The Ascent of Money by Niall Ferguson - full 4hr 48min (minus E06)

ALSO WATCH Episode 6 ! (the video response)

history of money

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HELICOPTER ROTORS THRUM

THUNDER RUMBLES

Welcome to the world of money,

lt's the English-speaking world's
favourite game...property.

The most basic financial impulse of all

We may think power resides

ln our time, we've witnessed
the zenith of global finance.

bread, cash, dosh,

is to save for a rainy day.

with presidents and prime ministers
in palaces and parliaments. Not so.

dough, loot, lucre, moolah,

Some people today say that companies -

Because, as we've been painfully reminded
by the recent months of financial turmoil,

And today the stakes in the game
are higher than ever.

ln 2006, the world's total economic
output was worth around $47 trillion -

the readies, the wherewithal.

and particularly multinational
corporations - rule the world.

ln today's world, real power lies in the
hands of an elite group of unassuming men

the future is so unpredictable.

Call it what you like,
money can break us or it can make us.

lt's pretty hard to believe
that any kind of human organisation

The world really can be a dangerous place.

that's 47 followed by 1 2 zeroes.

in anonymous, open-plan offices...

The original property game we know
today as Monopoly was actually

could tame the vast natural barriers
of South America.

..the men who control
the world's bond market.

Not many of us get through life
without a little bad luck.

The total value of stock
and bond markets

invented back in 1 903 to expose
the unfairness of a social system

ln the past year, it's certainly broken

But one company believed it could.

more than a few of the biggest names
on Wall Street

was roughly $1 1 9 trillion -
more than twice the size.

Some of us get a lot.

where a small minority of landlords
screwed the majority of tenants.

and in the City of London.

lt's all about being in the wrong place
at the wrong time,

And the amount outstanding
of the strange new financial life form

Bill Gross is the boss of PlMCO,

By constructing a 1.5 billion dollar
gas pipeline from Bolivia

like New Orleans
when Hurricane Katrina hit.

the world's biggest
bond-trading operation,

And while former masters of the universe
crash and burn,

30 years later, an unemployed
plumber named Charles Darrow

known as derivatives
was $47 3 trillion - ten times larger.

which manages a portfolio of bonds
worth $7 00 billion.

right across the South American continent
to the Atlantic coast of Brazil.

the rest of us are left worrying if our
savings would be safer in a mattress

patented a new version of the game,
with the board based on

The question is, how shouId we deaI with
the risks and uncertainties of the future?

Gross is widely regarded
as the king of the bond market.

the streets here in Atlantic City.

than in a bank.

By running gas along
the longest pipeline in the world

By the summer of 2007, it seemed as if
the Earth had turned into Planet Finance.

ShouId the onus be on the individuaI
to insure against disaster?

Just call him Mr Bond.

4,000 miles from the tip of Patagonia
to the Argentine capital Buenos Aires.

The great financiaI crisis that began
in the summer of 2007

lt was Darrow who introduced
the little houses and hotels.

ShouId we be abIe to reIy on the voIuntary
charity of our feIIow human beings

As never before,
the world was interconnected,

has most of us utterIy baffIed.

How on earth
couId a IittIe IocaI difficuIty

but not just by cabIes,
container ships and jet pIanes.

when caIamity strikes?

Bonds are the magical link
between the world of high finance

What the game of Monopoly tells us,
contrary to its inventor's intentions.

Or shouId we be abIe
to count on the state -

with sub-prime mortgages
in the United States

Such schemes exempIify the vauIting
ambition of modern capitaIism,

and the worId of poIiticaI power.

By 24/7 deaIing rooms
and internationaI investment banks.

is that it's smart to own property.

in other words, the compuIsory
contributions of our feIIow taxpayers -

unIeash an economic tsunami big enough

Governments wiII aIways spend more
than they raise in taxation -

And if it's smart to own property,
it's even smarter

but they're onIy possibIe
because of one invention -

to obIiterate some of WaII Street's
most iIIustrious names,

to baiI us out when the fIood comes?

ln this series, we've seen how
the markets for credit, bonds, stocks,

sometimes shed-Ioads more -

to Iend money
to the peopIe who own property.

the joint stock company.

THUNDER RUMBLES

and they make up the difference
by seIIing bonds that pay interest.

to force nationaIisations of banks
on both sides of the AtIantic

insurance and real estate all evolved
in Europe and North America.

That's because the phrase,
''Safe as houses''

But - and here's the magic -
if you want to get rid of a bond,

has a rather speciaI meaning in
the worId of finance. What it means

That's a long way of asking
a simple question -

and to bring the entire worId economy
to the very brink of recession,

lf the 1 6th century had seen
a revolution in money and credit,

the government doesn't have
to give you the cash back.

are you insured?

is there's nothing safer than to Iend
money to peopIe who own reaI estate.

Well, now it's time to tell the story

and the 1 7th had witnessed
the birth of the bond market,

if not downright depression?

You just take it to a bond market,

of how those financial innovations
conquered the world.

ShouIdn't this series be caIIed
The Descent Of Money?

Iike the one here at
Tokyo Stock Exchange, and seII it.

then the next step in the story
of the ascent of money

The British certainly think they are.

Why? WeII, because if they
defauIt on the Ioan,

WeII, I want to expIain to you
just how money rose

This is the story
of financial globalisation.

was the rise of the joint stock
limited liability company.

GULLS CRY

you can aIways repossess the property.

After the rise of banks,

Today, we pay a larger proportion
of our income on insurance

Even if they run away,
the house can't.

to pIay such a terrifyingIy dominant roIe
in aII our Iives.

the birth of the bond market was the next
big revolution in the history of finance.

than any other people in the world.

What's more, the English-speaking
world's obsession with property

Globalisation is something
we take for granted today.

But the ability of the company
to transform our lives

lt's rather odd, because Britain is
one of the safest countries on Earth.

lt created a whole new way
for governments to borrow money.

What's more,
l want to reveal financial history

And yet for all the advantages
of an interconnected world,

has been the foundation for a unique
economic and political experiment -

would depend on another innovation...

as the essential back story
behind all history.

The bond market funded the wars

perfectIy exempIified by Hong Kong's
astonishing humming container port,

The struggle to overcome risk has been
a constant theme of the history of money,

the property-owning democracy.

that plagued northern ltaly
600 years ago.

The stock market.

Some say it's a model
the whole world should adopt.

Banks financed the Renaissance
while the bond market decided wars.

there's a downside to gIobaIisation,
and that is its vuInerabiIity -

from the invention of life insurance
by two hard-drinking Scots clergymen,

GUNSHOT ECHOES

lt dictated the outcome

The price that people are prepared to pay
for a company's shares in the market

The growth of property ownership

its vuInerabiIity to financiaI shocks,
because finance isn't an exact science,

of the Battle of Waterloo

to the rise and fall of the welfare state,

gave rise to a new era
in the history of finance.

and created the world's greatest
financial dynasty.

tells you how much money
they think it'll make in the future.

and its vuInerabiIity to poIiticaI forces
beyond the controI of the bankers.

to the explosive growth of hedge funds
and their multi-billionaire owners.

On the back of property,
literally trillions of dollars

Stock markets built empires...

lt ensured the defeat of the South
in the American Civil War.

have been borrowed, some of it by
so-called sub-prime borrowers -

..and monetary meltdowns made revolutions.

But as we have discovered
in recent months of financial turmoil,

And in modern times, the bond market

The ascent of money
has seldom been smooth.

At the core of our struggle with risk
is an insoluble conflict -

has brought once wealthy nations,
like Argentina, crashing to their knees.

stock markets can also be shock markets.

people who'd previously been content
to rent rather than own their homes.

Time and again, it's been punctuated
by big and painful crises.

we want to be financially secure,
and so we yearn for a predictable world.

From Ancient Mesopotamia
right down to present day London,

The future is aIways uncertain.

Today, governments and companies
use bonds to borrow

So it's come as rather a shock
to millions of people that real estate

But we human beings
are prone to over-optimism.

the ascent of money has been an
indispensable part of the ascent of man.

But the future always seems to come up
with new and unpleasant ways

Just ten years ago,
it seemed that these crises

on an unimaginably vast scale.

When prices here on the New York Stock
Exchange surge upwards in synch,

is fundamentally no different
from any other financial asset.

All told,

were more likely to blow up
in emerging markets, like Asia.

But money's rise has never been
a smooth, upward ride.

to take us by surprise.

there are bonds out there
worth around $85 trillion.

it's as if investors are gripped
by a kind of coIIective euphoria -

lts price can go down as well as up.

As we'II see, financiaI history
has repeatedIy been interrupted

We want calculable risk.

Yet today, it's the West that's caught up
in a full-blown credit crunch,

what the former chairman of
the FederaI Reserve, AIan Greenspan,

The fortunes of most of us,
whether we like it or not,

lt turns out that no amount
of financial alchemy

We're stuck with random uncertainty.

by gut-wrenching crises
of which today's is just the Iatest.

once famousIy caIIed
''irrationaI exuberance''.

are directly linked to the bond market.

can turn little suburban boxes
into treasure chests with roofs.

while Asia seems
scarcely to have noticed.

So stock markets reaIIy can be
Iike soap bubbIes.

From the fluctuating prices
of the homes we own

lndeed, a new phenomenon
has come to define the world economy.

lf the bond market tanks,
then down goes the value of our pensions -

We never quite know
when they're gonna burst.

to the high-speed industrialisation
of China,

Which raises the question,
is property really as safe as houses?

American borrowers have come
to rely on Chinese savers -

and that's a huge part
of our wealth as individuals.

the power of finance is everywhere we look
and it affects all of our lives.

The exuberance was especially irrational
and the burst especially painful

ln the financial crisis that has gripped
the world since the summer of 2007,

a symbiotic relationship between China
and America that l call ''Chimerica''.

Or couId it be that we've Iet
our Iove affair with reaI estate

for the company that proposed
those vast projects in Latin America.

US government bonds have been seen as
a safe haven for investors seeking shelter

SEAGULLS CRY

get compIeteIy out of proportion?

But can we be sure
that Chimerica will save

But are you in on the secret?
Do you know what causes a bank run

from the storm
of falling property and share prices.

Enron became the biggest corporate fraud
in modern American history.

this era of financial globalisation?

or a monetary meItdown
or a stock market crash?

The chiIIing reaIity
is that a hundred years ago,

So if Bill Gross were to lose faith
in those bonds,

Can you teII the difference
between a sub-prime Ioan and a prime Ioan?

But Enron was very far
from the only corporate scam

another age of financiaI gIobaIisation
ended not with a whimper, but with a bang.

it would hit the financial world like...
well, a thunderball.

When Hurricane Katrina hit New Orleans
in the last week of August 2005,

since shares were first bought and sold
400 years ago.

WeII, I think these financiaI
technicaIities onIy reaIIy make sense

That's why this ''Mr Bond''

And there's no reason why that
shouIdn't happen again in our time.

it caused death and destruction.

once you know where they came from.

And the shady practices
it epitomised live on.

has become so much more powerful
than the Mr Bond created by lan Fleming.

And that's why financiaI history
is of more than mereIy academic interest.

lndeed, they've been a key cause of the
financial crisis we're living through now.

Property ownership was once
the preserve of an aristocratic elite.

Not knowing this stuff can seriousIy
damage your weaIth.

And that's why both kinds of bond
have a licence to kill.

Yet it's not a natural catastrophe that
now threatens the survival of the city.

Cooked books? Stock prices rigged?

Been there. Done that.

The real lesson of the disaster
is about money.

Estates were passed down from
father to son, along with titles

For centuries.

TRADERS SHOUT

How the risk management system
we call insurance

Nothing illustrates more clearly
than the history of stock market bubbles

and political privileges.

Everyone else was a mere tenant,
paying rent to their landlord.

simply failed when faced
with a calamity on this scale.

how hard human beings find it
to learn from history.

Even the right to vote in elections

lt used to be said
that ''emerging markets''

The hurricane didn't hit
New Orleans directly.

was originally
a function of property ownership.

were places where
they have emergencies.

HORN BLARES

The main force of the storm
passed to the north-east of the city.

In one respect, not much has
changed in Britain since those days.

lnvesting in faraway places
can make you rich,

But just as the residents
breathed a sigh of relief,

Crisis or no crisis, the amount of money
sloshing around planet finance

STOCK MARKET HUBBUB

Of 60 miIIion acres of British Iand,
around 40 miIIion

''War, '' declared the ancient Greek
philosopher Heraclitus,

but when things go wrong, it's often
been a fast track to financial ruin.

the real catastrophe began.

still boggles the mind.

''is the father of all things. ''

This IndustriaI CanaI Iinks
Lake Pontchartrain to the Mississippi.

are owned by just 189,000 famiIies.

By one measure, the US stock of money
is now $8, 7 00,000,000,000,

lt was certainly the father
of the bond market.

The difference is that they no Ionger
monopoIise the poIiticaI system.

After the hurricane,
the huge storm surge

up 1 2% since last year.

raised the water IeveI
in the canaI so high

That's why many of today's apparently
unstoppable emerging markets

Indeed, thanks to reform
of the House of Lords,

For much of the 1 4th and 1 5th centuries,
the medieval city-states of Tuscany -

And some people are still pocketing
a huge share of that cash.

that it broke the Ievee,

the hereditary peerage
is being phased out of ParIiament.

pouring umpteen gaIIons of the Iake over
here, into the Ninth Ward of New OrIeans.

are really re-emerging markets.

Hidden away among
the many splendours of Venice

Florence, Pisa and Siena -
were at war with each other.

Now, you can expIain the decIine
of the aristocracy in many ways.

is a small clue to one of the most
astonishing tales of adventure

But, as far as I'm concerned,
the main driver was finance.

Last year, despite the onset
of the biggest financial crisis

This was war waged
as much by money as by men.

in all financial history.

Just to the east of the Ninth Ward
is St Bernard,

since the Depression, his hedge fund paid
George Soros a cool $2.4 billion.

a blue-collar community of homeowners

These days, of course, the uItimate
re-emerging market is China.

all, on paper at least,
covered by private insurance.

To taIk to some peopIe,

In Pieter van der Heyden's BattIe
Of The Money-Bags And Strong-Boxes,

''To the honour and memory
of John Law of Edinburgh,

there's simpIy no Iimit to the amount
of money to be made here.

Until the 1 830s, fortune smiled
on the British land-owning elite -

That's roughly 41,000 times more than
the average American family earned.

And it's certainIy true
that over the past 20 years,

''most distinguished controIIer of
the treasury of the Kings of the French.''

piggy banks, treasure chests
and barreIs fuII of coins

the 30 or so families with gross
annual income from their lands

the mainIand has foIIowed the exampIe
set here in Hong Kong, and boomed.

As they say on Wall Street,
''Way to gol''.

Iay into one another with Iances
and swords in a chaotic free-for-aII.

above Ł60,000 a year -

Councillor Joey DiFatta
refused advice to leave the city,

This is the finaI resting pIace of the man
who invented the stock market bubbIe.

