Lords of Finance and the New Lombard Street

While the world is struggling with the consequences of the 2007-8 financial crisis and many efforts are invested to find out (or to conceal) its causes — history is calling on us. Two recently published books provide insightful and eye-opening accounts on the critical subject matter: policymaking, central banking, and financial system in a specific political economy.
Perry Mehrling’s The New Lombard Street: How the Fed Became the Dealer of Last Resort traces the evolution of ideas and institutions in the US banking system since the establishment of the Federal Reserve in 1913. The book lucidly explains how the Fed took classic central banking wisdom from Britain and Europe and adapted it to America’s unique and considerably more volatile financial conditions. Mehrling demonstrates how the Fed increasingly found itself serving as the dealer of last resort to ensure the liquidity of securities markets–most dramatically amid the recent financial crisis. Now, as fallout from the crisis forces the Fed to adapt in unprecedented ways, new principles are needed to guide it. Mehrling persuasively argues for a return to the classic central bankers’ “money view,” which looks to the money market to assess risk and restore faith in our financial system. The New Lombard Street makes a serious and successful effort to deepen our understanding not just of the last century or more of U.S. monetary history, but also of the way in which economic analysis has evolved alongside that history.
Looking at the years before and at during the Great Depression, in Lords of Finance: The Bankers Who Broke the World Liaquat Ahamed presents a more focused view and he does it brilliantly. It’s still commonly believed that the Great Depression that began in 1929 resulted from a confluence of events beyond any one person’s or government’s control. In fact, it was the decisions taken by a small number of central bankers (of Britain, France, Germany and the United States) that were the primary cause of the economic meltdown, the effects of which set the stage for World War II and reverberated for decades. This excellent book compellingly connects the dots between the personalities involved in the creation and managing of the international banking system, the economic crises that rocked the world, and the fiscal emergencies that beset us today. “Like Alan Greenspan”, Bloomberg News remarked, “the four men described here saw their apparent successes melt into failure.”