Episode 4

Niall Ferguson travels to New Orleans, post-Hurricane Katrina, to ask why the free market can't provide
adequate protection against catastrophe and hardship
Episode 5
Niall Ferguson explains how we got hooked on the idea of a property-owning democracy, and why the
unintended consequence of 'securitizing' mortgages was a global financial crisis.
Episode 6
In the final programme Professor Niall Ferguson's final question is: What happens when you globalise
Western financial institutions: the banks, bond and stock markets?
The Ascent of Money Summary Chapter 5 Safe as Houses
Posted on October 17, 2010 by curiousmanager
The concept and desire to own a house is baked into our minds from early in life, take as an example
Monopoly which was at the time hugely popular and widespread. Safe as houses is the popular
expression, also because of its use as collateral for loans. Banks are happy to provide loans to buy a
house, and this has increased 75-fold since 1959. In earlier times, it was only the aristocracy that
owned both land and houses, and live off its rent. And only house-owners were allowed to vote in the
earliest days of democracy. But as inflation rose and industrialization diminished the importance of
land, the economic relevance and political power of the land-owning aristocracy decreased as well. A
regular job, with a regular income, became more important than titles and land income. In the preGreat Depression period, the US was a place where not many workers owned a house and mortgages
to obtain them were uncommon. With the Great Depression, a lot of foreclosures happened and social
unrest was on the rise. F. D. Roosevelts New Deal answered the concerns of the huge groups of
unemployed Americans who were more and more inclined to listen to communist voices. It increased
the opportunity for average workers to afford an own house and lots of public housing was developed.
The Savings and Loans, and later the Federal Housing Administration standardized lending, offered
low-interest and long-term loans. As the collateral was safe as a house, a secondary market of these
mortgages was created. The Federal National Mortgage Association (Fannie Mae) issued bonds and
bought the loans, thereby making the loans cheaper. By 1960, 60% of the population in US was a
house owner. There was another dimension to it: most people enjoying the surge in ownership were
white. Black citizens were considered credit unworthy and had to pay much higher interest. This
resulted in racial unrest and much struggle, but it was only in the 70s that the situation improved, that
discriminating against blacks became a federal offence and that banks were under pressure to lend to
minorities. In the UK, the emphasis was much more public housing than on cheap lending. Also there,
the property-owning democracy slowly became a fact, helped by a higher inflation in the 60s and 70s.
The Saving and Loans, mentioned before, struggled with the inflation and later with the increase in
interest rates in the 70s and consequently were deregulated. They were now allowed to invest in much
more than long term mortgages, but still insured by the state. This created reckless investing and
outright fraud, the biggest of which was the Savings and Loan Empire case in Texas. The management
rose funding from brokered deposits and was used to develop empty land into business parks and
residences, paid for by investor who borrowed from Savings and Loan Empire. By the time the liabilities
were far higher than the assets, which could never be sold at the value that they were accounted for.
The company went bankrupt and management was convicted, but it appeared that the entire system
of Savings and Loans had been running the same scheme country-wide. The total cost to US was 154
billion USD (123 billion to be paid by taxpayers) when the investigations, trials and reorganizations
were finalized in 1991. Who was buying the mortgages that all the Savings and Loans associations
throughout the US were selling off? A new breed of Wall Street traders bought them at rock bottom
prices (in the 80s), repackaged them into big chunks and sold them off as bonds. First the
government-insured ones, later anything else that could be sold. Securitization was born and took
away the natural social bond between lender and borrower. The consequences of this anonymity,
leading to poor judgment of the solvency of the underlying borrower, would emerge in the crisis of
2008 and onwards. One often reads about the comparison in return on real estate vs a return on stock
indexes. But this is not easily done due to differences in liquidity, volatility and depreciations.
Furthermore, should one include dividends and house rents or just look at capital appreciation? What
become apparent, by any measure, is that investing in real estate does not give a bigger return than
stock, it actually declined quite significantly in some US regions during the last crisis. A part of the
problem also comes from subprime mortgages, meaning mortgages with borrowers who arent really
creditworthy and who will run in trouble after the tease period with artificially low paybacks ends.
These were exactly the mortgages that were repackaged and sold off. Large groups of people, often of
ethnic minorities, never had the chance of owning a house and now got it at incredibly cheap rates.
The federal government under Bush was even supporting the trend by subsidizing first-house