And yet this isn't the first time that
foreign investors have piIed into China,

roughly Ł 1 50 million pounds today.

The Dutch verses
inscribed at the bottom read,

staying put during the storm.

''It's aII for money and goods,
this fighting and quarreIIing.''

An ambitious Scot, a convicted murderer,

aiming to make megabucks from
the worId's most popuIous nation.

With such vast property assets
backing them

Eventually, he was forced to retreat
to the roof of the town hall

a compuIsive gambIer
and a fIawed financiaI genius,

But what they might
just as easiIy have said

And the Iast time,

and income from agriculture booming,

those foreign investors
Iost aImost as many shirts

as the waters kept rising.

is that war is impossibIe
if you don't have the money to pay for it.

it was hard to see how
the aristocracy could fail to flourish.

he not onIy caused the first true
boom and bust in asset prices,

Now, however,
imagine a world with no money.

..And as you can see,

as the IocaI taiIors here
can stitch together in a week.

BELL TOLLS

- this is the water Iine.
- That's the water Iine.

he aIso indirectIy caused
the French RevoIution.

Yet, by ignoring a fundamental truth
about property,

(Joey DiFatta) Where it came up to.

And the way to do that -

The water came in this buiIding in, er...

The key problem with overseas
investment, then as now,

There was a time when John Law owned a
quarter of what is now the United States,

the ability to finance war
through the bond market -

they ensured their own decline.

500 years ago, the most powerful society
in South America,

- 1 4 feet of water in 15 minutes.
- Wow.

is that it's hard for an investor
in London or New York

GUNSHOT

the lnca Empire,
had no real concept of money.

was, like so much else,
an invention of the ltalian Renaissance.

CROWS CAW

only to lose it all in history's
first great crash.

to see what a foreign government
or company is up to

The lncas appreciated the aesthetic
qualities of rare metals -

From the second fIoor of this buiIding,

Like many of us today,
the great magnates saw the value

when they're an ocean or more apart.

From Edinburgh to Amsterdam to Paris,
all the way here to New Orleans,

I couId see, coming down
Judge Perez, a waII of water.

of their property as a cash cow
and used it to borrow to the hilt...

Rather than require their own citizens
to do the dirty work of fighting,

lf the foreign borrower
decides to default on its debts,

gold was the sweat of the sun,
silver the tears of the moon -

and finally to Venice, Law's story
is a classic tale of boom and bust.

In that waII of water was debris -
cars, vehicIes, pieces of roofs.

what's an investor to do?

each city hired military contractors -
condottieri -

..often more than
the property was worth.

The answer before 1 91 4
was brutally simple but effective.

labour was the unit of value
in the lnca Empire,

And this waII of water,
you know, you guestimate,

lt's also very much a story
for our own times.

What they'd failed to understand
is that property is only a security

who raised armies to annex land
and loot treasure from the others.

just as it was later supposed to be
in a communist society.

had to be maybe 15 to 20 feet taII.

to the person who lends you money.

- And moving fast.
- Moving quickIy.

Hidden away here in the warehouse
of the Louisiana State Museum

Among the condottieri
of the 1 360s and 1 37 0s,

Get your government
to send in the navy.

Just coming down this bouIevard street,
and taking everything with it as it came.

As a borrower, you still have to
earn the money to pay back the loan.

is the onIy known painting of John Law.

But in 1 532, the lncas ran into a man

one stood head and shoulders
above the others.

By guaranteeing European
political control,

And for the great landowners

whose hunger for money
had led him across an ocean.

Here he is.

of Victorian Britain, that suddenly
became a very difficult thing to do.

gunboat diplomacy provided
reassurance for British investors

The whole of St Bernard Parish
was inundated in just 1 5 minutes.

With that Iean and hungry Iook,

This is his portrait in Florence's Duomo -
a thank-you from a grateful public.

he reaIIy is, for aII the worId,
a Scotsman on the make.

even at the remotest extremities
of the world economy.

Francisco Pizarro and his fellow
Conquistadores had come from Spain

Nowhere was the pain more acute than here
in the heart of rural Buckinghamshire.

Only five houses out of 26,000
weren't flooded.

to what they called Upper Peru
inspired by the legend of El Dorado,

Unlikely though it may seem,
this master mercenary was an Essex boy.

The Royal Navy provided the firepower

the realm of the gold-covered king.

The path that led Law ''from obscurity
to celebrity, to notoriety'' is a path

that underwrote the first age
of globalisation...

More than 2,000 peopIe
were kiIIed in Hurricane Katrina

So skilfully did he wage war

After defeating the lnca army
at the Battle of Cajamarca

and the subsequent fIooding.

that many of the great stock market
players have followed since.

..and its pioneers,

that the ltalians called Sir John Hawkwood
Giovanni Acuto -

Here in St Bernard Parish,
1 48 peopIe Iost their Iives,

like William Jardine...
and James Matheson.

There's something undeniabIy
magnificent about this huge,

their quest began in earnest.

John the Acute.

Law was born here
in Edinburgh in 1 67 1,

mostIy because they became
trapped in their houses

neocIassicaI paIace -

At Potosi, in what is now Bolivia,

Stowe House - arguabIy
the greatest private residence

Jardine and Matheson
were buccaneering Scots

This castle was one of many pieces
of prime real estate

as the fIood waters rose.

the son of a successful goldsmith
and heir to the estate of Lauriston.

the Spaniards struck it rich.

The painted signs
on these abandoned houses

buiIt in EngIand in the 18th century.

who'd set up a trading company in the
southern Chinese port of Canton in 1 832.

They discovered the Cerro Rico,
literally the Rich Hill.

the Florentines gave him
as a reward for his services.

say whether dead bodies were found
after the fIood waters receded.

Just Iook at these extraordinary
scagIioIa piIIars

ln 1 694, while living in London,

A IittIe bit Iike medievaI London
in the time of pIague.

Law killed a man in a duel over a woman

or the stunning eIIipticaI
pIaster ceiIing.

Towering nearly 1 6,000 feet
above sea level,

Not to put too fine a point on it,

But Hawkwood was a mercenary

and was sentenced to death.

who was willing to fight
for anyone who'd pay him -

it was a money mountain.

their most profitable line
of business was drug dealing.

And yet there seems to be
something missing.

Milan, Padua, Pisa or the Pope.

In their 250 years of Spanish ruIe,
more than two biIIion ounces of siIver

Or rather many things.

Yet three years later,

Somehow, Law managed to escape
from prison and fled to Amsterdam.

They shipped opium produced
under British Government control in lndia

Because once in each of these aIcoves
there was a Roman statue.

it's not flooding or plague
that's killing New Orleans.

to China's population of addicts -

He couldn't have picked
a better town to lie low in.

were extracted from mines Iike this one,
1 4,000 feet up in the Andes.

A harsh financial reality has emerged.

a trade that China's Emperor
had banned.

People can't live here any more

These dazzIing frescoes
in FIorence's PaIazzo Vecchio

What the Incas couIdn't grasp was why
the Europeans had such an insatiabIe Iust

because they can't insure their homes.

On March 1 0th, 1 839,
an imperial official named Lin Zexu

The exquisite Georgian firepIaces
have been ripped out

By the 1 690s, Amsterdam was
the world capital of financial innovation.

show the armies of Pisa and FIorence
cIashing in 1364.

One man made it his mission

and repIaced by
bog-standard ones Iike this.

for goId and siIver.

At that time, Hawkwood was fighting
on the side of Pisa.

arrived in Canton under orders from
the Emperor to stamp out the trade.

to show the limits of private insurance

To help finance their war against Spain,

They couIdn't understand that to Pizarro
and the Conquistadores,

when it comes to a really big crisis.

But 15 years Iater, he'd switched sides.

the Dutch had introduced one
of the world's first national lotteries.

Why?

siIver was much more
than just shiny metaI.

He besieged the British
opium warehouses,

How did this most stately of stately homes
become a mere shell of its former self?

Why? Because FIorence
was where the money was.

To protect their merchants
from dodgy coinage,

It couId be made into money...

blocking any further imports.

20,000 chests of opium
valued at Ł2 million

they'd created the world's
first central bank.

..a store of vaIue, a unit of account,
portabIe power.

The cost of these incessant wars
plunged ltaly's city-states into crisis.

The answer is that this house beIonged
to the principaI victim

He's former navy pilot
Richard F Scruggs,

But the one that had
the biggest impact on Law

were confiscated
and literally thrown in the sea.

was the single greatest
Dutch invention of them all -

one of those lawyers that only
America seems to produce.

of the first modern property crash -

Expenditures, even in years of peace,
were running

Faced with catastrophic losses,
Jardine hurried to London

Richard PIantagenet
TempIe-Nugent-Brydges-Chandos-GrenviIIe,

the company.

at double or more tax revenues.

Dickie Scruggs took $50 million
off the asbestos industry,

to lobby the British Government
to send a gunboat.

I must say,
I find this pIace pretty harrowing.

To pay the likes of Sir John Hawkwood,
Florence was drowning in deficits.

2nd Duke of Buckingham.

The story of the company had begun
1 00 years before Law's arrival

then $248 billion
off tobacco companies

The Spaniards
had a system of forced Iabour

Stowe was only part of the Duke's
vast empire of real estate.

which meant that every abIe-bodied maIe
in the native popuIation

WeII, Jardine got his wish granted.

as Dutch traders spread out
all over the world,

for failing to warn smokers
of the danger of lung cancer.

ln all, he owned around 67,000 acres
in England, lreland and Jamaica.

On August 23rd, 1840, British gunships
Ianded here on Hong Kong IsIand.

had to do a stint down these mines.

from Manhattan lsland
to the Cape of Good Hope.

This wonderfuI document
in the FIorentine State Archive

This kind of work has its rewards.

And you can see why one in eight of them
didn't survive the ordeaI.

But it was Asia that became the primary
target of Dutch commercial expansion.

The Qing Empire
was about to feeI the fuII force

shows how the city's debt had expIoded

Scruggs's share in fees
on the tobacco case was $1.4 billion.

These immense properties
seemed more than adequate

from around 50,000 fIorins
at the beginning of the 1 4th century

of history's
most successfuI narco-state.

Why?

to back his extravagant lifestyle.

The East Indies were so aIIuring
because of these -

to five miIIion by 1 427.

And he spent money
as if it might go out of fashion

Scruggs's latest target has been
America's insurance companies.

spices -

It was quite IiteraIIy a mountain of debt,
hence the name - the Monte Commune.

As Jardine had predicted,

on mistresses, on illegitimate children,

pepper, cIoves, nutmeg, ginger.

the Royal Navy made short work
of the Chinese defences.

on anything that he felt was compatible
with his standing as a Duke of the Realm.

Today, 500 years later,

Europeans craved them to fIavour
their food, but aIso to preserve it.

But from whom couId the FIorentines
possibIy have borrowed such a vast sum?

His clients, hundreds of homeowners
whose houses were destroyed by Katrina,

conditions for miners in the Cerro Rico
haven't improved much.

TraditionaIIy, they'd come overIand
by the Spice Road.

PEACOCK CRIES

argued that the companies were refusing
to pay up on genuine claims -

With south-western China
under British control,

The answer is right here -
from themseIves.

But at least they get paid
for the work they do.

But the Dutch pIan was to fetch them
the Ionger, but quicker way, by sea.

By 1 845, the jig was up.

the opium trade was given free rein.

ln those days, it was a way of making
money that verged on genocide.

a view the insurers disputed.

And that pungent aroma
was the smeII of money to be made.

Drug addiction exploded.

There was a house there?

Grain prices had begun
their long slide downwards,

lt was a revolutionary idea that would
change the world of money for ever.

Large tracts of the country
slid into rebellion and anarchy.

There was a house here,
a house next to it,

and so had the income
from agricultural land.

where you see the traiIer.

Rather than paying direct tax,
citizens were now

Rural property prices plummeted.

Scruggs had a dog of his own
in this fight.

But for Jardine Matheson, with their head
office now established in Hong Kong,

The silver ore was ground up,
refined with mercury

effectively obliged to lend money
to their own government.

Suddenly, the aristocracy found
that their borrowings

This painting shows the return of one
of the first Dutch fleets from the East.

His own home on Pascagoula's Beach
Boulevard, here on the Mississippi coast,

the glory days of Victorian
globalisation had arrived.

and then shipped to Europe
as bars and coins.

had outrun the value of their estates.

The inscription reads, ''Four ships sailed
to go and get the spices towards Bantam

was so badly damaged by Katrina

The Duke was spending
far more than his income

Empire, it seemed, had made the Spanish
crown rich beyond the dreams of avarice.

that it had to be demolished.

and most of that was being absorbed
by interest payments.

ln return for these forced loans,
they received interest.

By1 900, the firm had diversified into
more respectable lines of business.

''and also established trading posts.

- This is the...
- The front door?

''And came back richly laden
to the poles of Amsterdam.

This is the front door, right here.

But there was to be one final bout
of conspicuous consumption.

lt had its own breweries,
its own cotton mills,

''Departed 1 st May 1 598.

The edge of the sIab, if you wiII.

These debt instruments -
simpIe Iines in a Iedger -

its own insurance company,

- You were sIabbed.
- We were sIabbed.

''Returned 1 9th July 1 599. ''

In preparation for a visit
by Queen Victoria and Prince AIbert,

and its own railways, like the one
they built from Kowloon to Canton.

were the originaI government bonds.

If you couId fix the system...

And the wonderfuI thing about them was
that if you needed your money in a hurry,

But I'm fortunate enough
that I have the means to...

the Duke decided to spIash out and
refurbish Stowe House from top to bottom.

And yet, aII the siIver
in the mines of Potosi

you couId seII your bonds
to other citizens.

- To Iose a house and buiId it.
- Most peopIe here don't.

The Asian spice trade was so profitable

couIdn't haIt the inexorabIe economic
and poIiticaI decIine of Spain's empire.

15 saIoons were stuffed fuII
of the most expensive furniture

They were Iiquid assets.

that just one return trip could pay
for the construction costs

If you had the power to change the system
so that peopIe really were insured,

What this record teIIs us

Back in 1913, an investor in London
had an extraordinary range

is how FIorence turned its citizens
into its biggest investors.

Why was that, when Pizarro seemed to have
struck it so incredibIy rich?

that money couId buy.

of a ship like this.

The fIoorboards were groaning
under the weight of Genoa veIvet,

But so prolonged was the journey round
the Cape of Good Hope to the East

how wouId you do that?

of foreign opportunities,

Is there a way of making
insurance work again?

The answer is that the Spaniards
had dug up so much siIver

and nothing iIIustrates that better than
the Iedgers of N M RothschiId & Sons.

embroidered satin and goId brocade.

and so hazardous that merchants had
to pool their resources and their risk.

There is, and it's discIosure
of what...what you're buying.

to finance their wars of conquest,

This wartime expedient marked the birth
of the modern bond market.

