Listening to BBC's Peter Day interview of Professor Niall Ferguson, an Economics Historian at Harvard University provides a perspective from one of capitalism's leading experts on the global economic meltdown. First our analysis, then the BBC audiotaped interview, then an Axis of Logic transcript of the interview.

Analysis: We find ourselves taking issue with most of Ferguson's claims but a few were more odious than the others -

• blaming the ignorance of the people for the international financial collapse and not the bankers, the corporations, Wall Street, the Federal Reserve, the Central Banks of England and Europe, nor the corporate media which promoted, hid and defended the corporate crimes that led to disaster.
  
  
• arguing that the government should not to be held responsible for cleaning up the mess. Ferguson states:
  
  "Politicians are as much to blame if not more for this crisis .... But if you ask me which of these two institutions is more responsible for the financial crisis the answer is the SEC not Goldman Sachs. So we have to remember the old Latin tag, 'Quis custodiet ipsos custodes? -Who regulates the regulators?. Who guards the guards?' That is the big question that we have to address in financial regulations. Assuming that the politicians are the solution, ah, is I think, a very fatal mistake."
  
  Make no mistake. We have no fantasy that the politicians can or will solve these massive problems that they and their corporate masters have created. However, if Ferguson believes that they are not the solution to the problem, who does he think is the solution - hidden rulers of the global corporate empire?
  
  
• Throughout his interview on the BBC, Ferguson repeats in one form or another his early statement, "Well we have avoided a great depression and that's a cause for celebration," never admitting that a great depression may have only been avoided temporarily. In fact, he implies that a great depression has been permanently avoided. He does so without really answering the salient questions about how western nations will be able to pull them out of "almost world war levels of borrowing" and "unsustainable public debt" when "none of the major governments of the West have a credible plan for returning to fiscal equilibrium." His presumption that a great depression has been permanently avoided, begs. His argument, laced with admissions that governments are not dealing with the root problems simultaneously suggests that the system will recover.
  
  
• The arrogance. Peter Day asks, "People are bubble-minded though. They like bubbles, don't they?" Ferguson concludes the interview:
  
  "One of the biggest problems we have is that ordinary consumers of financial products like mortgages and credit cards are almost completely ignorant of even elementary concepts of finance like how an interest rate works. We need to address that problem educationally and we need to teach people not just textbook macro economics. Sometimes I think that might do more harm than good. We could do with teaching them some financial history. If people had only known more financial history 4 or 5 or 6 years ago, this crisis would have been far less severe. Because the delusion that property prices could only go up would have never taken root in public consciousness. So my argument is that we need to educate people better and we need to get them out of the prison of their own personal experience by drawing on historical evidence and showing them just how scary and dangerous our present predicament is."
  
  Who is the "we" referred to by Ferguson? Rhetorical question: Why isn't he talking about teaching the investment bankers, CEOs of corporations and politicians about financial morality and responsibility in classes behind bars - rather than teaching "the common consumer ... how an interest rate works?" Perhaps the corporate and political thugs who have brought misery to millions of people should be shown "just how scary and dangerous" prison life is in the United States, England and Europe!

BBC Description: This week on Global Business Peter Day talks to historian, Professor Niall Ferguson of Harvard University about financial history repeating itself and how to avoid making the same mistakes.

Peter Day: Hello and welcome to Global Business. In these rather unnerving times, what's going on in the world? ... to address these somber questions ... after the nasty impact of the credit crunch crisis, how different is the world we live in now from 5 years ago before the trouble started to bite."

Niall Ferguson: The financial world of course is worse than it was 5 years ago in the sense that all the problems that caused the crisis have been worsened by the crisis and not many people want to admit that, but it's true, for example, the banking system in the United States is more concentrated. There are fewer investment banks. Ah, the amount of risk they take on if anything, has gone up, certainly in the case of Goldman Sachs and JP Morgan and the fatal implicit guarantees of government to excessively large financial organizations are now explicit so the moral hazard has gone off the charts. All the things in other words that have caused the crisis have been exacerbated by the crisis, which is why I would not be at all surprised to see another crisis in a relatively short time.

Peter Day: And governments and 'other people' don't have the money to cope with another larger crisis, do they?

Professor Niall Ferguson, Harvard University

Niall Ferguson: What happened in 2007, and let's not forget that it began in the summer of 2007, was a crisis of private debt, of private leverage, in the US household sector, in the banking sector and around the world. That has now metamorphosed into a crisis of public debt as in their attempts to avoid a great depression, western governments embarked on what was almost world war levels of borrowing. We haven't seen deficits of these magnitudes since World War Two. Now the problem is that there is an upper bound to how much anybody can borrow, be they a bank or a government and many governments have reached if not passed that upper bound. They are now into the realm of the unsustainable public debt. That's true of Japan; famously it's true of the so-called PIGS, Portugal, Ireland Greece and Spain. And we've seen very recently just what happens when the markets wake up to unsustainable debt. But it is also true of the United Kingdom and it is also true of the United States. So there is a generalized crisis of public finance which is the unresolved part of the crisis. The crisis isn't over. It's just moving from the private sector.

