new kind of power. The dazzling legacy of the Medici family’s power still surrounds you in Florence today. In the space of 400 years, two Medici became Queens of France, three became Pope. Appropriately, it was Machiavelli, the supreme theorist of power, who wrote their history. Perhaps no other family left such an imprint on an age as the Medici left on the Renaissance. You might even say that they paid for the Renaissance, their patronage running the gamut of genius from Michelangelo to Galileo. And this, in the Uffizi Gallery, is the Medici’s private art collection, one of the most spectacular ever assembled.

What the millions of tourists who flock here generally forget to ask is how the Medici paid for all this.

The simple answer is that they were foreign exchange dealers, members of the Arte de Cambio – the money changers’ guild – who made it big. They were known as banchieri or tavolieri because, like the Jews of Venice, they literally did their business sitting on benches behind tables. Indeed, the original Medici bank – or bench – was located right here in the Via dell’Arte della Lana – Wool Guild Street.

Prior to the 1390s, the Medici were Florence’s answer to the Sopranos – a small-time clan notable more for low violence than for high finance. In a 17-year period, no fewer than five Medici were sentenced to death by the criminal courts for capital crimes. Then came Giovanni di Bicci de’ Medici. It was his aim to make the Medici totally legitimate. Part of the secret of his success was an ingenious bit of creative accounting that got the Medici off the hook of the anti-usury laws.

These ledgers of the Medici bank make it clear how important commercial bills for financing foreign trade were to the bank. True, the Church prohibited the collection of interest on loans. But there was nothing to prevent a shrewd trader from making money on transactions like these, which involved multiple currencies. There was no interest, and therefore no sin, simply a commission deducted for the conversion of one currency into another. If money was advanced to a particular trader for any length of time, the commission was that bit larger. In the same way, depositors who put their money in the Medici bank were given ‘discrezione’ to compensate them for risking their money. This was credit, in other words, but with the interest payments discreetly concealed. Now, for the first time, moneylending had evolved into banking.

The real story of the success of the Medici bank can be found here in the Libro Segreto – the Secret Book – of Giovanni di Bicci de’ Medici. The key was not so much size as diversification. Earlier Italian banks had been monolithic and very vulnerable to default by a single bad borrower. But the Medici bank was made up of multiple interlocking partnerships, each in some measure independent of the rest. It was this decentralisation that was the key to their astonishing profits.

Under Giovanni’s guidance, the Medici banking network extended from Florence, to Venice, to Rome. The scale and diversity of the Medici’s operations was the key to reducing the risks of moneylending, and therefore also the costs to borrowers. That’s the essential difference between loan sharks and banks – between Shylock and the Medici.

And here’s the proof that it worked. Page after page of Giovanni’s assets, declared for tax purposes and culminating in the grand total of 91,089 florins. In those days that was serious money.

When Giovanni died in 1429, his last words were an exhortation to his heirs to maintain his standards of financial acumen. His funeral was attended by 26 men of the name Medici, all paying homage to the man who had made the business of banking respectable – and profitable – as it had never been before. For his son Cosimo, the accumulation of wealth combined seamlessly with the accumulation of power. Within 20 years of his father’s death, Cosimo de’ Medici was the Florentine State. As the Pope himself put it – “Political questions are settled at his house. “The man he chooses holds office. “He it is who decides peace and war and controls the laws. “He is King in everything but name.”

This Botticelli is mainly famous for the beauty of its young subject. But it’s actually intended as a tribute to a dead banker, Cosimo de’ Medici. That’s him there on the medallion, and you can just make out the inscription Pater Patriae – the father of his country.

In 150 years, the Medici had transformed themselves from backstreet moneylenders to the most powerful financial force in Europe. But it’s this painting, Botticelli’s Adorazione dei Magi, which more than any other captures the transfiguration of finance the Medici had achieved. On close inspection, the three wise men are Cosimo de’ Medici, washing the feet of Christ, and his sons Piero and Giovanni. The young man on the left is Lorenzo. The painting had been commissioned by the head of the Bankers’ Guild as a tribute to the family. Perhaps it should really have been called The Adoration of the Medici. Having once been damned, bankers were now close to divinity.

Nothing could better illustrate the extraordinary ascent of money. For what the Medici had achieved was nothing less than the birth of modern banking.

Others had tried before, but the Medici were the first bankers to hit the political big time. And they did it by learning one crucial lesson – in finance, small is seldom beautiful. By making their bank bigger and more diversified, the Medici had found a way of spreading their risks. And by focusing on currency trading rather than just lending, they’d reduced their exposure to defaults by borrowers. For Cosimo and his family, it was a truly beautiful business model.

Yet not even the Medici were invulnerable. The bank suffered heavy losses as a result of over-generous loans to blue-blooded debtors who felt no compunction about defaulting on their obligations and telling the bankers to get lost.

Bad debts – money owed by borrowers who go bust – are the perennial problem that any bank confronts. Yet for a time, it seemed as if modern bankers had solved this age-old problem. They really thought they were smarter than the Medici.

Memphis, Tennessee is a long way from Florence. And the world economy has come a long way since the Renaissance. A crucial part in that transformation has been played by the spread of modern banking from its Italian birthplace to a country where money has increasingly taken the form of easy credit. The United States has been built on borrowed money. But whereas the Medici tended to lend only to the relatively well off, until the present credit crunch at least, American banks seemed willing to give just about anyone a loan. Memphis is famous for blue suede shoes, barbecued ribs and bankruptcies. You can tell people here are a little… How shall I say it? …a little sub-prime. You only need to look at the shopping mall for the seriously poor. And the ubiquitous no-frills eatery. Then there’s a tax adviser who can tell you how to claim your low-income credits. A shop where you can borrow money on the equity you own in your car. And a place where they’ll give you an advance on next week’s pay cheque… not to mention a pawn shop the size of a department store.