When the Queen saw the resuIts,
she commented rather waspishIy,

Just a singIe page from 1913

that the metaI itseIf suffered
an extraordinary decIine in vaIue.

The result was around six fledgling
East lndia enterprises.

''I am sure I have no such spIendid
apartments in either of my paIaces. ''

Iists no fewer than 20
different foreign securities,

Everyone was a winner.

Er, so that, you know...

More siIver coins
didn't make Spain richer.

Bonds had saved the city-state
from bankruptcy.

incIuding bonds issues by ChiIe,
Egypt, Germany, Hungary, ItaIy,

Iike...Iike a drug.

SadIy, the cost of this mega-makeover
proved to be the finaI straw

They simpIy made prices higher
as an increased quantity of money

The citizens were happy
earning their interest.

There's a bIack box warning on there.

And the bond market let them
buy or sell as they saw fit.

chased the same amount of goods.

''This is what it does, this is what
you shouId watch out for.''

not forgetting 1 1 different
raiIway companies,

for the ducaI finances.

What the Spaniards didn't get

As opposed to this device, which
is caIIed a modern insurance poIicy,

incIuding four from Argentina,
two from Canada and, down here,

lt seemed as if the problem

was that money is onIy worth what
other peopIe wiII give in exchange for it.

ln August 1 848, to the Duke's horror,

In 1602, at the instigation
of the Dutch government,

of public debt had been solved,
allowing the citizens of Florence

his son had the entire contents
of Stowe House auctioned off.

the good oId KowIoon to Canton
raiIway Iine.

these various companies came together

which no-one can interpret or understand.

to turn their minds to higher things.

to form the United Dutch East India
Chartered Company,

Now, his ancestral stately home
was thrown open

But there was just one problem
with this brilliant idea.

or Vereenigde Oost-Indische Compagnie
for short.

For the first time in history,
the world economy was truly united

lt seemed as if the insurance companies
had been well and truly ''Scrugged''.

for throngs of bargain-hunters to bid
for the silver, the wine, the china.

And, whether money
takes the form of silver coins,

And this is its originaI charter,

by a combination of low trade
and high finance.

seashells, bars of gold or bank notes,

which speIIs out that the company
was to enjoy a monopoIy on aII trade

One of America's biggest insurers settled
hundreds of cases brought by Scruggs

that's been true from ancient times
right down to the present day.

Today, Stowe is a private boarding school.

Yet this first era
of financial globalisation

from the Cape of Good Hope aII the way
east to the Straits of MageIIan.

There was a limit to how many more or less
unproductive wars could be waged.

on behalf of clients whose claims
had been turned down.

was to be brought to a violent halt by
the world's first truly global conflict.

Even lumps of clay
can work better than silver coins,

Pretty much haIf the worId.

THUNDER RUMBLES

The larger the debts of the ltalian cities
became, the more bonds they had to issue,

if people have enough confidence in them.

The structure of the new entity was novel.

But in this bitter, high-stakes battle,

lt's a poignant symbol
of the transience of landed wealth.

In Ancient Mesopotamia,
nearIy 4,000 years ago,

the insurance companies
had the last laugh.

The capital of the company
was divided unequally

and the more bonds were issued, the less
valuable they looked to investors.

peopIe used cIay tabIets Iike these ones

between all the major Dutch cities.

After winning the case, Scruggs was
convicted and sentenced to five years

ln the modern world, it turned out,

On June 28th, 1 91 4,
the heir to the Austrian throne,

to commit themseIves to particuIar
financiaI transactions.

Citizens were invited to participate
in the new venture by investing.

a regular job and a steady income
mattered more than an inherited title -

for attempting to bribe a judge and
influence the distribution of legal fees.

For exampIe, this one,
found a IittIe south-west of Baghdad,

And that was exactly
the sequence of events in Venice.

the Archduke Franz Ferdinand,

lt was the form of this investment
that was the real novelty.

was assassinated
in the Bosnian capital, Sarajevo.

no matter how many acres you owned.

specifies that a debtor wiII repay
a Iender 330 measures of grain

By the early 1 6th century,

lnitially, financial markets
shrugged off the news

the city had suffered
a series of military reverses,

And the big insurance companies responded
to the weight of post-Katrina claims

Divorced by his Iong-suffering
and much-betrayed Scottish wife,

This rather wonderfuI painting is
of the famiIy of one of the founders

as just another bout of Balkan bloodshed.

on the harvest day.
But this one's even more fascinating,

and the value of Venetian bonds
had taken a hammering.

by, in effect, declaring parts of the
Gulf Coast a no-home-insurance zone.

whose entire wardrobe had been seized
by Sheriffs Officers in London,

of the Dutch East India Company,
Dirck Bas.

because what is says is that
a debt of four measures of barIey

ln reality, the assassination

For 6,000 guiIders,
he and 16 other so-caIIed ''participants'',

the Duke was finaIIy forced
to reIinquish Stowe

had sparked off a chain reaction
in the world's financial markets.

shouId be repaid
to the bearer of the cIay tabIet

Today, as Councillor Joey DiFatta
has found out,

and move into rented accommodation.

became the firm's managing directors,
the bewindhebber.

and it's that idea of repayment
to the bearer that reaIIy fascinates me.

At their nadir between 1509 and 1529,

As investors belatedly grasped the
likelihood of a full-scale European war,

He eked out his days
at his cIub, the CarIton,

insuring a house in this part of
New Orleans is virtually impossible.

After 1606, however, anyone who put
his money into the East India Company

Venetian Monte Nuovo bonds were trading
at just 10% of their face vaIue.

writing a succession
of highIy unreIiabIe memoirs

liquidity - the ability to borrow
money or sell assets -

received an ''aktie'' -
IiteraIIy an ''action'',

and incorrigibIy chasing actresses
and other men's wives.

- They can't get a mortgage either?
- (Joey DiFatta) That is correct.

lf the phrase sounds familiar,
then it should.

was sucked out of the world economy as if
the bottom had dropped out of a bath.

Now, if you buy a bond when war is raging,
you're taking a risk -

or as we wouId say,
''a piece of the action'' -

They have to make a choice.
Do I buiId a house here?

Just take a look at a Ł20 note.

The fall of the Duke of Buckingham
was a kind of harbinger

a share in the company's future profits.

Or do I reIocate to an area where
insurance may be a IittIe cheaper

the risk that the city won't pay you back
or pay your interest. On the other hand,

And here it is, the worId's
very first share certificate,

for a new democratic age in which
every adult would be given the vote

The resulting disruption
to international finance

and I can afford it?

Bank notes have next
to no intrinsic worth.

remember that the interest is paid
on the face vaIue of the bond,

issued by the worId's
very first muItinationaI company.

That is hurting our community,
it's taking our peopIe away,

They're simply promises to pay,

shattered globalisation.

whether they owned a stately home
or paid rent for a humble flat.

the nucIeus of this parish,
and puIIing them away.

so if you can buy it
at just 10% of its face vaIue,

just like the clay tablets of
ancient Babylon four millennia ago.

AImost exactIy four centuries ago.

As aristocratic fortunes
from agriculture declined,

SHIP HORN

you're earning a handsome return
of maybe 50%.

It's absoIuteIy fascinating to foIIow
the outbreak of the First WorId War

On the back of the $1 0 bill
it says, ''ln God We Trust''.

Three years after disaster struck,

so the franchise was widened.

And that is how the bond market works.

St Bernard Parish has only a third
of its pre-Katrina population.

through the financiaI pages
of the London Times.

Three years later,
Bas and his fellow directors declared

Yet the advent of universaI suffrage
didn't mean that property ownership

In a sense, you get return
for the risk you're prepared to take.

It wasn't untiI JuIy 22nd, 191 4,
that anybody appreciated

that any shareholders who wanted their
cash back could not have it refunded,

But it's not really God
you're trusting in.

had become universaI.

At the same time, it's the bond market

On the contrary, as recentIy as 1938,

By swapping your goods or your Iabour
for a fistfuI of these things,

that sets interest rates
for the economy as a whoIe.

but would have to sell their shares
to another investor.

THUNDER RUMBLES

that the assassination of the
Archduke Franz Ferdinand in Sarajevo,

Iess than a third of the UK housing stock
was in the hands of owner-occupiers.

If the state has in effect to pay 50%,
then so do aII the other borrowers.

Of course, life has always been dangerous.

you're trusting the US Treasury Secretary
not to repeat Spain's mistake

three weeks before, might have
some financiaI repercussions.

The real lesson of Katrina,
or any big disaster,

Overnight, a market for
the company's shares was born -

It was on the other side of the AtIantic

and produce so many of the damn things
that by the time you come to spend them,

Just ten days Iater,
on August 1st, 191 4,

that the first true property-owning
democracy wouId emerge.

is that even when we think
we're protected against risk,

the worId's first true stock market.

The bond market had been invented
to help pay for ltaly's wars.

they're worth even Iess
than the paper they're printed on.

the Times had to report the cIosure
of the Stock Exchange,

sometimes it turns out we're not.

And it wouId emerge from
the biggest financiaI crisis ever seen.

But now it was setting interest rates
for everyone.

and cIosed it remained
untiI January 4th, 1915.

This invention was to change
the face of finance for ever,

Even making quite modest insurance claims

lts rise to power had begun.

can seem more trouble than it's worth.

Why were investors so seemingIy
obIivious to Armageddon

because it created a mechanism whereby
the price of shares was determined

lt leaves you wondering why we bother

Over the next two centuries,
bonds would come to rule the world.

just days before
the outbreak of worId war?

by the laws of supply and demand,
sellers and buyers.

Today we're quite happy with paper money.

spending so much
on insurance policies every year.

WeII, the answer is that a combination
of financiaI innovation

Where did this strange habit come from?

And as the renegade Scotsman
John Law couldn't help but notice,

and gIobaI integration had made
the worId seem reassuringIy safe.

Even more amazingly, we're happy
with money we can't even see.

Saving up for the proverbiaI rainy day
is the first principIe of insurance,

the trading of these company stocks

was making the world's
first shareholders very rich indeed.

Millions of dollars pass through
this woman's hands every day...

An EngIishman's home is his castIe

This house was built
by the financial dynasty

but the trick is knowing
what to do with your savings

The lights in financial markets
were flashing green, not red,

and Americans know that
there's no pIace Iike home too,

that helped decide
the Battle of Waterloo -

so that, unIike in New OrIeans
after Katrina,

even if aII the homes are rather simiIar.

until the very eve of destruction.

..or rather, across her computer screen.

they're in the kitty
when you reaIIy need them.

the dynasty that produced the man
they called the Bonaparte of finance,

There may be a lesson
here for our time, too.

But to do that, you need to be
more than usuaIIy canny,

Today we take the universal right
to own our own home for granted.

She's a foreign exchange dealer,

the emperor
of the 1 9th-century bond market.

Financial globalisation mark one
took a generation to engineer.

and that gives us a vaIuabIe cIue

whose business is literally
buying and selling money.

as to where the history
of modern insurance has its origins.

But before the 1 930s,

Each day around $3 trillion changes hands

''He is master of unbounded wealth,

Where eIse but in bonny, canny ScotIand?

no more than two-fifths of American
households were owner-occupiers.

But it was blown apart
in a matter of days.

By 1 61 0, the world's first joint stock
company, the Dutch East lndia Company,

''he boasts that he is the arbiter
of peace and war,

in transactions like these
around the world.

And it would take more than a generation
to repair the damage done

BELL TOLLS

''and that the credit of nations
depends upon his nod.

was ready to conquer the world.

by the guns of August 1 91 4.

lf the old class system,

And it's all built on trust. lt has to be
when you can't even touch the stuff.

lt had a new charter, new shareholders
and a burgeoning trade in these shares.

''Ministers of state are in his pay. ''

based on elite property-ownership
was distinctively British,

They say the Scots
are a pessimistic people.

the revolution that created
a new property-owning democracy

Maybe it's the weather -
all those hundreds of rainy days.

That's what the Conquistadores got wrong.

But it had to fight to survive,

was born out of a great
American financial crisis.

The First World War had put an end
to the first age of globalisation.

Those words, spoken in 1 828 by the Radical
Member of Parliament Thomas Duncombe,

literally.

They failed to see that money
is about trust - even faith.

Maybe it's the endless years
of sporting disappointment.

Until the late 1 960s,
international finance slumbered.

were describing Nathan Rothschild,
bond trader extraordinaire

Or maybe it was the Calvinism we picked up
at the time of the Reformation.

Trust in the person paying you the money,

When the Depression struck in 1 929,
the US economy nose-dived.

Having established a string of factories
and warehouses across South Asia

trust in the centraI bank
issuing the money,

and founder of the London branch of what
became the biggest bank in the world.

Some even considered it dead.

trust in the commerciaI bank
that honours the cheque.

from Java to lndia, the company
had to struggle to keep the Spaniards

Certainly, it's two
Church of Scotland ministers

The minority of people
who did own their own homes

Money isn't metaI. It's trust inscribed.

ln 1 944,
the soon-to-be-victorious Allies

The bond market made the Rothschilds
stupendously rich -

who deserve the credit for inventing
the first true insurance fund,

couldn't afford the mortgage payments.

and their English competitors at bay.

And it doesn't much matter what
it's inscribed on - paper, siIver, cIay,

gathered to devise a new financial
architecture for the world.

Tenants too struggled to pay the rent
when all they had coming in was the dole.

With 40 warships and a private army
of 1 0,000 soldiers,

so rich that they could afford to build
41 stately homes all over Europe.

back in 1 7 44,

or a screen -
provided the recipient beIieves in it.

and fathering
a multi-billion-pound industry.

the directors of the East lndia Company
were the original corporate raiders.

Trade wouId be free,

but capitaI movements wouId be
subject to tight reguIation.

Nowhere were the effects of the Depression
more painful than in Detroit.

This is number 29 -
Waddesdon Manor in Buckinghamshire,

When money did fIow
across nationaI borders,

which has been restored
in all its gilded glory

it wouId go from government
to government.

There was one huge possibility created

The Kirkyard of Greyfriars
is best known for the grave-robbers,

Soon the automobile industry here

by Jacob Rothschild,
Nathan's great-great-great-grandson.

by the emergence of money
as a system of mutual trust -

For the Dutch East India Company,

employed only half the number
of workers it had in 1 929,

firepower and foreign trade
went hand in hand.

the Resurrection Men, who came here
in the late 1 8th century

a possibility that would
revolutionise world history.

and at half the wages.

This new financial order
was to have two guardian sisters,

WeII, he was short, fat,

But the key to the company's success
wasn't just its cannons

to supply the Medical School
at Edinburgh University

By 1 932, the dispossessed of Detroit
had had enough.

established here in Washington DC -

obsessive, extremeIy cIever,

lt was the idea that you could rely on
people to borrow money from you

with corpses for dissection.

Iike these ones aboard The Batavia,
the pride of its fIeet.

the lnternational Monetary Fund

whoIIy focused.