Peter Day: Most economists said when the emergency measures were put into place, this was the right thing to do.

Niall Ferguson: There's no question that we learn from history. We learned two important things from the Great Depression. One was that you can't allow massive bank failures to happen. So Central Banks operated very successfully to staunch bankruptcy in the financial sector. And what we also learned from John Maynard Keynes was that in the face of a collapse of private demand or some sudden insurgent private saving, government should borrow and substitute for that sudden loss of demand and that was really the essence of Keynes general theory so we applied both of these insights ...

Peter Day: But the results are still gathering storm.

Niall Ferguson: Well we have avoided a great depression and that's a cause for celebration. But nobody really knew what would happen next because we never tried this before. We never had a near depression and applied massive monitary and fiscal stimulus. What was not clear was just what the side effects of these drugs would be. I mean we've taken medication like we've never taken it before. And now although we've survived we're out of [intelligible word] emergency; we're off life support but the side effects of this massive stimulus are really quite perturbing and the big problem as I see it is that none of the major governments of the West have a credible plan for returning to fiscal equilibrium. Now it's fine from a Keynsian vantage point to have fiscal stimulus in the depth of the crisis but there is no justification in the world for running a trillion dollar deficit a year for the rest of time which is essentially what the United States policy implies at the moment and the situation in the United Kingdom is actually worse. So both of these countries cannot say, 'It's keynsianism, we've saved the world, because it's not keynsianism anymore; it's a structural crisis of public finance that was already there before the crisis and had been laid bare by the crisis.

Peter Day: What people said about this thing that the Bank of England did was that it was quantative easing which I don't really understand was ah, that it could have all sorts of effects depending on what happened to the economy after it.

Niall Ferguson: Quantative easing essentially meant, pumping the banks full of liquidity, full of money until they had excessive reserves that they really didn't know what to do with to make sure that there was no liquidity crisis out there. And Central Banks did that, essentially by buying all kinds of assets that they never bought before. That was "quantative easing" and it seems to me to be relatively easy to exit from that kind of policy when you feel you've overcome the liquidity crisis. Right now one obvious measure of the lack of confidence is this bank credited contraction. In the United States it's really been in rather steep negative territory for the better part of a year. That's partly because banks don't want to lend .. ah but it's also because consumers and businesses don't want to borrow. Now it's not difficult because the Bank of Japan has done this itself on more than one occasion to undo quantative easing and pull back the excess reserves, soak them up when the time is right. I don't worry about that. I think the Fed, the Bank of England, have this under control. I am far more worried about the fiscal crisis because that requires, not just a technical adjustment on the part of a monetary authority but a political adjustment. And the political adjustment, whether it's by increasing taxation or reducing public expenditure, it's far more difficult than for a central bank to end quantative easing.

Peter Day: And this is a big adjustment, a big fiscal adjustment, like the kind we normally don't have except in wartime.

Niall Ferguson: It's a vast fiscal adjustment. We would tend to associate the adjustment in historical perspective with the aftermath of a world war. Essentially, we have the fiscal policy of a world war right now without the war. Now the problem is that in the postwar period after 1945 when very large public debts existed in both sides of the Atlantic, there were really only 3 ways out. One was rapid growth, another was inflation and ... and the third was to run budget surpluses. Now what happened in the UK and the US was that we never really ran budget surpluses. Deficits continued on and off in good times and bad. So we relied on growth and inflation to bring the debt to GDP ratio down.

The growth was higher in the US than in the UK so about half the reduction in the US was achieved through growth but half through inflation. In the UK it was nearly all done through inflation. Now my concern is that ultimately, faced with debt burden of the sort that we see today, we will rerun the postwar period, in the United Kingdom certainly and possibly also in the United States; that is to say that we will have relatively low growth, ah we will fail to run budget surpluses and we will end up at some point having to inflate the debt away.

The problem is that its harder to get through inflation these days than it used to be because bond investors are not so dumb as they used to be. These days bond holders are smarter than that. We don't tend to buy depression or recession bonds. It's the pension fund or some other investment vehicle that holds the bonds on our behalf. Everytime an institutional investor smells future inflation, they bid down the price of bonds and therefore up the long term interest rate ... the yield. That's happening now in countries in Europe. It will happen to the UK pretty soon. And that's really a painful process because it means that the interest rate moves before the inflation rate does.

