Are we staring at another Great Depression?

Author: Vivek Kaul

Name of the book: Easy Money—The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System (Easy Money 3) 

Publisher: Sage Response 

Rs 395

Pages: 360

Easy Money — The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System (or Easy Money 3 in short), is a fitting final book in Vivek Kaul's trilogy on the history of money and the financial system as it has evolved over the centuries.

The book from Kaul, one of the most important Indian writers on contemporary economic matters, comes at a time when the world may face another tumult, with the Chinese juggernaut slowing down, impending rate rise in the US, and a slump in commodity prices.

A well-researched narrative, the book takes stock of the last one-and-a-half decade of the global economy, gives a lot of insights into the current economic problems, and pinpoints what is wrong with the financial system now.

Easy Money 3 takes on from the second book in the trilogy: Easy Money: Evolution of the Global Financial System to the Great Bubble Burst, which ends with the dotcom bubble bursting in the United States and other parts of the world.

The third book in the series starts in the aftermath of the dotcom bubble bursting and airplanes ramming into the World Trade Centre in New York on September 11, 2001. Alan Greenspan, deemed to be the greatest central banker in the world until then, cut interest rates to ensure that the United States does not go into a recession.

In the process, he managed to engineer a real estate bubble in the United States. Real estate bubbles have popped in other parts of the world. And as happens in case of bubbles, people got conned into believing that the rise in price will continue to forever. Until 2000, people were speculating in stocks, after that, they started speculating in real estate.

The Wall Street also cashed in on the bubble by speculating in a variety of derivatives. In fact, this is one of the best parts of the book, where Kaul explains terms like securitization, credit default swaps, adjustable rate mortgages, in simple English. Typically, when people write on finance, they end up writing it in a language that only other people who follow finance regularly enough, can understand. Kaul's book, in that sense, is a welcome change from the usual, where the idea is not to talk down to the reader.

Getting back to the book, Wall Street's fun with derivatives cost it a lot. And in a period of two weeks in September 2008, the United States government had to come to the rescue of some of the biggest financial firms in the United States. Europe soon followed over the next couple of months.

People who had speculated in real estate were already in a mess, once the real estate prices all over the world started crashing in 2007, after years of giving double digit returns. This led to a fear of a depression along the lines of the Great Depression which had engulfed large parts of the Western world starting in 1929.

The central banks of the Western world, led by the United States started printing money and pumping it into the financial system. The idea was that with all this new money floating around in the financial system, interest rates would be low. Low interest rates would lead to people borrowing and spending more money. This spending would engineer an economic recovery.

Kaul actually comes into his own in this section of the book, where he dissects the impact of the massive money printing carried by the Western central banks. Even after so much money being printed (one estimate suggests around $7-8 trillion), why has no sustainable economic recovery been seen in the Western countries? The answer is simple. People had a lot of debt already, and they were in no mood to take on more.

What happened instead, was that Wall Street came back into the picture. The firms borrowed money at low interest rates and invested that money in financial markets all over the world, leading to asset market bubbles everywhere, which Kaul explains beautifully.

Then there is the proverbial question of should the governments have rescued financial firms? Kaul compares the situation to forest fires. Small forest fires are necessary to clear up the shrubs, dried leaves etc., burnable material which can lead to bigger fires. Hence, it is necessary that small fires be allowed to run so that this burnable material can be cleared out.

The financial system is a tad like that. Financial firms inevitably end up being rescued. This has led to a scenario where those operating the financial firms indulge in excessive risk taking knowing fully well that if they bungle it up, the government will come to the rescue. Further, many banks all over the world have become “too big to fail”, i.e. they have become so big that if they are allowed to fail many more firms will fail along with them and bring down the economy as well.

In such a scenario, the governments have to come to the rescue of these financial firms. Given this, there is an inherent need that these firms be broken down into smaller firms, feels Kaul. He also writes that financial firms and banks need to start having more capital on their books. Currently, the real capital for most banks is less than 5% of their assets and this leads to financial and banking crises.

There are two sections in the book that deal with inflation, which I found to be a particularly interesting way of explaining things - in one Kaul explains how tomato ketchup can be used to create inflation. And in another he uses the mystery novels of Agatha Christie. Getting into detail on these sections would mean giving away too much. 

To conclude, Kaul's last book in the Easy Money trilogy is an excellent read and sums up very well all that is wrong with money and the financial system in this day and age. Anyone who wants to know how the economic future will turn out to be should be reading this book.