purchases. The assumption was that real estate prices would keep rising, people would keep their job
and interest rates would stay low. In the mean time, the subprime loans were repackaged and sold as
triple A investments, rated by Moodys and Standard & Poors, in theory to those who were best able to
take the risk, but in practice to those that did not fully understand the risk. The moment that interest
rose, the debt became unbearable and showed to be much higher than the assets of a mortgage
holder. The fire rapidly spread, and estimates show that in US around 2.4 million foreclosures, the
equivalent of 12.7% of mortgage lenders, are likely to hit the real estate market. In the meanwhile,
banks parked their exposures in off-balance Strategic Investment Vehicles to hide their losses. When
the interbank credit market went into a crunch, many banks and investors found themselves in
liquidity crisis. As confidence dropped, the subprime crisis triggered a worldwide one. Fannie Mae and
Freddie Mac, the companies put in place to facilitate property ownership to a wider public, were largely
undercapitalized and had to be sponsored, in fact owned, by the federal state. Another aspect of
property ownership is its potential for injecting capital into the poorest layers of society in Latin
America and other places. Peruvian economist Hernando de Soto has the following theory: if the
process to obtain legal ownership is simplified, it would mean that the poor living in their little shacks
in the third worlds overpopulated capitals would have a collateral for a loan, thereby providing capital
to unleash their capitalist energies. It would also bring them up for effective taxation and strengthen
democratic tendencies. But the model has been tested, challenged, and proven not very effective or
fast to provide loans to property owners. It will also, in less secure places, give rise to speculation and
eviction of the slum occupants. It seems that the real security lies not in the ownership of a house, but
in a steady income. Another way to fight poverty, is to provide micro-credit. The experience has proven
that, contrary to practices which existed until the 70s, women are better credit risks than men, and
more likely to successfully invest it to bridge an agricultural season or start a small business. It has
proven to be so successful that it has spread throughout the third world, but also to some segments of
the developed world. Interest rates can be high, as is the risk, but as an overall business micro-finance
is profitable, thereby attracting parties not necessarily interested to fight poverty.
The Ascent Of Money - 4 Risky Business
8:30pm Thursday, 18 Jun 2009 Documentary CC G
Life is a risky business, which is why people take out insurance. But faced with an unexpected disaster,
the State has to step in - in other words, the compulsory contributions of taxpayers.
In tonight's episode Professor Ferguson travels to post-Katrina New Orleans to ask why the free market
cannot provide adequate protection against catastrophe. His quest for an answer takes him to the
origins of modern insurance in the early 19th century and to the birth of the welfare state in post-war
Japan.
The struggle to overcome risk has been a constant theme of the history of money, from the invention
of life insurance in 1744 by two hard-drinking Scots clergymen, to the rise and fall of the welfare state.
To the explosive growth of hedge funds and their multi-billionaire owners.
The creation of the Scottish Ministers' Widows' Fund was a milestone in financial history, for it provided
a model not just for Scottish clergymen - but for everyone who aspired to provide for life's
eventualities.
At the Battle of Waterloo your chances of getting killed were up to one in four. But with insurance, you
had the consolation of knowing that your wife and children wouldn't be thrown out onto the street.
No matter how many private funds were set up, there were always going to be people beyond the
reach of insurance, who were either too poor or too feckless to save for that rainy day.
Disasters like 9/11 and Katrina expose the limits of both traditional insurance and the welfare state.
But insurance and welfare aren't the only ways to buy yourself protection against future shocks. These
days the smart way of doing it is by being 'hedged'. Everybody's heard of 'hedge funds', but what
exactly does hedging mean - and where did it come from?
The Ascent Of Money - Chimerica
8:30pm Thursday, 02 Jul 2009 Documentary CC G
By the summer of 2007 it seemed as if the earth had turned into Planet Finance. As never before, the
world was interconnected - but not just by cables, container ships and jet planes but by 24/7 dealing
rooms and international investment banks.
Globalisation is something we take for granted today. And yet for all the advantages of an
interconnected world - perfectly exemplified by Hong Kong's astonishing humming container port,
there's a downside to globalisation and that is its vulnerability - its vulnerability to financial shocks,
because finance isn't an exact science, and its vulnerability to political forces beyond the control of the
bankers.
Just ten years ago it seemed that these crises were more likely to blow up in emerging markets, like
Asia. Yet today, it's the West that's caught up in a full-blown credit crunch - while Asia seems scarcely
to have noticed. Indeed a new phenomenon has come to define the world economy: American

borrowers have come to rely on Chinese savers - a symbiotic relationship between China and America
that Niall Ferguson calls 'Chimerica'.
But can we be sure that Chimerica will save this era of financial globalisation? The chilling reality is
that a hundred years ago - another age of financial globalisation ended not with a whimpThe Ascent Of
Money - Safe As Houses
8:30pm Thursday, 25 Jun 2009 Documentary CC G
It sounded so simple: give state-owned assets to the people. After all, what better foundation for a
property-owning democracy than a campaign of privatisation encompassing housing?
An economic theory says that markets cannot function without mortgages, because it is only by
borrowing against their assets that entrepreneurs can get their businesses off the ground. But what if
mortgages are bundled together and sold off to the highest bidder?
This week Professor Niall Ferguson explains how someone's bright idea to bundle together a bunch of
sub-prime mortgages and sell them on, virtually brought down the world's financial markets.
er, but with a bang. And there's no reason why that shouldn't happen again in our time.