Niall Ferguson on the Ascent of Money: 'We Need New Banks'

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SPIEGEL: So you believe that, just like in nature, only the fittest and most adaptable survive in the financial world.

Ferguson: In principle, yes. The players are competing for limited resources. Some of them succeed through innovation and thus prevent a monoculture from developing.

SPIEGEL: German President Horst Köhler said, "The financial markets have become a monster that needs to be cut down to size."

Ferguson: That was a foolish comment. You could just as easily claim democracy was a monster. Our financial markets are simply a reflection of our economic activity, and it's not the mirror's fault if it reflects our flaws. We shouldn't demonize the financial markets. We're just experiencing the markets getting rid of all that is "unadapted and non-viable," as the economist Joseph Schumpeter once put it.

SPIEGEL: But this process is rather painful. Couldn't greater state control have prevented the worst excesses? Is deregulation therefore to blame for the financial crisis?

Ferguson: That is the popular argument. I think it's nonsense. The process of deregulation began as far back as the early 80s, and the global economy has experienced a huge upswing since then. Apart from that there were also financial problems in the decades before that, when the markets were far more tightly regulated. Overall, banks are some of the most tightly-controlled institutions, and yet that's where the crisis began. Mortgage bank Fannie Mae, for example, operates under direct oversight from the US Congress. It's therefore not about more regulation, but about better regulation.

SPIEGEL: What should banking regulators watch out for?

Ferguson: They should pay closer attention to liquidity. The banks issued longterm loans, but could only procure the money for themselves on a short-term basis. Many institutions racked up huge debts -- sometimes 30 or 40 times more than their equity capital. If you then get a bottleneck in short-term credit, such behavior inevitably leads to a collapse. In addition, the regulators mustn't let banks get too big. Right now, many major institutions are practically bankrupt. They are zombie banks: half dead, but also half alive thanks to cash injections from the state. We have to think seriously about how long we can afford to continue this policy.

SPIEGEL: Are you suggesting the state should let problem banks fail?

Ferguson: Some are probably too big for that. But they should be wound up in a controlled manner. If they keep receiving state aid, the subsidies will distort the competition. The success of the financial system is gauged by its innovativeness. We need new banks. And we must look for ways to develop our monetary system.

SPIEGEL: What do you mean by that?

Ferguson: The fates of many of the world's economies are pegged to the development of the dollar at the present time. If the dollar loses value, which is highly likely, it will be particularly painful for countries like Japan and Germany, whose exports will become more expensive. So it should be in Germany's interest in particular that the monetary system is changed.

SPIEGEL: What might such a new system look like?

Ferguson: Perhaps a little like the situation in the 19th century, when there were several reserve currencies: sterling, the US dollar, the German mark, and the French franc. As such, the dollar's dominance could well diminish in favor of the euro, the Japanese yen, or the Chinese currency; the yuan.

SPIEGEL: Does that mean that we can learn from the history of financial crises and that of money?

Ferguson: Of course we can learn from the past. Ever since the Great Depression we have known how dangerous banking crises are. We can thank our lucky stars that the US Federal Reserve is chaired by Ben Bernanke, a man who spent his entire academic career studying the minutiae of the 1930s Depression. That's why he knew exactly what to do when crisis hit.

SPIEGEL: But not every banker or manager has the benefit of such historic insight.

Ferguson: Precisely. Companies are filled with mathematicians who sometimes calculate 'Value at risk' on the basis of as little as three years of data. If the models don't even follow the timeframe of a normal business cycle or take account of all the players, but merely focus on the share price at the end of the quarter, it's hardly surprising when people decide there is no risk. The lessons of history were ignored at every level.

SPIEGEL: So do you think companies should employ more historians and fewer mathematicians?

Ferguson: It wouldn't hurt. Financial history should at least be a significant part of every business studies course. This kind of knowledge is too important to leave to specialists like me. Unfortunately most of the people who read about financial history are retired bankers. It would have been better if they had read these books earlier.

SPIEGEL: Professor Ferguson, we thank you for this interview.

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• Part 1: 'We Need New Banks'
• Part 2: 'The Ascent Is Never Entirely Straight'
• Part 3: 'It's Not About More Regulation, but About Better Regulation'