Like aII big companies, it was abIe
to combine economies of scaIe

But Greyfriars' lasting importance

and the lnternational Bank for
Reconstruction and Development,

I can't imagine he wouId have been a very
pIeasant person to have had deaIings with.

and pay it back at some future date.

comes from the work of the minister
here, Robert Wallace,

with reduced transaction costs

later known as the World Bank.

On March 7th, 5,000 workers
laid off by the Ford Motor Company

That's why the root of ''credit''
is ''credo'', the Latin for ''I beIieve''.

and what economists caII
''network externaIities'' -

and his friend, Alexander Webster.

the abiIity to pooI information between
muItipIe empIoyees and agents.

marched to the factory
to demand unemployment relief.

By the 1 97 0s, however, vast sums
of money were being accumulated

It's somehow appropriate
that it was Scottish ministers

Between around 1 81 0 and 1 836, the five
sons of Mayer Amschel Rothschild

The Batavia was part man-of-war,
part muItinationaI corporation.

Without the invention of credit,

who invented modern insurance.

What followed would force Americans
to completely rethink

by the oil exporters of the Middle East.

the entire economic history of our world
would have been impossible.

After aII, we tend to think of them as
the embodiment of prudence and thrift,

rose from the obscurity of
the Frankfurt ghetto to attain a position

With Western bankers desperate
to reinvest the money as loans,

their attitude to property ownership.

weighed down with an anticipation
of impending divine retribution

The big networked company
was simply more efficient.

of unequalled power
in international finance.

the guardian sisters relaxed their grip.

That was why, by the 1 620s,

for every tiny transgression.

Financial globalisation was reborn.

But, in fact, Robert WaIIace
was a hard drinker,

it had established a virtual monopoly
on spice exports from Asia to Europe.

lt was the third son, Nathan,

As the unarmed crowd reached Gate 4

Because we take it for granted,

who orchestrated
this family triumph from London.

of the company's River Rouge
plant in Dearborn,

as weII as a mathematicaI prodigy,

we tend to underestimate the extent to
which our entire civiIisation is based on

The region where the bankers
chose to lend the petrodollars

The world's first multinational was making
its shareholders enormously wealthy.

scuffles broke out.

who Iiked nothing better than
knocking back magnums of cIaret

Evelyn de Rothschild
is Nathan's great-great-grandson.

Suddenly, the factory gates opened

seemed to promise the best returns.

the borrowing and Iending of money. No, it
doesn't IiteraIIy make the worId go round.

with his bibuIous buddies.

He recently retired
as chairman of Rothschild's -

and a phalanx of police
and security men rushed out

Not for the first time
in financial history,

I'm Iooking here
at the originaI sharehoIders' register

the bank that Nathan built.

Wallace and Webster were unhappy

and fired into the crowd.

But it does makes vast quantities
of peopIe, goods and services

it also posed the biggest risks.

He was very ambitious

of the Dutch East India Company,

GUNSHOTS

at the way the widows and children
of their fellow clergymen

and he moved to London.

and IiteraIIy every name in here
was a winner.

go around the worId
from BabyIon to BoIivia.

I think he was determined.
I don't think he suffered fooIs IightIy.

ln seven years, Latin America
quadrupled its borrowings from foreigners

were treated when the Grim Reaper struck.

If you'd put 1 ,000 guiIders
into the company at its very inception,

Maybe that's a famiIy trait.

to more than $31 5 billion.

by 1 736, your investment
wouId have been worth 7,000.

They often found themselves
homeless and penniless.

The puzzle is that the early moneylenders
got so little thanks for their services.

Five workers were killed.

This is one of the few surviving Ietters
from Nathan RothschiId to his brothers

Then, in 1 982,

Days later, 60,000 people sang
The lnternationale at their funeral.

On the contrary,
they were widely reviled as pariahs.

Mexico declared that it would
no longer be able to service its debt.

Over its entire Iifetime, the company
paid an average annuaI dividend of 16.5%.

The plan Wallace and Webster
came up with was ingenious -

written, as aIways, in Judendeutsch -

that was German transIiterated
into Hebrew characters -

the first true insurance fund in history.

Soon, the entire continent teetered
on the verge of bankruptcy.

Why was that?

and it gives you an idea of what
an extraordinary work ethic the man had

VirtuaIIy aII its profits were paid back
to the sharehoIders.

and how he tried to impose it on his poor,
Iong-suffering brothers.

The Communist Party newspaper
accused Edsel Ford,

These are some of the voIuminous
caIcuIations that Robert WaIIace did,

But the days had gone when investors
could confidently expect their governments

Dirck Bas's original shareholding
of 6,000 guilders

Just Iisten to this.

son of the firm's founder, Henry,
of allowing a massacre.

''Dear AmscheI, I am writing you my opinion
because it's my damned duty to do so.

now housed at
the NationaI Archives Of ScotIand.

to send a gunboat to get their money back
when foreign borrowers misbehaved.

Welcome to Northern ltaly
in the year 1 200AD.

had been transformed
into a 500,000 guilder fortune.

You can see how he ran the numbers
over and over again,

making very carefuI assumptions
about the maximum number

''I read your Ietters, not once,
but often 100 times,

Could anything be done

Now responsibility for such debt crises
fell on the lMF and the World Bank.

of widows and orphans
that wouId have to be provided for.

to defuse what was beginning
to seem like a revolutionary situation,

A land divided into multiple
feuding city states.

''because you can weII imagine
that after dinner I don't read books,

The key point was that, from now on,
ministers wouIdn't just pay money in

pitting the seriously propertied Fords
against their property-less ex-employees?

To John Law, lying low in Amsterdam
having escaped the gallows in London,

''I don't pIay cards,
I don't go to the theatre.

that wouId be paid out
when one of their number died.

They didn't have gunboats.

A land where trust
was in rather short supply.

''My onIy pIeasure is my business.''

Rather, they wouId pay premiums
that wouId be used to create a fund,

the workings of the Dutch East lndia
Company came as a revelation.

ln a remarkable gesture of conciliation,

But in return for new loans,

they could insist that
Latin American governments

Among the many remnants of the defunct
Roman Empire was a numerical system

Edsel Ford turned to a Mexican artist
named Diego Rivera.

and the fund wouId then be invested
for profitabIe purposes.

adopt painful ''structural
adjustment programmes'' -

Law was living off his winnings
at the gambling table.

PHONES RING

He invited him to paint a mural
that would show Detroit's economy

The widows and orphans, henceforth, wouId
be paid out of the returns on that money,

But he was fascinated by the relationships
between the company,

singularly ill-suited to complex
mathematical calculation,

lt was this phenomenal drive,
allied with innate financial genius,

impose fiscal discipline.

as a site of cooperation,
not class conflict.

with its splendid offices in the
Hoogstraat, the nearby stock exchange,

Ieaving the premiums to accumuIate.

let alone the needs of commerce.

To American economists, these
programmes all made perfect sense.

that propelled Nathan from obscurity
to mastery of the London bond market.

where dealers busily traded the company
shares, and the Bank of Amsterdam.

Nowhere was this more of a handicap
than in Pisa,

But not everyone agreed.

Diego Rivera was a IifeIong Communist.

All that was required
for the scheme to work

where merchants struggled to do business

Once again, however,

with seven different forms of coinage
in circulation.

was an accurate projection
of how many widows and orphans

His ideaI was of a society in which
there wouId be no private property,

the opportunity for
a financial breakthrough came from war.

To the increasingly vocal
critics of global finance,

Yet this Dutch financial system
struck Law as not quite complete.

Even the simplest transaction could be a
headache, requiring the use of an abacus.

there would likely be in the future.

in which the means of production
wouId be commonIy owned.

A calculation which Wallace and Webster
made with extraordinary precision.

the two guardian sisters
of the post-war order

By comparison, economic life
in the Eastern world -

In his eyes, Ford's River Rouge pIant
was the very opposite,

To Law's financiaIIy supercharged mind,
the Dutch were missing a trick, or two.

were being transformed
into economic hit men.

in the Muslim caliphate or the Sung
Chinese Empire - was far more advanced.

a capitaIist society
in which the workers worked

For one thing, it seemed compIeteIy nuts

They were holding a financial gun to
the heads of Third World governments...

On the morning of June 1 8th, 1 81 5,
67,000 British, Dutch and German troops

and the property owners, who reaped
the rewards of their efforts,

The creation of
the Scottish Ministers' Widows' Fund

to restrict the number
of East India Company shares

To discover modern finance,
backward Europe needed to import it.

was a milestone in financial history,

when the markets
were so cIearIy enamoured of them.

mereIy watched.

..propping up dictators and furthering
the interests of Yankee imperialism.

under the Duke of Wellington's command
looked out across the fields of Waterloo,

for it provided a model
not just for Scottish clergymen,

Law was also puzzled by the conservatism
of the Bank of Amsterdam.

Enter a young mathematician called
Leonardo of Pisa or Fibonacci.

but for everyone who aspired
to provide for life's eventualities.

lt had created an internal system which
allowed merchants to settle their accounts

not far from Brussels, towards an almost
equal number of French troops

When the murals were unveiled in 1 933,
the city's dignitaries were appalled.

And woe betide those
who resisted the hit men.

commanded by the French Emperor,
Napoleon Bonaparte.

The son of a Pisan customs official
based in what is now Algeria,

by direct cashless transfers,

but it hadn't issued
any real banknotes to the public.

By 1815, the principIe of insurance
was sufficientIy widespread

Fibonacci is best remembered today

Conspiracy theories flourished
in the anti-globalisation movement.

They saw them as Communist propaganda,
''a travesty on the spirit of Detroit''.

The BattIe of WaterIoo was the cuImination
of more than two decades

for his sequence of numbers
that mimic the properties of nature.

The idea was aIready taking shape
of a breathtaking modification

to be adopted for the widows
of men who Iost their Iives

According to one popular theory,
two Latin American leaders -

of intermittent confIict
between Britain and France.

of the institutions that Law
had first encountered here in Amsterdam.

fighting against NapoIeon.

The power of art is a wonderful thing.

Jaime Roldos of Ecuador
and Omar Torrijos of Panama -

But the famous sequence was onIy one
of many Eastern mathematicaI ideas

But it was more than just a battIe
between two armies.

At the BattIe of WaterIoo, your chances
of getting kiIIed were up to one in four,

But it was clearly going to take something
rather more powerful than art

OnIy combine the properties of a monopoIy
trading company and a pubIic bank

It was aIso a contest
between rivaI financiaI systems.

were actually assassinated for resisting
the demands of American imperialism.

but at Ieast if you'd taken out insurance,

that Fibonacci introduced to Europe with
his path-breaking book the Liber Abaci -

to heal a society so deeply split
by the Depression.

One, the French, based on pIunder.
The other, the British, based on debt.

you had the consoIation of knowing
your wife and chiIdren

and the sky reaIIy wouId be the Iimit.

And yet there's something about
this story of a WorId Bank-IMF pIot

The Book of Calculation.

wouIdn't be thrown out onto the street.

Law was preparing to unIeash
a whoIe new system of finance

Other countries turned to the extremes
of totaIitarianism.

Even more important was his demonstration
of the superiority of Arabic numerals

Gives a whoIe new meaning
to the phrase ''take cover''.

To pay for the war,

But in the United States
the answer was the New DeaI.

the British government had sold
an unprecedented amount of bonds.

on an unsuspecting nation.

against Third WorId Ieaders
that doesn't quite add up.

over Roman numerals.

And that incIuded
a New DeaI on housing.

After aII, it's not as if the
United States had Ient that much money

And crucially, nearly all Fibonacci's
examples related to business.

According to a long-standing legend,

In radicaIIy increasing
the number of Americans

to Ecuador and Panama.

the Rothschild family
made their first millions

who couId hope to own their own homes,

In the 1970s, they accounted for just
0.4% of totaI US grants and Ioans.

ln 1 7 1 6, John Law arrived in Paris.

by speculating on how the outcome
of the Battle of Waterloo

the RooseveIt administration pioneered
the idea of a property-owning democracy.

The Scottish ministers' fund grew into
the world-famous Scottish Widows.

He had identified France
as the ideal laboratory

would affect the price of these bonds.

Nor were they particuIarIy big
customers for the United States.

Since Roman times,

Europeans had been struggling to do
simple arithmetic with these...

It proved to be the perfect antidote
to Red revoIution.

Even novelists, not renowned
for their financial prudence,

Again, Iess than 0.4%
of totaI US exports.

for what would be the biggest experiment
in the history of the stock market.

lt was this legend
of Jewish profiteering

could join.

Now, those just don't strike me
as figures worth kiIIing for.

that, a century later,
the Nazis did their best to embroider.

Walter Scott took out a policy in 1 826,

But why did the French
give him his chance?

to reassure his creditors they'd be paid
in the event of his death.

ln effect, the government
would rig the housing market

The Hindu or Arabic numerals
made all kinds of calculation easier.

To say the least,

ln 1 940 Josef Goebbels approved
the release of this film, Die Rothschilds.

the idea of lMF-sponsored
assassinations is a stretch.

to incentivise Americans
to become property owners.

By the mid-1 9th century, being insured
was as much a badge of respectability

The answer is that France's fiscal
problems were exceptionally desperate.

HE SPEAKS GERMAN

Nevertheless, this new phase
in the story of globalisation

as going to church on Sunday.

Customers at local mortgage lenders,
known as savings and loans,

The country was saddled
with enormous public debts

Nathan is seen bribing a French general to
ensure the Duke of Wellington's victory,

did see the emergence of a new and
more plausible kind of economic hit man,

BELL TOLLS

ln particular, Fibonacci showed how
the new methods of calculation

the equivalent of
British building societies,

as a result of the wars of Louis XlV.

and then deliberately misreporting
the outcome of the battle in London.

would have their deposits guaranteed
by the Government

armed with a financially
lethal weapon - the hedge fund.

When the Sun King died in 1 7 1 5,

could be applied to commercial
bookkeeping, to currency conversions

even if a bank went bust.

This triggers panic selling
of British bonds,

the Duke of Orleans, who was acting as
Regent for the under-age king Louis XV,

What no-one anticipated back in 1 7 44

which Nathan then snaps up
at bargain-basement prices.

and, crucially,
to the computation of interest.

Crucially, a new
Federal Housing Administration was set up

faced a country on the brink of its third
bankruptcy in less than a century.

The men who ran the hedge funds
were far more intimidating

was that the careful calculations
of two Scottish ministers

Just imagine trying to work out
percentages in Roman numerals.

precisely because they didn't even need
to threaten violence to get their way.

to offer larger, longer
and lower-interest loans.

would grow into today's
huge insurance industry.

Fibonacci's Liber Abaci
made it child's play.

lt was the perfect opportunity for Law,

After the 1 930s, most mortgages
in the United States were fixed

What happened here
in 1 81 5 was altogether different.

And their distinctive contribution
to globalisation was to speed it up.

the maverick self-taught economist
who'd developed his theories

for 20 or 30 years.

