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(Blair Gable/© 2009, Blair Gable Photography)
(Blair Gable/© 2009, Blair Gable Photography)

Taking Stock

Why Niall Ferguson is still bearish Add to ...

Harvard University financial historian Niall Ferguson has climbed to the head of the doom brigade - and the bestseller lists - with his strong views, clear prose and prescient pronouncements about the global financial crisis. The Oxford-schooled native of Glasgow, whose latest best-seller, The Ascent of Money, is now out in paperback, continues to make waves. Here are excerpts of an interview Mr. Ferguson did with Report on Business.

Does the recovery we've seen in fits and starts have any legs at all, outside of the major emerging markets? Or is it a mirage?

I don't think it's possible to infer from the stock market rally anything resembling a sustained recovery. The third quarter GDP number of 3.5% growth was at least half due to one-off government measures. In any case, the U.S. consumer is constrained by horrible balance sheet problems - excessive leverage and severely reduced real estate values on the assets side. The stock market rally has been largely due to near-zero interest rates and a weaker dollar. In foreign currency terms there's been no rally.

What's your assessment of how the economic and financial crisis has played out this past year? Worse or better than you thought? Are markets headed for another big fall, or are they correctly predicting that the frail recovery will be sustainable?

I feared all summer that we might have another big banking crisis in Europe just as happened in 1931. Well, the European governments turned a blind eye to their big banks' problems and we avoided a repeat of Creditanstalt. So things are better than they might have been. But I don't think you can have any faith in markets 'predicting' anything. First, the bond market isn't predicting anything resembling what you might infer from the stock market, where the price/trailing earnings ratio is now pretty high. Secondly, how well did markets predict the crisis? Enough said.

Let's address your famous "Blood in the streets" comment to The Globe and Mail last February. Still feel that way?

I wasn't saying there would be blood in the streets of Toronto, remember. My first point was that the crisis would likely destabilize about a dozen relatively weak states and that this 'axis of upheaval' would become more violent. That's happening already - just look at the escalation of violence in Afghanistan and Pakistan, and the signs of a deterioration of security in Iraq, not to mention Somalia.

The other point I had in mind was that, after previous big financial crises, insecure governments have been tempted to rattle sabres for the sake of promoting their own domestic legitimacy. My prime suspect here is Russia, which of all the big powers stands to gain the most from geopolitical instability, since [for example]a major attack on Iranian nuclear installations would double the price of oil and greatly enrich the denizens of the Kremlin. The probability of such a war is currently being underestimated by many people.

You have said projections about the economy are wrong because they're based on models that don't correspond to real life. Do you feel they have by now been well and truly discredited, along with the efficient market theory and other dearly held views of so many academic economists?

No, I think they are putting up a heroic resistance. And I don't want to caricature the process whereby economists try to model the complex thing that is the economy. These exercises have their uses. And the efficient market hypothesis is not all wrong. Most of the time, stock prices do seem to follow a random walk, as the theory states. But the key phrase is 'most of the time.' We need to use history and psychology to understand what makes seemingly irrational manias and panics happen so frequently in financial markets. Too many economists thought they didn't need to stoop to incorporate such lowly disciplines. The discipline succumbed to hubris, because mathematical elegance took precedence over the real world.

Please give your outlook for the U.S. dollar, inflation and long-term interest rates?

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