Spotlight: Niall Ferguson

Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University and a member of the Belfer Center Board of Directors.

In early 2007, the investment industry was riding high. Industry newsletters trumpeted claims that market volatility was a thing of the past. Interest rates were low, encouraging borrowing.

In Las Vegas that year, hedge fund managers convened a conference to toast their successes. During one particularly glossy presentation, a hedge fund manager argued that there would never again be a U.S. recession.

Niall Ferguson, a Harvard Business School professor and a member of the Belfer Center's board of directors, stood up from the floor to challenge him. Later, the two decided to make it a bet.

“I said, 'Never is a very bad timeframe,'" Ferguson said. "'Let's say five years.'"

The bet: $14,000, with 7 to 1 odds. If there were no recession before 2012, Ferguson would pay the hedge fund manager $14,000. If the economy went south, the hedge fund manager would owe Ferguson $98,000.

“There were powerful forces at work," Ferguson said. "Not many people saw there would be a spectacular unraveling. History was just waiting to deliver a sucker punch."

Ferguson's caution was well-grounded in academic research. For years, he had studied the unique role financial markets played in both the rise of the West and in precipitating periods of social upheaval. His newest book, The Ascent of Money, traces these themes in detail.

When he struck the bet with the hedge fund manager, Ferguson had just completed a handful of papers examining signs of trouble in the American financial empire. In 2006, he researched the ramifications of a sudden liquidity crisis, tracing the way that an unexpected spark could make the entire system seize up. He also wrote in the New York Times that excessive American indebtedness would ultimately provoke a crisis.

Born in Glasgow in 1964, Ferguson rose rapidly in European academia, first as a Hanseatic Scholar in Hamburg and Berlin, and later as Fellow and Tutor in Modern History at Oxford's Jesus College. He came to Harvard in 2004 after a brief stint in New York University.

Ferguson, writing in the Financial Times in the fall, dubbed the financial crisis "The Great Repression" - both because the financial risk is comparable in scale to the 1930s, but also because governments are repressing the full extent of the damage through injecting liquidity into the banking system. "The Great Repression" also has a psychological connotation, Ferguson said: "We're all in some degree of denial about how bad it is."

Ferguson wrote in "An Imaginary Retrospective of 2009" for the Financial Times in December, in which he quoted a fictitious advisor to President Obama: "We assumed that we economists had learned how to combat this kind of crisis," the imaginary advisor admitted in late 2009, shortly after returning to academic life. "We thought that if the Fed injected enough liquidity into the financial system, we could avoid deflation. We thought if the government ran a big enough deficit, we could end a recession. It turned out we were wrong. So much for [John Maynard] Keynes. So much for [Milton] Friedman."

To Ferguson, the financial meltdown has geopolitical implications as well. Although some have argued that the crisis will accelerate America's decline, the same economic forces also have undermined the United States' geopolitical rivals - to some extent even worse than in America. Thus, he notes, in relative terms the United States may not lose power.

Ferguson also argues that the current economic crisis highlights the dangers of being an indebted empire, especially as it comes to financing America's national debt with Asian savings.

The crisis "will reveal the fundamental vulnerability of the United States," Ferguson said. "We rely on foreign capital - and that's drying up fast."

One reason Ferguson has been able to make such timely - and accurate - predictions: He extrapolates the lessons of history and applies them judiciously to current events. When studying the lead-up to World War I, for example, Ferguson noted a mismatch between the wildly optimistic financial markets of the time and the darkening political clouds.

"Until the last week of July, 1914 looked as if it would be another good financial year," Ferguson wrote in TIME magazine in January 2007. "The stock-market crash of seven years before had almost faded from memory. Inflation was under control, and interest rates had stabilized. Emerging markets were booming. On the back of sustained global growth, commodity prices were up. Best of all, volatility was as low as most investors could remember. Sound familiar?"

The 1914 analogy was one key reason Ferguson wrote in the same TIME article, aptly titled, "The Next Meltdown," "A stock-market shutdown in 2007? History warns us not to rule it out."

Although Ferguson made his career out of studying financial institutions, getting rich has never been his top priority. Thus it is easy to see why, when betting against the hedge fund manager in 2007, Ferguson made one crucial misstep: He agreed that neither side can collect their winnings until 2012.

"By which time, the dollar may be worthless or his fund may go out of business," Ferguson said.