This means that the real interest rate which is the nominal interest rate minus inflation goes up. Now in highly leveraged economies, with households groaning under the weight of mortgages and credit card debt, the last thing you want is rising real interest rate. It's an absolute killer, but unfortunately I fear that's where we're heading. So the outlook is very different than the outlook after 1945 when robust growth in the United States and relatively high inflation, essentially inflated and grew the debt away. We're not going to be able to do that and in that sense the outlook is really much more bleak I think, ah for most western economies than the majority of commentators allow. I still hear people talking about V-shaped recoveries but it seems to me like a V sign recovery that we're going to get ah because we're going to get a big shock about the hangover that this crisis has left us with.

Peter Day: Is the hangover worse than that emergency cure?

Niall Ferguson: The emergency cure was preferable to depression. I would far rather have these problems than the problems of the 1930s. But we shouldn't delude ourselves. In some ways we merely postponed the day of reckoning. I think the path is preferable but it is not a rapid upward recovery that we're looking at. It is a long hard slog as we try to resolve a very grave fiscal imbalance.

Peter Day: A fiscal imbalance and for people like me who take flight at that word, "fiscal" - well it means in this case, public finances, tax and revenue inflows and government spending outflows.

[BREAK] This is Global Business from the BBC ...

Peter Day: I'm with Peter Liah and ... and after this tour of the economic horizon, I remarked to him that he sounded pretty gloomy about the future for many of us. And you know, he didn't agree.

Niall Ferguson: Not really, because after all I've acknowledged that we've avoided a great depression and real gloom would be to say that it's around the corner we've only postponed the day of reckoning. I don't think that's true. I think we have avoided a rerun of the early 1930s but I'm also an optimist about the non-western world. I very carefully talked only about a crisis in terms of western governments, because leaving aside Japan, the Asian economies are in a very different position. I would be really gloomy if I thought that China, India and other Asian economies were also running out of steam. In fact, I see no sign of that and the fact that the most populous countries in the world are enjoying robust growth, did not see recessions during the crisis, effectively decoupled themselves from the US and Europe. That is a cause for celebration.

Peter Day: Is this an accelerated part of the decline of the west then?

Niall Ferguson: Yes. We have grown accustomed to the ascent and dominance of the west because ... it's a 500 year long phenomenon. Since the end of the 15th century the big story in economic history has been "the rise of the west". What we are witnessing at the moment is a fundamental world historical shift - a return to some kind of equilibrium between west and east. And from the vantage point of the big countries of Asia this is great news because they had centuries of stagnation to endure. The fact that they have bounced back; the fact that their growth rates are ranging between 7 and 10 percent even at a time of near depression is something of a relief for all of us because if that were the case than I think we'd be much closer to that 1930s rerun than we currently are.

Peter Day: Relative decline as we've come to know so vividly in Britain is very uncomfortable, isn't it?'

Niall Ferguson: I was speaking in the United States the other day at the National War College and and making the argument that the United States was contemplating relative decline with China, poised to overtake the US in terms of gross domestic product within the next 20 years and somebody from the state department said 'So what? Why should we worry?' and I said, 'Well you know what? To a British ear that is really a really stupid question because relative decline is not fun. It wasn't fun for Britain after 1945 and we were declining relative to the United States, a country we effectively had created. Relative decline with China at the rising part will be a lot less fun than that. Now it's true that when it comes to intellectual propery, when it comes to the 'big idea' the United States is still the best to have that idea and turn it into a business. In terms of innovation, they are still ahead. But nobody should assume that they have a monopoly on innovation.

The lesson of economic history is that it is actually very easy to steal the clothes of the innovator. So it's perfectly possible for you to lose that competitive advantage. In the end there is a lot of tranparency in the world economy today. Intellectual property is very hard to protect and piracy is a phenomenon not only in the sea off Somalia, but throughout the Asian world.

Peter Day: Translate that economic power, that consulive change in the economic landscape into geopolitical power or even military power. What are the implications?

Niall Ferguson: Now if you measure power in traditional ways - armies, navies, that sort of thing the Chinese are still a long, long way behind and one can't envision them catching up that much before the middle of the century. But, military power is not just about aircraft carriers, and the Chinese are building those. It is also increasing about software and technology and cyber warfare is an area in which China can make big strides and may already be catching up with the United States. There is also soft power. Right now, China's recovery has propelled recovery for nearly all the other Asian economies. China is the engine of growth for the world but it is the engine of growth above all, for Asia. Now that means that China's diplomatic leverage is growing all the time.

Peter Day: They [unintellible] Africa so vividly on aid, in road building and building buildings dollar denominated reserves and into commodities and a kind of empire is being built, not only in subsaharan Africa where

Niall Ferguson: The African story is part of a wider story where China by switches out its large dollar dominated reserves and into commodities and a kind of empire is being built, not only in SubSaharan Africa where it's very obvious if you travel there but also in Latin America and in other parts of Asia.