As Robert WaIIace
understood 250 years ago,

Whereas the World Bank lends money
to countries for periods of years,

Far from making money
from WeIIington's defeat of NapoIeon,

This was to be the appIication
of mathematics to making money.

somewhere between the casino
and the stock market.

A new Federal National Mortgage
Association, nicknamed Fannie Mae,

size matters in insurance,

the RothschiIds
were very nearIy ruined by it.

hedge funds are more likely
to put their money in for just weeks,

because the more peopIe
are paying into a fund

was set up to create
a nationwide market for home loans.

Their fortune was made
not by WaterIoo, but despite it.

Law's ambition was to revive
economic confidence in France

or even days.

the easier it becomes,
by the Iaw of averages,

(TV REPORTER) This coupIe
is going through a modeI house now.

by estabIishing a bank
on the Dutch modeI,

to predict how much wiII have to be
paid out each year.

The grandmaster of
the new economic hit men

The most fertile soil
for such financial seeds

This is how it really happened.

but with the difference that this bank
wouId issue paper money

AIthough no individuaI's date of death
can be known in advance,

The husband, apparentIy,
isn't very keen about it aII,

proved to be the ltalian city states.

was George Soros.

Selling bonds to the public had raised
plenty of cash for the British government.

Iike this 100 Iivres note.

but his wife is entranced
by such convenient features

actuaries can caIcuIate the IikeIy Iife
expectancy of a Iarge group of individuaIs

Fibonacci's home town of Pisa was one.

as the sturdy buiIt-in ironing board.

A Hungarian Jew by birth, but educated
in London and based in New York,

As money was invested in the bank,

But it was above all Venice -

But neither bonds nor bank notes
were any use to Wellington.

the government's huge debt
wouId be consoIidated.

with quite astonishing precision.

By reducing the monthly cost
of a mortgage,

more exposed than any of the others
to Oriental influences -

But at the same time, and this was
the reaIIy important part of Law's system,

To provision his troops
and pay Britain's allies against France

these reforms made
home-ownership possible

Soros brought to global finance
a brand-new theory of economic behaviour

that became the great money-lending
laboratory...

for many more Americans than ever before.

he needed a currency
that was universally acceptable.

paper money wouId revive French trade,
and with it French economic power.

that underlined
the fallibility of human nature

ln other words, insurance is all about

(TV REPORTER) They both wouId Iike
to have this pIace for their very own.

Nathan Rothschild was given the job of
taking the money raised on the bond market

and the instability of financial markets.

trying to cope
with the risks of the future.

Too bad they can't afford it.

..and the home of literature's
most notorious moneylender -

Your actions wiII have
unintended consequences,

The Royal Government gained doubly.

Ah! But maybe they can.

lf, that is, you're insured
in the first place.

and delivering it to Wellington -
as gold.

Consolidation simply meant
that its onerous debts

For according to this sign,
they can buy this house

Shylock, in William Shakespeare's
The Merchant of Venice.

so the outcome wiII not correspond
to your expectations.

with monthIy payments that are Iess
than they now spend for rent!

were magically transformed
into shares in Law's bank.

No matter how many private funds
like Scottish Widows were set up,

The success of this operation would
determine the fate of the warring empires

At the same time,
the monarch gained the ability

And that is the way
human affairs generaIIy work.

May you stead me? WiII you pIeasure me?

there were always going to be people
beyond the reach of insurance,

and of all Europe.

to print as much money as he liked.

ShaII I know your answer?

who were either too poor or too feckless
to save for that rainy day.

lt's not too much to say
that the modern United States,

As Law wrote - ''l maintain that an
absolute prince who knows how to govern

This Ietter marks a turning point in
the history of both the RothschiId famiIy,

CruciaIIy, ShyIock's onIy prepared to Iend
the money if Bassanio's friend,

According to Soros's
Theory of Reflexivity,

with its seductively samey suburbs,
was born out of these New Deal reforms.

The Iot of the poor
was once a pretty harsh one -

financial markets can't
possibly be perfectly efficient,

''can extend his credit further and find
needed funds at a lower interest rate

and the British government.
It's dated the 1 1th of January 181 4,

the merchant Antonio,
is providing the security.

either dependence on private charity,

much less rational,

and it's an order
from the ChanceIIor of the Exchequer

or the harsh regime of the workhouse,

''than a prince
who is limited in his authority.

From the 1930s then,
the US Government effectiveIy underwrote

for the simpIe reason

Three thousand ducats for three months
and Antonio bound.

that prices are just the refIection
of the ignorance and the biases,

to the Commissary-in-Chief
teIIing him to appoint Nathan RothschiId -

Iike this typicaIIy austere one
here in the heart of Edinburgh.

''ln credit, supreme power
must reside in only one person. ''

the mortgage market,
bringing borrowers and Ienders together.

Yet by the 1880s,

mostIy compIeteIy irrationaI,
of miIIions of investors.

Mr RothschiId -
as a British government agent.

peopIe began to feeI that Iife's Iosers
somehow deserved better.

Your answer to that.

And that was the reason for
the big expIosion in property ownership

In Soros's eyes, markets are bound
to go through cycIes of boom and bust,

Antonio is a good man.

Nathan's job was to gather together
as much goId and siIver as he couId find

The seed was pIanted of
an entireIy new approach to risk,

and mortgage debt in the decades
after WorId War II.

By ''good'', ShyIock doesn't mean virtuous,

as sureIy as the human temperament

on the European continent and make sure it
got to the Duke of WeIIington and his army

That absoIute power
was in the hands of the Duke of OrIeans

is prone to bouts of euphoria
and despondency.

a seed that wouId uItimateIy sprout
into the modern weIfare state.

There was just one catch -

he means ''good'' for the money
he's about to Iend Bassanio.

who Iived here in the PaIais RoyaI,

not everyone in American society had an
invitation to the property-owning party.

who had just fought their way out of Spain
into the South of France.

The state system of insurance was designed
to expIoit the uItimate economy of scaIe,

just a short step from Law's apartment
in the PIace Vendome.

In other words, creditworthy.

It was an operation that reIied heaviIy

It was to him that Law
now unfoIded his scheme.

Have you heard any imputation
to the contrary?

Soros's Quantum Fund had made
millions from short selling,

on the RothschiIds' unique
pan-European credit network

by covering IiteraIIy every citizen
from the cradIe to the grave.

Oh, no, no, no, no. My reason
in saying that he's a good man

The prize was nothing Iess
than the revivaI of French power

and on Nathan's abiIity to mobiIise goId
the way WeIIington couId mobiIise troops.

a type of dealing which
borrows stocks or currencies

through financiaI engineering.

is to have you understand me
that he is sufficient.

When these houses were built
in Detroit back in 1 941,

and sells them for future delivery

But that was onIy haIf
of Law's ingenious pIan.

on the calculation that
they'll go down in value.

whether you got the money or not
for a mortgage

Shifting such vast amounts of gold
in the middle of a war was hugely risky.

Yet while we tend to think of
the welfare state as a British invention,

(ShyIock) Three thousand ducats.
I think I may take his bond.

As Law wrote,

depended on which side
of this divide you lived.

His biggest coups came from
being right about losers, not winners.

in fact, the world's first
welfare superpower

Yet, from the Rothschilds'point of view,

''The bank is not the only,
nor the grandest of my ideas.

It was a reaI estate deveIoper
who buiIt this six-foot high waII

was Japan.

the hefty commissions they were able
to charge more than justified the risks.

And the greatest of these was among
the most momentous speculative hits

''l will produce a work
which will surprise Europe

With any loan, things can go wrong.

right through the middIe
of Detroit's 8 MiIe district.

''by changes more powerful than were
produced by the discovery of the lndies. ''

in all financial history.

He had to buiId it
in order to quaIify for Ioans

Ships can sink. And that is precisely why
anyone who lends money to a merchant -

The Rothschilds soon became indispensable
to the British war effort.

from the FederaI Housing Administration.

On September 1 6th, 1 992,
with the British pound in big trouble,

The Ioans were to be given for
construction on that side of the waII,

ln the words
of the British Commissary-in-Chief...

if only for the duration of an ocean
voyage - needs to be compensated.

The second part of Law's idea

''Rothschild of this place has executed
the various services

which was a predominantIy
white neighbourhood.

was that a huge monopoIy
trading company shouId be estabIished,

l watched as Soros put out
a contract on the Bank of England.

We usually call the compensation
''interest'' -

On this side, on the bIack side,
there was to be no federaI credit,

''entrusted to him in this line
admirably well, and though a Jew,

Disaster just kept striking Japan
in the first half of the 20th century.

the amount paid to the lender over
and above the sum lent or ''principal''.

the Compagnie d'Occident,
the Company of the West.

because African Americans were regarded
as fundamentaIIy uncreditworthy.

''we place a good deal
of confidence in him. ''

I became convinced that specuIators
Iike Soros were bound to win

As he put it, the whoIe nation
wouId become a body of traders

ln 1 923, a huge earthquake
devastated Tokyo.

if it came to a straight showdown
with the British Government.

and Law himseIf, named here
as the company's chief director,

Overseas trade of the sort
that Venice depended on

The Rothschilds were so effective
as war financiers

lt was part of a system
that divided the whole city -

It was a matter of simpIe arithmetic -

couldn't operate
without such transactions.

because they had a ready-made
banking network within the family -

As in New Orleans,

a triIIion doIIars of currency traded
every day on foreign exchange markets

in theory by credit-rating,

wouId be at its head.

And they remain the foundation
of international trade to this day.

private insurance policies
turned out to be worth little more

in practice by colour.

Nathan in London, Amschel in Frankfurt,

Segregation, in other words,
wasn't accidental,

than the paper they were printed on.

against the meagre hard currency
reserves of the UK Treasury.

James in Paris, Carl in Amsterdam and
Salomon roving wherever Nathan saw fit.

A new idea began to emerge in Japan -
that the state should take care of risk.

but a direct consequence
of federal policy.

The focus for this wildly ambitious
scheme would be in America,

At that time, the British pound
was tightly linked to the German mark

where the French laid claim
to a vast tract of land

But why does Shylock
turn out to be such a villain,

This map by the
FederaI Home Loan Board

through the ERM -
the European Exchange Rate Mechanism.

either side of the Mississippi -
Louisiana.

shows the predominantIy bIack areas
of Detroit, the Iower east side

But this was to be state protection
allied with imperial ambition.

demanding literally ''a pound of flesh'' -
in effect Antonio's death -

lf the price of gold was higher in,
say, Paris than in London,

The Regent gave Law's company, what
was to become the Mississippi Company,

and so-caIIed coIonies Iike the one
we're in now in Birwood-Griggs,

As German interest rates rose

James in Paris would sell -
and Nathan in London would buy.

if he can't fulfil his obligations? Why is
Shakespeare's moneylender so heartless -

in the wake of that country's
hugely expensive reunification,

The Japanese set up a welfare state.

marked with a Ietter D
and coIoured red.

a monopoly on trade with the new colony.

Britain's rates had to rise too,

Frenchmen, regardless of rank, were
encouraged to buy shares in the company.

You can see why the practice

And they did it to promote warfare.

the original
of that bloodsucking financier

hurting home-owners and businesses.

of giving whoIe neighbourhoods
a negative credit rating

Soros calculated that the British
Chancellor, Norman Lamont,

who recurs time and again
in Western literature?

I think their edge over famiIies Iike the
Barings, with whom they were competing,

Law's name headed the list of directors.

came to be known as ''red-Iining''.

would be forced to withdraw from
the ERM and devalue the pound.

The resuIt was that when peopIe
from round here needed mortgages,

was that they had their brothers in very
important financiaI centres in countries.

lt was the mid-20th-century
state's insatiable appetite

they had to pay significantIy
higher interest rates

for able-bodied young soldiers
and workers,

Now whether that was pre-meditated,

lt was the biggest bet of Soros's life.

than the foIks in the white part of town.

In modern parIance,
what these documents teII us

One clue is that Shylock is one of the
many Jewish moneylenders in history.

not some kind of bleeding-heart altruism,

whether they thought that through
as they got out of the ghetto,

So sure was he that the pound
would drop that he bet $1 0 billion -

is that Law was attempting
a refIation. And why not?

that inspired the rise of welfare.

Half a century later,
the two categories of borrowers

it's hard to beIieve
that they went as far as that.

Jews who stayed in Venice
for more than two weeks

France in 1 7 16 was in a depression

But that's what happened and once
they saw that it was an advantage,

would come to be known euphemistically
as prime and sub-prime.

more than the entire
capital of his fund.

were supposed to wear a yellow ''O''
on their backs or a yellow hat.

and Law's banknotes
heIped stimuIate a recovery.

State healthcare would ensure
a fitter populace

they worked on that advantage.

The risk-reward
was disproportionate.

At the same time, what he was doing

and a steady supply of able-bodied
recruits to the Emperor's armed forces,

But in the 1 960s, this divide
was the hidden financial dimension

And they were confined to a special area
which became known as the Ghetto Nuovo.

was effectiveIy transforming a burdensome
and badIy managed pubIic debt

ln March 1 81 5, Napoleon returned to Paris
from exile in Elba

And therefore it seemed
Iike a good specuIation,

of the Civil Rights struggle.

determined to revive
his imperial ambitions.

and deliver him an empire.

into shares in what was a privatised
tax-gathering and trade company.

Blacks were to be excluded
from the new property-owning society.

This is the entrance to the Jewish ghetto
in Venice where Jews were obIiged to Iive

or investment, if you Iike,
shorting the pound.

WeII, what was not to Iike about that?

ENGINE REVS

The Rothschilds immediately
ramped up their gold operation,

There would be a heavy price
to pay for this exclusion.

and indeed confined at night. Jews were
toIerated in Venice, but for a reason.

buying up all the bullion and coins
they could lay their hands on.

l was equally convinced that sterling
would have to be be devalued,

ln a fever of mass speculation,

the Mississippi Company's
share price soared,

Nathan's reason for buying this
huge stock of gold was simple.

On July 23rd 1 967, property in Detroit
literally went up in flames.

The wartime slogan
''All people are soldiers''

though all l had to bet
was my credibility.

from the original price of 500 livres
to 5,000 on September 4th.

The key was that Jews could provide
a service that Christian merchants

That evening, I headed to the opera
to see Verdi's The Force Of Destiny.

was adapted to become
''All people should have insurance''.

He assumed that,
as with all Napoleon's wars,

were forbidden to do - they could charge
interest on their loans.

this would be a long one.

(TV) Four days of rioting, Iooting
and arson rocked the city of Detroit

It proved exceedingIy appropriate.

By December 1 7 1 9,
it had reached 1 0,000.

His gold would be more and more
sought after and it would rise in value.

Fibonacci might have figured out
the mathematics of lending,

in the worst outbreak
of urban raciaI vioIence this year.

The only problem was that
Japan had gone to war

but it took Shylock to do the deal.