And finally, when you’ve no possessions left to pawn or to sell, there’s just one option left. And that’s to head on down to ZLB Plasma where you can sell your own blood for $25 dollars a pop. Talk about being “bled dry”. It’s amazing really – an entire economic sector based on people who are broke. In some ways, it rather reminds me of the East End of Glasgow. Yet there’s a world of difference between this world and the world where loan sharks extract their pounds of flesh from petty defaulters. Here in sub-prime America, defaulting on your debts is easy. Well, pretty easy.

This is Richie. He’s in the repo business – snatching cars from under their owners’ noses when they haven’t made their payments. He grabbed that bolt action, he went “chh” and I watched the rifle shell go in the barrel and he lunged it towards me and hit me right here and almost knocked me down. He said, “Either you drop the truck or I’m dropping you.” And I said, “Yes, sir,” and I dropped the truck. You know, you make it sound so attractive, maybe I… I should switch jobs! I tell you what, it’s interesting.

In the bankruptcy capital of America, repossessing cars is a routine matter.

$16,000… It’s got the leather, the top…

Each week, United Auto Recoveries sells 500 repossessed cars. The cars are auctioned off to the trade, ending up in the same car lots, to be sold to much the same people and, when they can’t keep up with their monthly payments, repo’d and recycled once again.

Technically the Memphis repo men are simply doing what debt collectors do the world over. The difference, apart from the sheer mind-boggling scale of the thing, is the relative ease with which the bad debts are wound up and the collateral is sold off. For the debtors, there’s virtually no social stigma and nobody seems to be getting hurt. The big mystery is why the world’s most successful capitalist economy is based on a foundation of more or less painless economic failure.

Here in Tennessee, when the house has been stripped bare and the repo man has taken your car, you end up in the hands of one of Memphis’s bankruptcy lawyers, along with around 13,000 other people who filed for bankruptcy here in the past year.

Of course that’s one thing that’s making you… Bumping your payments up so high.

Every week, bankrupts gather here with their lawyers to hammer out deals with their creditors. There’s even a fast track lane.

In this case it’s a mortgage and it’s a car, or two cars. I can’t see anything else in there that they’re… they’re having to pay off.
Actually there are three cars.
Three cars?
The third car is… the neighbourhood title loans, has a… has a lien on the car, they are holding the title.
So putting this really simply, what were they supposed to be paying and what are they now paying?
Well, that payment was reduced from 241.11… down to 107.
OK. Quite an improvement. Cutting their monthly obligations by more than half.

From 1996 to 2006 there were between one and two million bankruptcy cases a year in the United States, nearly all of them involving individuals who elected to go bust rather than meet their obligations. In medieval Italy – or in the Glasgow of my youth, for that matter – bankruptcy was seen as a disaster. But not here.

In fact, this ability to walk away unscathed from unsustainable debt and start again has been a defining characteristic of American capitalism. There were no debtors’ prisons here in the early 1800s, at a time when English debtors could languish in jail for years. Since 1898, every American has been entitled to file for Chapter 7 – liquidation, or Chapter 13 – voluntary personal reorganisation. For rich and poor alike, bankruptcy has become as much of an inalienable right as “life, liberty and the pursuit of happiness”.

The theory is that American law exists to encourage entrepreneurship – to facilitate the creation of new businesses. And that means giving people a break when things don’t work out the first time, or even the second time. The born risk-takers don’t get wiped out as they learn through trial and error how to make that first million, because today’s bankrupt might be tomorrow’s billionaire. It’s a theory that seems to work. Many of America’s greatest successes failed in their early endeavours, including the author Mark Twain, the comedian Buster Keaton, and none other than the great industrialist Henry Ford himself. All of these men eventually flourished not least because they were given a chance to try, fail and start over. For their part, the banks simply assume that a proportion of the loans they make will go bad. After all, most people going bankrupt owe relatively trivial sums. A Chapter 13 doesn’t wipe their debts out, it just reschedules them.

So it’s a mistake to think, as Shakespeare’s Antonio did, of moneylenders as mere leeches, sucking the life’s blood out of unfortunate debtors. Credit and debt are the building blocks of economic development. But it takes banks to elevate that relationship beyond the tie between a loan shark and his hapless victim.

It’s only when borrowers like the ones on this Glasgow housing estate have access to efficient credit markets that they can escape the clutches of the Shylocks and the loan sharks. It’s only when savers can put their money in dependable banks that it can be channelled from the idle to the industrious.

But wait, I hear you ask, if banks are the answer, how could so many have collapsed so spectacularly in the past year, throwing the financial world into turmoil? To understand why bad debts in places like Memphis could cause such chaos, you need to understand how the relationship between banks and borrowers broke down as loans came to be “securitised” and sold on to unwary investors.

Once upon a time, being a banker was really rather boring. You lived by the 3-6-3 rule, which meant you paid 3% on deposits, collected 6% on loans and were on the golf course by 3 o’clock. But in our time, banking became really rather too interesting. A whole series of financial innovations made it possible for common or garden loans to poor folks in places like Memphis to metamorphose into weird and wonderful things with names like “collateralised debt obligations”. Well, this financial alchemy – turning lead into gold or toxic waste into gilt-edged securities – was only possible because the ascent of banks was followed by the ascent of the second great pillar of the modern financial system – the bond market. And for an explanation of how that came about, we’ll turn to Mr Bond himself.

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