Peter Day: Meanwhile, back on Wall Street, back in the City of London, Frankfurt, all sorts of places, we have a banking system that hasn't been changed very much yet and the bankers are still kind of rampant in ignoring that they are in public hands or something. What's going on there? What needs to go on there?

Niall Ferguson: Two things caused this crisis and we need to focus laser-like on these things. One was excessive bank leverage, that is to say that banks financing themselves on the liability side of the balance sheet with huge amounts of borrowed money, usually very short term. The other thing that caused the crisis was the unregulated derivatives market, the over-the-counter derivatives market. Serious regulatory reform has to address both of those things and do it globally. The problem is that there's no sign of a serious regulatory change on the global level. On the contrary, for the past year, countries have gone in every which direction, the US going one way, Britain going another. This was not going anywhere. This is a major problem because unless we address the bank balance sheet issue and the derivatives issue the financial system is not as unstable as it was before; it is more unstable than it was before.

Peter Day: Because of this consolidation of the banking system through emergency measures?

Niall Ferguson: We have "too big to fail" institutions on both sides of the Atlantic, that are in effect, guaranteed by government. It's actually a worse position than the one we had before when they just hoped that they were too big to fail. Now it's official. We need to reform both institutions and we need to do it fast.

The United States has a 1,300 plus page piece of legislation going through the congress at the moment. I think I must be one of the very few people who has read this. Most of what it contains does not address the key causes, the key problems that brought the crisis to a head. And that's a real worry to me. That there is the appearance of regulation, there's the appearance of reform, but not the reality of it. We have at the moment a kind of pseudo-debate on regulation and not a real debate. We're going to end up with a very complex piece of legislation that changes some parts of the banking system. We don't really yet know what the final bill will look like. But the idea that it's going to make a major improvement in the system seems to me is fanciful. The US Congress has a pretty poor track record when it comes ah, to finance. Not only has it been responsible for deficit upon deficit in good years as well as bad but it's role in keeping an eye on major financial institutions like Fannie May and Freddie Mack, the mortgage underwriters was absolutely catastrophic.

Peter Day: Indeed, wasn't part of the subprime loan crisis caused by politicians who wanted to open the housing market to people who couldn't really afford houses. Wasn't that one of the energetic pushes for it?

Niall Ferguson: Politicians are as much to blame if not more for this crisis. Ah, there is a major case at this moment before the Securities and Exchange Commission and Goldman Sachs and many people may not even think this is good because Goldman Sachs surely having made a great deal of money before, during and after the crisis so surely they are the villains of the peace. But if you ask me which of these two institutions is more responsible for the financial crisis the answer is the SEC not Goldman Sachs. So we have to remember the old Latin tag, "Quis custodiet ipsos custodes?" -Who regulates the regulators?. Who guards the guards'? That is the big question that we have to address in financial regulations. Assuming that the politicians are the solution, ah, is I think, a very fatal mistake

Peter Day: You've been ever so clear about this. Why don't we know it as clearly as this? Are we whistling in the dark - are we looking for hopes of spring and recoveries in the housing market you see blazoned over the front pages of newspapers as though we're going to get back to the norm and then some, pretty soon and you say we're not.

Niall Ferguson: It's funny isn't it that we should be so enthusiastic about asset-price inflation when we used to worry so much about consumer-price inflation. The news that UK housing prices are going up should be greeted with, ah, unease, not enthusiasm because it's a symptom that once again, we're headed down the primrose path to hell.

Peter Day: People are bubble-minded though. They like bubbles, don't they.

Niall Ferguson: Well you would have thought that we'd have been cured of our addiction by now because we've had two housing busts in the space of less than 20 years. But it does seem to be addictive the way some drugs are addictive. The critical thing is to get away from public ignorance of finance. One of the biggest problems we have is that ordinary consumers of financial products like mortgages and credit cards are almost completely ignorant of even elementary concepts of finance like how an interest rate works. We need to address that problem educationally and we need to teach people not just textbook macro economics. Sometimes I think that might do more harm than good. We could do with teaching them some financial history. If people had only known more financial history 4 or 5 or 6 years ago, this crisis would have been far less severe. Because the delusion that property prices could only go up would have never taken root in public consciousness. So my argument is that we need to educate people better and we need to get them out of the prison of their own personal experience by drawing on historical evidence and showing them just how scary and dangerous our present predicament is.

Peter Day: Many thanks to historian Professor Niall Ferguson of Harvard University doing something to educate us out of our economic illiteracy, well, if not yours, certainly mine. The world is changing shape and we need to be aware of how profound the change may be. History has a lot to teach us and so do the people who teach history.

An Axis of Logic Transcript.

Peter Day and the producer of Global Business is Julie Ball.

BBC - Global Business: The History Man (23 minutes)