And this is where it aII happened.

lt proved to be
a near-fatal miscalculation.

Anger at economic discrimination
spilled over into five days of rioting

This was where Law's share issuing office
was Iocated, the Rue Quincampoix.

with the world's economic colossus -

At the intervaI, they announced
that ChanceIIor Norman Lamont

the United States.

This is where the Venetian Jews
used to do business.

Wellington famously
called the Battle of Waterloo,

that left 43 people dead.

You can imagine the scenes of frenzy here

had appeared in there,
in the Treasury courtyard,

This buiIding here was the oId Banco Rosso

Significantly, most of the violence
was directed not against people,

''The nearest-run thing
you ever saw in your life. ''

as haIf of Paris descended
on this narrow aIIeyway

to say that Britain
was withdrawing from the ERM.

and it was outside here that they used to
sit behind their tabIes - their tavoIe -

Japan's warfare state proved
to be a massive mistake.

aII desperate for a piece of the action.

How we aII cheered.

but against property.

CROWS CAW

Today has been an extremeIy
difficuIt and turbuIent day.

The higher the share price went,
the more they wanted to buy.

Nearly 3,000 buildings
were looted or burned.

Quite apart from the nearly
three million lives lost

on their benches - their banchi,
the root of the ItaIian word for banks.

After a day of brutal charges,
counter charges and heroic defence,

It was a cIassic stock market
feedback Ioop.

in Japan's doomed bid for empire,

Massive specuIative fIows
have continued to disrupt

by 1 945, the value of
Japan's entire capital stock

Now, there was good reason why merchants
came here to the Jewish ghetto

the late arrival of the Prussian Army
finally proved decisive.

the functioning of
the Exchange Rate Mechanism.

The real lesson for policy makers
was that excluding ethnic minorities

lt was in these heady times that the word
''millionaire'' was first coined.

to borrow money. For Christians,
what the Jews were doing,

seemed to have been reduced to zero

For Wellington, it was a glorious victory.

by American bombers.

Soros made a billion dollars that day,

Iending money at interest, was a sin.

from the property-owning democracy
was a fast track to trouble.

Yes, millionaires, like entrepreneurs,
were invented in France.

Cities built largely out of wood
were incinerated.

But not for the Rothschilds.

and that was only 40%
of his fund's annual profits.

To make people feel like stakeholders
in the social status quo,

Nearly a third of the urban population
lost their homes.

No doubt it was gratifying
to Nathan RothschiId

And by January 1 720,
John Law was the richest of them all.

(NiaII) Do you feeI...
or did you feeI a sense of triumph

The medieval Church's laws against usury -
charging interest on loans -

you had to make them property owners.

to be the first to hear the news
of NapoIeon's defeat.

when your prophecy came true
and the bet paid off hugeIy?

Thanks to the swiftness
of the RothschiId couriers,

were a major obstacle to the development
of finance in Europe.

Louis XlV had said ''L'etat, c'est moi'' -
''l am the state. ''

lndeed, widening home ownership
might even turn the malcontents

he heard it fuIIy 48 hours
before Major Henry Percy

Of course. It was Iike when
you're betting and you win,

After all, what God-fearing
Christian merchant

deIivered WeIIington's officiaI despatch
to the British Cabinet.

into conservatives.

naturaIIy, you have that
satisfaction and aIso the profit.

wished to risk the torments of Hell?

Now the renegade Scotsman,
John Law, was able to say,

But, no matter how early he heard it,

This was a lesson that
Margaret Thatcher was quick to learn.

This astonishing vision
of eternaI damnation

Practically the only city
to survive intact

''L'economie, c'est moi'' -

the news of Waterloo was anything
but good from Nathan's point of view.

was Kyoto, the former imperial capital.

was painted by Giorgio Vasari
and Federico Zuccari

Here in Britain, the idea
of the property-owning democracy

COWS MOO

''l am the economy. ''

He had bargained
for something much more protracted.

on the inside of the great dome
of FIorence's CathedraI, the Duomo.

became a keystone of 1 980s Conservatism.

1 945 may have seen the end
of the Japanese warfare state,

Now he and his brothers were sitting on
top of a piIe of cash that nobody wanted,

And beIow there's another fresco
by Domenico di MicheIino

By selling off council housing
at bargain-basement prices,

Soros owed his success
to a kind of gut instinct

Ensconced in his paIatiaI suite,
here in the PIace Vendome,

but it wasn't the end of the Japanese
experiment with state-sponsored welfare.

to pay for a war that was over.

about the way the ''electronic herd''
would move.

that's the Ritz HoteI over there,

Thatcher ensured that more and more
British couples had a home of their own.

of FIorence's greatest poet,
Dante AIighieri,

But even his instincts
are sometimes wrong.

With the coming of peace,

Law had achieved a greater concentration
of financiaI power in his hands

the great armies that had fought Napoleon
could be disbanded.

So what if instinct couId somehow
be repIaced by mathematics?

hoIding his masterwork,
the Divine Comedy.

In Japan, as in most competent
countries, the Iesson was cIear -

than any individuaI in aII French history.

According to Dante, there was a speciaI
part of the seventh circIe of HeII

That meant no more gold for soldiers'
wages and it meant the price of gold,

That also meant that more people
than ever had mortgages.

the worId was just too dangerous a pIace

What if you couId write
an aIgebraic formuIa

As ControIIer-GeneraI of French Finances,
he was IiteraIIy in charge of

for private insurance markets
to cope with.

that was excIusiveIy set aside
for usurers.

that guaranteed doubIe-digit returns?

which had soared during the war,
would fall.

With the best wiII in the worId,

the coIIection
of aII France's indirect taxes,

WeII, on the other side
of the financiaI gaIaxy,

Up untiI the 1980s, government incentives
to borrow money and buy a house

peopIe couIdn't be expected to insure
themseIves against the US Air Force.

the entire French nationaI debt,

such a formuIa had just been devised.

made pretty good sense
for the average British famiIy.

the 26 mints that produced
the country's goId and siIver coinage,

The answer, practicaIIy
everywhere, was the same -

Interest rates were reIativeIy Iow
in the '60s and '70s,

for government to step in.

the Company of the Indies -
better known as the Mississippi Company -

Nathan was faced
with heavy and growing losses.

In effect, to nationaIise risk.

There the moneylenders were eternally
tortured with scorching earth

and the infIation rate tended to creep up,

As the new era of globalisation
increased trade and growth,

CAR HORNS HONK

which had a monopoIy
on the import of tobacco,

so that the reaI vaIue of mortgage debt
tended to faII.

There was only one possible way out.

aII of France's trade
with Africa and Asia,

and freezing snow, their necks
weighed down with bulging purses.

Perhaps the most familiar sub-system
of welfare from the cradle to the grave,

it also increased the world economy's
vulnerability to financial shocks

But there was a sting in the taiI.

oh, and the Louisiana coIony,

Nathan could use the Rothschild gold
to make a massive and hugely risky bet...

The very same governments
that professed their faith

which covered around a quarter
of what is today the United States.

also born in the ruins of war,

in the property-owning democracy
were aIso committed to fighting infIation,

that could spread rapidly
to the four corners of the Earth.

Jews, too, weren't supposed
to Iend at interest.

was devised by the British
economist, William Beverage.

on the bond market.

But there was a convenient
get-out cIause

and that meant raising interest rates.

But what if we inhabited another
completely different kind of planet?

in the OId Testament book of Deuteronomy,
chapter 23,

ln his own right,
Law also owned the Mazarin Palace,

When the Japanese came up with
their own comprehensive weIfare system

The British and American policy
of encouraging people

you weren't supposed to Iend to your
brother at interest, but to a stranger?

A planet without all the complicating
frictions caused by subjective,

to take out mortgages and then cranking
up interest rates led in the late '80s

more than a third of the buildings
around the Place Vendome,

in October 1947,

On July 20, 1 81 5, the evening edition
of the London Courier

their advisory committee
in sociaI security recommended

sometimes irrational human beings.

WeII, that was a different matter. In
other words, a Jew couIdn't Iend to a Jew,

more than 1 2 country estates,

reported that Nathan had made
''great purchases of stock'',

to one of the most spectacular booms and
busts in the property market's history.

what amounted to
''Bebariji no Nihon-ban'',

One where the inhabitants instantly
absorbed all new information

but he couId Iend to a Christian.

''Beverage for the Japanese''.

several plantations in Louisiana,

meaning British government bonds.

lt was to the '80s what the sub-prime
meltdown has been in our own time -

and used it to maximise profits,

And yet, they went even further
than Beverage had intended,

Nathan's gamble
was that the British victory at Waterloo

and a hundred million livres of shares
in the Mississippi Company.

where amid the turbulence
of everyday life

The price the Jews paid for performing
this service was social exclusion.

as this copy of their report,

would send the price of British bonds
soaring upwards.

the first, but not the last time
that America's mortgage market

all was calm and predictable.

here in the Iibrary of the Japanese
NationaI ParIiament, makes cIear.

Not bad going for a man who, when
he'd first come here 12 years before,

Hence the ghetto.

has gone stark raving mad.

It caIIed on the government to provide
against every cause of poverty.

ln such a perfectly observed,
efficiently interconnected world,

And hence the centuries-long association
between Jews and finance,

had been identified as a joueur -
a professionaI gambIer and a possibIe spy.

Nathan bought, and as the price of bonds
began to rise, he kept on buying.

Sickness and injury, disabiIity, death,

an unpredicted catastrophic stock market
crash would be about as common

one of the few forms of economic activity
from which Jews were not once excluded.

By January 1 720,
Law's triumph seemed complete.

chiIdbirth, Iarge famiIies,
oId age and unempIoyment.

as an adult shorter than
one-and-a-half feet in our own world.

Despite his brothers' desperate entreaties
to sell, Nathan held his nerve

A Scots murderer was, in effect,
Prime Minister of France.

Whatever the reason, the needy wouId be
guaranteed the minimum standard of Iiving

lt would happen only once
in four million years of trading.

ln the end, of course,
Shylock is thwarted.

To many of us, it's come as a shock

for another year.

by nationaI assistance.

that a crash
in the American property market

For although the court recognises
his right to a pound of flesh,

This was the planet imagined

MONKS PERFORM INCANTATIONS

could trigger a major financial crisis.

Law's problem was that he had
no clear idea where to stop.

by some of the most brilliant
financial economists of modern times.

Eventually, in July 1 81 7,

the law also prohibits him
from shedding Antonio's blood.

with bond prices up by 40%,
he sold his holding.

The Japanese wouId no Ionger have to
reIy on the benevoIence of a feudaI Iord

ln fact, as so often in the ascent
of money, it's happened before.

On the contrary, he had a strong personal
interest in printing more money,

And, because he's a Jew, the law also
requires the loss of his goods and life

And this is what
their planet looked like.

His profits were worth approximately
Ł600 million today.

which his own bank controlled, to drive up
the price of his own company's shares.

or the Iuck of the gods -

for so much as plotting
the death of a Christian.

the weIfare state wouId cover them

He only escapes
by submitting to baptism.

against aII the vagaries and
vicissitudes of the modern worId.

ln 1 993, two mathematical geniuses
came to Greenwich, Connecticut,

The Rothschilds had shown

ln March 1 984, American
government regulators received a copy

FortunateIy for Law,
both his bank and his company

lt turns out to be a risky business
to be a moneylender.

that bonds were more than just a way
for governments to fund their wars.

of a video showing mile after mile
of half-built houses and condominiums

were now operating
out of the very same buiIding,

with a big idea.

lf they couldn't afford education,

They could be bought and sold in a way
that generated serious money.

Stanford University's Myron Scholes

the Mazarin PaIace,
which he himseIf happened to own.

the state would pay.

The Merchant of Venice
raises profound questions

along lnterstate 30,
just outside Dallas in Texas.

had invented a revolutionary new theory
of pricing things called ''options''.

lf they couldn't find work,

So aII he had to do in order to
drive up the company's share price

And with money, came power.

about both economics and anti-Semitism.

the state would pay.

Why don't debtors
aIways defauIt on their debts -

was to take a waIk down the corridor from
the office where the shares were issued,

He and Harvard's Robert Merton
were the original ''quants'' -

lf they were too ill to work,
the state would pay.

Mayer Amschel Rothschild
had repeatedly admonished his five sons,

especiaIIy when the creditors
beIong to unpopuIar ethnic minorities?

You can still see
the empty slabs today.

to the office where the money was printed.

When they retired, the state would pay.

a new breed of speculators
using quantitative mathematics

Why don't the ShyIocks aIways Iose out?

You couId say that Law had become
the uItimate insider trader.

''lf you can't make yourself loved,
make yourself feared. ''

And when they finally died, the state
would pay their dependents.

to make money.

The investigation triggered
by these un-buiIt homes wouId expose

As they bestrode
the mid-1 9th century financial world

From this nondescript office they plotted
a global financial revolution.

one of the biggest financiaI scandaIs
of aII time -

as masters of the bond market,

At root, Law's system was what
we nowadays call a Ponzi scheme,

the Rothschilds were already
more feared than loved.

To get a better idea of how
primitive moneyIending works,

a scam that wouId make
a mockery of the idea

Merton and SchoIes's idea was
based on the simpIe option contract.

after the legendary ltalian-American
conman, Charles Ponzi.

So what happened after the war in Japan

you don't need to
traveI back in time.

of property
as a safe form of investment.

But now, they had become hated too.

was merely the extension
of the warfare welfare state.

There are pIenty of modern-day ShyIocks
remarkabIy cIose to home.

Take the case of a stock
that's worth $100 today.

This isn't a story about reaI estate -

To pay out the generous returns
it's promised to the first lot of suckers,

more Iike surreal estate.

The slogan now became
''All people should have pensions''.

Now, suppose I think that stock's
going to be worth 200 in a year's time.

And they don't need to be Jewish
to suffer a simiIar fate to ShyIock.

a Ponzi scheme needs to take in
more money from the next lot of suckers.

The fact that the Rothschilds were Jewish

WouIdn't it be nice to have the option to
buy it at today's price in a year's time?

Savings and loan associations -
America's building societies -

ln John Law's scheme,
the acquisitions of other companies

The Japanese welfare state
seemed to be a miracle of effectiveness.

gave a new impetus
to deep-rooted anti-Semitic prejudice.

were not only central to Roosevelt's
New Deal on housing.

If I'm right, I make
a tidy profit of $100.

and the generous dividends Law paid

ln public health and education,
Japan led the world.

(RothschiId) Just a few months ago
a colleague of mine in my office,

were financed not from company profits,

By the 1 97 0s, they were the foundation
of America's property-owning democracy.

But if I'm wrong, weII, who cares?
It was onIy an option.

who coIIects posters, found these...

but simply by selling new shares.

The onIy cost to me
is the price of the option itseIf.

By the late 1 97 0s,

the Japanese could boast
that their country had become

WeII, this particuIar, rather
extraordinary exampIe of anti-Semitism

Then, in the 1970s,
the savings and Ioan industry was hit

The big question is,
what shouId that price be?

This is ShettIeston
in the East End of GIasgow.

the welfare superpower.

$5? $1 0?

first by doubIe-digit infIation
and then by higher interest rates.

in a stark form, about the RothschiIds,
who were as it were epitomised,

It's actuaIIy where my grandmother
used to Iive.

The answer
was to be found in a magic formula.

Like aII Ponzi schemes, however,
the effect of Law's system

And I think with its distinctive
steeI shuttering,

to them and others at times,

Run Iike this, the weIfare state
seemed to make so much sense.

lt was a lethal double punch for
institutions that were forbidden by law

''Quants'' sometimes refer
to this formula as a ''black box''.

it's one of the grimmest pIaces
in the whoIe of Western Europe.

the most extreme forms of undesirabIe
capitaIism as practised by Jews.

was to generate an unsustainabIe bubbIe.

Japan had achieved security for aII,

Well, let's look inside the box.

In fact, average maIe Iife expectancy
here is just 64,

to raise the rates they paid to savers,

Law had refIated the French economy

the eIimination of risk,

and which were receiving interest payments
from local mortgage borrowers

whiIe at the same time
growing so rapidIy that by 1968

with a combination of paper money
and pubIic confidence.

The challenge Merton and Scholes
faced was how to price an option

which is sIightIy worse than BangIadesh.

lt was, above all, the Rothschilds'
seeming ability to permit or prohibit wars

That means that the average ShettIestonian
doesn't actuaIIy Iive Iong enough

Now, unfortunateIy,
his bubbIe was about to go pop.

it had the second-Iargest
economy in the worId.

that had been fixed decades before.

to buy a particular stock
on a particular date in the future,

to coIIect his state pension.

that aroused the most indignation.

You might think nobody wouId be mad enough

The response in Washington was
to remove nearly all these restrictions.

taking into account the unpredictable
movement of the price of the stock

One US economist even predicted
that Japan's per-capita income

to try and provide financiaI services
here. But someone does.

would overtake America's
by the year 2000.

in the intervening period.

You might have thought that
the RothschiIds actuaIIy needed war.

When deregulation
was enacted in 1 982,

Work that option price out accurately,
rather than just relying on guesswork,

After aII, some of Nathan's biggest deaIs
had been produced by war.

President Reagan was cock-a-hoop.

By the beginning of 1 720,

WeIfare was working
where warfare had faiIed -

AII in aII,
I think we hit the jackpot.

If it hadn't been for war, 19th-century
states wouIdn't have needed to issue bonds

That someone is a loan shark.

and you truly deserve
the title ''rocket scientist''.

France was in the grip of a mania -
the Mississippi Bubble.

to make Japan top nation.

You give him your benefit card as security
and he gives you a loan.

Well, some people certainly did.

With wonderful mathematical wizardry,

for the RothschiIds to buy and seII.

The key turned out to be
not a foreign empire,

On the day your benefit arrives,
he gives you back the card

But the troubIe with war,
and even more so with revoIution,

but a domestic safety net.

But the man responsible, the renegade
Scots murderer and gambler, John Law,

the quants reduced the price
of the option to this formula.

And yet, there was a catch,

and you go to the post office
to get your money,

was that increased the risk that a debtor
state might faiI to meet its commitments.

Liberated from the old constraints,
the people running savings and loans

a fataI fIaw in the design
of the post-war weIfare state.

repaying him the interest. lt's a modern
version of Shylock's business model.

who'd risen to become master
of the entire French economy,

FeeIing a IittIe bit baffIed? Finding
the aIgebra rather tricky to foIIow?

suddenly saw a chance
to make some serious money

Just what was it that caused those
predictions of Japan's uItimate triumph

And that hit the price of existing bonds.

was about to discover
an inviolable law of finance...

Usury is alive and well
and living in Scotland.

from the once boring business
of mortgage lending.

By the mid-19th century, the RothschiIds
were no Ionger mere traders,

WeII, that was just fine by the quants.

to faiI to come true?

In order to make money
from this kind of thing,

Trees don't grow to the sky.

they were fund managers,

By raising savings rates, they could
attract much more money from depositors.

they needed markets to be fuII of peopIe
who had no idea how to price options.

carefuIIy tending to a vast portfoIio
of their own government bonds.

These are some pages from the Ioan book
of a GIasgow Ioan shark.

The welfare state looked to be working
smoothly enough in 1 97 0s Japan.

And it's kind of interesting to see how
the business modeI works.

Then they could use these deposits

Now, they stood to Iose much more
than to gain from confIict.

ln its first two years,
Merton and Scholes's company,

But elsewhere, there were signs
that all was not well.

as the basis
for as many loans as they liked.

You Iend out maybe Ł10 to someone

According to Law's PR campaign,

Long Term Capital Management,
made megabucks by selling options

and you expect to be paid back Ł12.50
at the end of the week.

the huge profits he was projecting would
come from the French colony of Louisiana,

The Rothschilds had helped decide
the outcome of the Napoleonic Wars

ln Britain
and throughout the western world,

Crucially, though,
one thing didn't change.

Now that's 25% a week,
but if you work that out at an annuaI rate

by putting their financial weight
behind Britain.

that were never exercised because
the buyers had guessed wrong

which he painted as
a veritable Garden of Eden,

the welfare state, it seemed,
had removed the incentives

Now they would help decide the outcome
of the American Civil War -

Savers' deposits were still insured
by the government.

and Long Term had got it right.

inhabited by friendly noble savages

it comes to 1 1 miIIion per cent.

without which a capitalist economy
simply cannot function -

by choosing to sit on the sidelines.

They also made a killing by buying up
all kinds of different securities

willing to exchange
a cornucopia of exotic goods.

lt was an invitation to a gigantic
free lunch for financial cowboys.

the carrot of serious money
for those who strive,

GUNSHOTS

These would flow to France
through a new city

that the rocket scientists
thought were mispriced.

Once again, it was the masters of the bond
market who would be the arbiters of war.

the stick of hardship
for those who are idle.

at the mouth of the Mississippi,
New Orleans,

So why do people scraping by
on just Ł5.90 a day

Greenwich's luxury car dealers
had never had it so good.

This is the Wise Circle Grill
just outside Dallas,

named to flatter the always susceptible
French Regent, the Duke of Orleans.

pay such horrendous interest on loans?

filled every lunchtime with local
citizens of unblemished integrity.

Admittedly, to generate these
huge returns, Long Term had to borrow.

The result was stagflation -

These, surely, are loans
you'd be mad not to default on.

All the colony lacked was settlers.

low growth and high inflation.

This additional ''leverage'',

Twenty years ago,
the clientele was rather different.

or gearing, allowed them to bet
more than just their own money.

But here in Glasgow, defaulting on
your loan is highly inadvisable.

What was to be done?

Grasping that Frenchmen were more
interested in stock market speculation

50 years after the Battle of Waterloo,
and on the other side of the world,

The city of DaIIas had more than its fair
share of frauduIent savings and Ioans,

By August 1 997, the fund's capital
was just under $7 billion,

One man and his pupils
thought they knew the answer.

You won't literally lose a pound of flesh,

than the hard graft of colonisation,

another great war would be decided
by the power of the bond market.

Law launched a recruitment drive
in the Franco-German borderlands.

and this was where the DaIIas
property cowboys came to hang out.

but grievous bodily harm
isn't an unknown consequence

Thanks in large measure
to their influence,

but the assets funded by borrowing
amounted to 1 26 billion.

one of the great economic trends
of the past 25 years

of letting down the loan shark.

The Wise CircIe GriII
was the pIace to have brunch

But this time, it would be the vanquished
who made the big bet and lost.

has been for the welfare state
to be dismantled -

Quite simply, individual loan sharks
have to be rapacious and ruthless

Several thousand bold Germans signed up
and set sail to the promised land.

You might have thought that a coupIe
of academics Iike Merton and SchoIes

when they weren't whooping it up
on their Southfork-styIe ranches.

reintroducing people with a sharp shock

wouId have been scared siIIy
by this enormous piIe of debt.

to the unpredictable monster
they thought they had escaped from...

because the costs to them
of even a single defaulter are so high.

It was aII very, very 1980s.

But not a bit of it. According to
their magicaI mathematicaI formuIa,

Risk.

They ended up here.

To one group of DaIIas deveIopers,
the Empire Savings and Loan Association

there wasn't the sIightest risk
in being so highIy geared.

And that explains why,
from Renaissance ltaly to modern Scotland,

The traditional view is that the key
turning point in the American Civil War

offered the perfect opportunity
to make money out of thin air...

Apart from anything eIse,
Long Term was pursuing muItipIe,

This was the unfortunate immigrants'
first gIimpse of Louisiana,

the moneylender
is so often a hated figure.

came in June 1 863,
two years into the conflict.

supposedIy uncorreIated trading
strategies, around a hundred in aII,

or rather, out of fIat, Texan Iand.

an insect-infested swamp.

He's providing a service,
but at a socially unacceptable price.

Within a year, 80% of them
had died of starvation

That was the month
when Union forces captured Jackson,

with over 7,600 different positions.

ln 1 97 6, a diminutive professor
called Milton Friedman,

The surreal saga
of Empire Savings and Loans began

or tropicaI diseases Iike yeIIow fever.

the Mississippi state capital,

One of these might go wrong,
or possibIy even two.

SadIy for Law,
the Mississippi Company's principaI asset,

and forced a Confederate army
to retreat westward to Vicksburg,

working here at the University of Chicago,

when chairman Spencer Blain teamed up

So how did Ienders Iearn to overcome
this fundamentaI probIem?

But sureIy aII the bets they'd pIaced
couIdn't possibIy go wrong simuItaneousIy.

won the Nobel Prize in Economics.

with a flamboyant high-school dropout
turned property developer

its monopoIy on trade with Louisiana,
Iooked Iike being more or Iess worthIess.

their backs to the Mississippi River.

If they were too generous,
they didn't make any money,

MiIton Friedman won his pIace
in the economic haII of fame

named Danny Faulkner, whose speciality
was extravagant generosity...

Surrounded, with Union gunboats
bombarding their positions from behind,

but if they were too hard-nosed,
borrowers wouId eventuaIIy defauIt.

Long Term was trading
in markets all over the world.

by restating this simpIe equation.

with other people's money.

But the firm's biggest business

The answer was to get bigger and more
powerfuI. It was time to invent banks.

MV = PQ,

the Southerners held out for a month
before laying down their arms.

As the inscription
on this Dutch cartoon put it,

COINS CASCADE

was selling options on American
and European stock markets...

The money in question
came in the form of deposit accounts

where M is the money suppIy,

''This is the wondrous Mississippi land
made famous by her share dealings,

V is the veIocity at which it circuIates,

on which Empire paid
alluringly high interest rates.

After Vicksburg, the Mississippi
was firmly in the hands of the North.

P is the price IeveI

''which through deceit and devious conduct
has squandered countless treasures.

..options that would be cashed in

and Q is the quantity of expenditures.

This is FauIkner Point,
one of the very first deveIopments

if there were big future stock price
movements, up or down.

The South was literally split in two.

ln 1 5th century ltaly, the key financial
service of providing credit

Friedman's observation was simpIe -

if the money suppIy went up,
then so did the price IeveI.

''However men regard the shares,
it is wind and smoke and nothing more. ''

that Danny FauIkner ever buiIt,
and it spawned a veritabIe empire

At the time, the high prices
these options were fetching

moved out of the ghetto to become
the legitimate preserve of banks.

Hence, the Quantity Theory of Money.

Yet this military setback
wasn't the decisive factor

implied that the markets
would become particularly volatile.

of FauIkner Crest, FauIkner Creek,
FauIkner Crescent,

But you needed much more than
a piece of chaIk and a bIackboard

This transition was symbolised
by the rise of one family - the Medici.

To Law, economic success
was all about confidence.

in the South's ultimate defeat.
The real turning point came earlier.

to answer the second cruciaI question
of MiIton Friedman's career -

FauIkner Fountains, FauIkner Oaks.

But Long Term
thought this was wrong.

Danny FauIkner's favourite trick
was ''the fIip''.

And it was financial.

But this was a confidence trick.

what had gone wrong
with the weIfare state?

He'd buy some parceI of Iand for peanuts,
and then seII it on to naive investors

With their ascent, credit came of age.

According to their calculations,
market volatility would actually decline,

THUNDER RUMBLES

ln Chile, he found the perfect
laboratory to test his theories.

200 miles downstream from Vicksburg,

Moneylending ceased to be disreputable.

where the Mississippi joins the Gulf
of Mexico, lies the port of New Orleans.

ln Paris, the first rumours
began to circulate

who got the money Ient to them by -

and that meant the chances of investors
exercising their options would be low too.

lt became glorious - and the foundation
of a new kind of power.

you've guessed it -
Empire Savings and Loans.

that all was not well with Law's system.

So Long Term piled the options
high and sold them cheap.

ln September 1 97 3, tanks
had rolled through Santiago

The share price of the Mississippi Company
began to slide.

Danny FauIkner may have cIaimed
that he was iIIiterate,

The dazzling legacy
of the Medici family's power

This is Fort Pike,

to overthrow the government

of Chile's Marxist president,
Salvador Allende,

still surrounds you in Florence today.

buiIt after 1812 to protect New OrIeans
from a future British attack.

Sounds risky?

but he certainIy wasn't innumerate.

They estimated their risk of going bust
at one in ten to the power of 24.

whose attempt to turn the country
into a communist state

ln a desperate bid to avert meltdown,
Law called on the Duke of Orleans

In the space of 400 years,
two Medici became Queens of France,

But 50 years Iater, it wasn't abIe to
protect the South from a Northern attack

Many investors never even got a chance
to view their properties close up.

had ended in total economic chaos

to cut the official share price
from 9,000 livres to 5,000.

three became Pope.

ln other words, virtually zero.

and a call by the Chilean Parliament
for a military coup.

Faulkner would simply fly them over
in his helicopter without landing.

when Captain David Farragut seized
New OrIeans on ApriI 28th, 1862.

AppropriateIy, it was MachiaveIIi,
the supreme theorist of power,

lt was as if they really were
on another planet,

This was when the limits
of royal absolutism,

who wrote their history.

It was a cruciaI moment in the CiviI War

By 1 984, property development
in Texas was out of control,

the foundation of Law's system,
suddenly became apparent.

as New OrIeans was the principaI outIet
for the South's most important export...

far from the mundane
ups and downs of terrestrial markets.

Perhaps no other family
left such an imprint on an age

paid for by government-guaranteed deposits

ln October 1 997,

as the Medici left on the Renaissance.

that were effectively going straight
into the pockets of the developers.

Within weeks, the share price
was in freefall.

as if to prove that Long Term
really was the ultimate Brains Trust,

Up there on the baIcony
of the Carrera HoteI,

You might even say that they paid
for the Renaissance,

..cotton.

Angry crowds gathered outside Law's bank.

opponents of the AIIende regime
ceIebrated with champagne

Without control over the cotton trade
the South's cause was doomed -

Merton and Scholes were awarded
the Nobel Prize in economics.

their patronage running the gamut of
genius from Michelangelo to Galileo.

On paper at least,
the assets of Empire had grown

as air force jets fIew overhead
to bomb the Moneda PaIace.

Stones were thrown, windows broken.

APPLAUSE

because cotton had become
the essential ingredient

from $1 2 million to $257 million
in just over two years.

WHISTLING, EXPLOSION

By December, the shares had lost
more than 90% of their value.

in an ambitious scheme to bring
the bond market into the war.

The troubIe was that the demand
for condos by Interstate 30

And this, in the Uffizi GaIIery,
is the Medici's private art coIIection,

It seemed as if inteIIect
had triumphed over intuition,

Like the ltalian city states
500 years before,

couId never possibIy have kept up
with the vast suppIy

as if rocket science
had taken over from risk-taking.

one of the most spectacuIar
ever assembIed.

Here in the paIace, AIIende prepared
to make a desperate Iast stand,

that was being generated
by FauIkner, BIain and their cronies.

Equipped with
their magicaI bIack box,

the Confederate Treasury
had initially raised money for the war

This French map from 1 730 gives an
absoIuteIy wonderfuI visuaI representation

armed with an AK-47 presented to him
by his Cuban roIe modeI, FideI Castro.

the partners in LTCM
seemed poised to make money

When the reguIators finaIIy
bIew the whistIe in 1984,

by selling bonds to its own citizens.

far beyond the wiIdest imaginings
of even George Soros.

of the worId's first stock market bubbIe.

that reaIity couId no Ionger be escaped,

But there was a finite amount of capital
available in the South.

What the millions of tourists
who flock here generally forget to ask

Here at the top is the goddess Fortuna,

and hundreds of the buiIdings
that they erected

And then, in the summer of 1998,

pouring down goodies
from her horn of pIenty.

ended up being buIIdozed
or burnt to the ground.

when every seIf-respecting
hedge fund manager

To survive, the Confederacy
looked to Europe

is how the Medici paid for all this.

Here are the happy investors
receiving their shares

Today, 24 years on,

shouId have been pIaying with his yacht,

in the hope that the world's greatest
financial dynasty might help them

it's stiII a Texan wasteIand.

something happened that
threatened to bIow the Iid right off

in the Mississippi Company
from fIying cherubs.

The simpIe answer is that they were
foreign exchange deaIers,

Looking out the paIace window
and seeing the tanks IiteraIIy roIIing in,

the NobeI Prize-winners' bIack box.

But down beIow, there are some
other cherubs chopping up the shares

beat the North as they had helped
Wellington beat Napoleon.

ln 1 991, Faulkner and Blain were both
convicted and jailed for fraud.

members of the Arte de Cambio - the
money changers' guiId - who made it big.

ReaIity started to misbehave.

beside a shattered printing press.

AIIende reaIised that it was aII over
for his dream of a Marxist ChiIe.

And there are two more cherubs
bIowing bubbIes.

One investigator called Empire
''one of the most reckless

They were known as banchieri or tavoIieri
because, Iike the Jews of Venice,

lnitially, the Confederacy
had grounds for optimism.

To the right, there are four
very unhappy Iooking men,

Cornered here in what was Ieft
of the presidentiaI quarters,

ln evolution, big extinctions
tend to be caused by outside shocks,

''and fraudulent land investment schemes
in American history. ''

they IiteraIIy did their business
sitting on benches behind tabIes.

one of whom is preparing to commit suicide
by faIIing on his sword.

he took the decision to shoot himseIf.

ln New York, the Rothschilds' agent
was sympathetic,

like an asteroid hitting the Earth.

ln all, nearly 500 savings and loans
collapsed.

Indeed, the originaI Medici bank -
or bench -

having opposed the North's leader,
Abraham Lincoln

On Monday August 1 7th, 1 998,

As if pricked by a sword,
the Mississippi Bubble had now burst.

was Iocated right here in the Via
deII'Arte deIIa Lana - WooI GuiId Street.

According to one official estimate,

in the presidential election of 1 860.

nearly half had seen
''criminal conduct by insiders''.

a giant asteroid smashed
into Planet Finance.

MILITARY BAND PLAYS

lt was at this moment that Law, vilified
by the French people, fled the country.

And - surprise, surprise - it struck
on the other side of the world

35 years later, you can still see
the bullet holes

But still the Rothschilds hesitated.

in some of the buildings
around the square.

The full cost of the crisis
was $1 53 billion,

Lending to the British government to help
defeat Napoleon had been one thing.

in an especially flaky emerging market.

Prior to the 1 390s, the Medici were
Florence's answer to the Sopranos -

He never saw his wife and daughter again.

What happened here in September 1973

making it one of the most expensive
financial crises in American history.

But buying bonds from a bunch of
breakaway Southern slave states

a small-time clan notable more
for low violence than for high finance.

He spent the rest of his life in Venice,

Weakened by political upheaval,
declining oil revenues

in many ways epitomised
a worIdwide crisis of the weIfare state,

And the federal government
which had deregulated

dividing his time between writing
long, self-justifying letters

seemed a risk too far.

and posed a stark choice between
aIternative economic systems.

and a botched privatisation, the ailing
Russian financial system collapsed.

the savings and loans in the first place

The Rothschilds decided to stay out.

and gambling.

ln a 1 7-year period, no fewer than
five Medici were sentenced to death

had to pick up the bill, which is another
way of saying that taxpayers forked out.

With output coIIapsing
and infIation rampant,

He died in 1 729.

A desperate Russian government
was driven to default on its debts,

ChiIe's system of universaI benefits
was effectiveIy bankrupt.

by the criminal courts for capital crimes.

fuelling the fires of volatility
throughout the world's financial system.

Yet despite this setback,

It was the first cIear sign
that there might be a downside

For AIIende, the onIy soIution

the Confederate government
had an ingenious trick up their sleeves.

was fuII-bIown, Soviet-styIe
takeover of the entire economy.

Then came Giovanni di Bicci de' Medici.

to the idea
of the property-owning democracy.

Stock markets plunged.

ln France, however,
his devastating legacy lived on.

The generaIs and their supporters
knew they didn't want that,

The trick, like the sleeves themselves,
was made of cotton.

lt was his aim to make the Medici
totally legitimate.

Remember all those low-cost
options Long Term had sold

Yet the savings and loans crisis
was a mere tremor

Law's bubbIe and bust fataIIy
set back France's financiaI deveIopment,

but what did they actuaIIy want,

based on their prediction
of low stock market volatility?

Part of the secret of his success was
an ingenious bit of creative accounting

compared with the property earthquake

given that the status quo
was unsustainabIe?

The South's idea was to use cotton
as collateral to back its bonds.

that would strike the US market
20 years later.

The ones they thought
no-one would ever exercise?

Enter MiIton Friedman.

putting Frenchmen off paper money and
stock markets for more than a generation.

that got the Medici off the hook
of the anti-usury laws.

Well, now they did.

lnvestors would be comforted to know
that if the interest payments dried up

The French monarchy's fiscaI crisis
went unresoIved

The quants had predicted
that Long Term was highly unlikely

ln March 1 97 5,

Savings and loans
was an all-American crisis.

and for the rest of the reign of Louis XV
and Louis XVI,

Friedman flew from Chicago
to Chile to answer that question.

to lose more than $35 million
in a single day.

they could still demand
their cotton instead.

But the sub-prime quake

These Iedgers of the Medici bank
make it cIear

the crown Iived from hand to mouth.

would shake the entire world of finance
to its very foundations.

SOLDIER SHOUTS ORDERS

how important commerciaI biIIs for
financing foreign trade were to the bank.

On Friday August 21 st,
it lost $550 million -

The South's agents went to work

Eventually, France was driven
by royal bankruptcy to revolution.

selling the bonds
in the financial centres of Europe.

True, the Church prohibited
the coIIection of interest on Ioans.

1 5% of its entire capital.

ln addition to giving
lectures and seminars,

Now that, according to the Long Term
risk models, was next to impossible.

But there was nothing to prevent
a shrewd trader

When this wall was built

When the Confederacy tried to market
conventional bonds

Friedman came here,
to the Moneda Palace,

from making money on transactions Iike
these, which invoIved muItipIe currencies.

to divide white homeowners
from black renters in the 1 940s,

for a meeting with the new Chilean
president, General Augusto Pinochet.

in European financial centres
like Amsterdam's,

The traders in Greenwich stared

black families found it virtually
impossible to get mortgages.

slack-jawed and glassy-eyed
at their screens.

investors wouldn't touch them
with a bargepole.

The Mississippi Bubble of 1 7 1 9 was
the first stock market bubble in history.

There was no interest,
and therefore no sin,

But when an obscure French firm
named EmiIe ErIanger and Company

lt couldn't be happening.

Sixty years later,
that had all changed.

simply a commission deducted for the
conversion of one currency into another.

Friedman spent three-quarters
of an hour with Pinochet,

But it was.

But it's been by no means the largest.

offered cotton-backed bonds,
it was a compIeteIy different story.

urging him to reduce the government
deficit that he'd identified

When we think of stock market bubbles,
we think of this.

''We want everybody in America
to own their own home, ''

The key to the success
of the ErIanger bonds

as the main cause of
Chile's sky-high inflation -

By the end of the month,
Long Term was down 45%.

President George WBush declared
in October 2002, challenging lenders

was that they couId be
converted into cotton

lf money was advanced to a particular
trader for any length of time,

then running at
an annual rate of 900%.

at the pre-war price of six pence a pound.

The nightmare
that haunts the world of finance,

to create 5.5 million
new minority homeowners

the commission was that bit larger.

which has returned to haunt us
in the last few months,

The only chance of survival was to find
a financial white knight to rescue them.

A month after Friedman's visit,

These cotton bonds formed the basis
of the South's new financial strategy.

by the end of the decade.

the Chilean junta announced that inflation
would be stopped at any cost.

is that there could ever be a bust
to match the Great Wall Street Crash,

Positively encouraged by the federal
government to relax lending standards,

ln the same way, depositors
who put their money in the Medici bank

lf they could restrict
the supply of cotton, its value,

And the most powerfuI knight in town
was none other than George Soros.

which began on October 24th 1 929,
Black Thursday.

The regime cut government
spending by 27%.

were given 'discrezione' to compensate
them for risking their money.

mortgage companies swarmed
into areas like this one,

and the value of the bonds,
would increase.

It was the uItimate humiIiation -

the quants from PIanet Finance
begging for a baiI-out

Over the next three years, the US stock
market declined a staggering 86%,

At the same time, the Confederates
set out to use cotton

offering all kinds of alluring deals.

This was credit, in other words,

but with the interest payments
discreetly concealed.

from the prophet of irrationaI,
unquantifiabIe refIexivity.

to blackmail the most powerful country
in the world -

''This problem of inflation
is not of recent origin.

reaching its nadir in June 1 932.

Britain.

Now, for the first time,
moneylending had evolved into banking.

(NiaII) That must have been
a very tense meeting.

Because so many of the new borrowers
had patchy credit histories,

''lt arises from trends towards
socialism that started 40 years ago,

Do you remember the atmosphere
in the room, or am I...?

(Tour guide) The routes
to the United States of America

these loans came to be known
as ''sub-prime''.

I remember he came for breakfast
and it wasn't at aII tense, because...

''and reached their logical and terrible
climax in the Allende regime. ''

provided Liverpool
with growing volumes of trade

What was worse,
this asset price deflation

and new docks opened on the Mersey
in quick succession during the 1 800s.

The reaI story of the success
of the Medici bank

was accompanied by the worst
depression in all history.

Of course, he was tense

can be found here in the Libro Segreto -
the Secret Book -

but I wasn't because
I wasn't putting in the money.

(Narrator) ln 1 860, the Port of Liverpool
was the principal gateway

That made you a perfect candidate
for a NlNJ A loan.

of Giovanni di Bicci de' Medici. The key
was not so much size as diversification.

There was to be no
white knight for Long Term.

for imports of cotton
to the British textile industry,

For tendering this advice,
Friedman found himself denounced

ln the United States,
output collapsed by nearly a third.

then the mainstay
of the Victorian industriaI economy.

The problem was that behind
low introductory payments,

for acting as a consultant
to a military dictator

I feIt that it was too dangerous
and that I didn't have enough capitaI

EarIier ItaIian banks had been monoIithic

Unemployment reached a quarter
of the civilian labour force.

these new mortgage loans
were very different from the old,

More than 80% of the cotton
came from the Southern United States.

responsible for the executions of more
than 2,000 real and suspected communists,

and very vuInerabIe to defauIt
by a singIe bad borrower.

and, in fact, it reaIIy required
the coordinated actions

30-year fixed-rate repayment loans
of the past.

Now that gave
the Confederate Ieadership hope

But the Medici bank was made up
of muItipIe interIocking partnerships,

Since the 1980s,

and the torture of nearly 30,000 more.

that they had the Ieverage to bring
in Britain on their side in the CiviI War.

of aII the banks to baiI out LTCM.

Why did the 1 929 crash happen?

the housing game has radicaIIy changed
throughout the EngIish-speaking worId.

each in some measure independent
of the rest.

To ratchet up the pressure,
they decided to impose an embargo

It was this decentraIisation that was
the key to their astonishing profits.

Why, indeed,
does any crash happen?

Mortgages are for shorter
and shorter durations

on aII shipments of cotton to LiverpooI.

And that's precisely what happened.

and more and more borrowers are
opting for interest-onIy mortgages.

This remains one of the most hotly
debated questions in financial history.

Fearful that Long Term's failure could
trigger a general financial meltdown,

Under Giovanni's guidance,

That makes househoIds far more sensitive
than they were to interest-rate hikes.

the Medici banking network extended
from Florence, to Venice, to Rome.

For a while, the South's strategy
worked brilliantly.

the New York Federal Reserve hastily
brokered a multi-billion-dollar bail-out

Cotton prices soared. So did the value
of the Confederates' cotton-backed bonds.

Chicago's roIe in ChiIe's new regime

So how come the lenders didn't worry
that these sub-prime borrowers

There are all kinds of technical
explanations for stock market crashes.

The scale and diversity
of the Medici's operations

consisted of more than just a visit
by MiIton Friedman, however.

by 1 4 Wall Street banks.

were almost certain to default
if interest rates rose?

What on earth had happened?

And the cotton embargo
devastated the British economy.

Since the 1950s, there'd been a steady
stream of bright, young economists

was the key to reducing the risks
of moneylending,

But at root,
it's all about herd psychology.

Why was Soros so right and
the giant brains at Long Term so wrong?

The answer to that question

and therefore also the costs to borrowers.

Mills were forced to lay off workers.

going from this pIace,
the CathoIic University in Santiago,

and the key to the sub-prime crisis
was another ''S'' word...

That's the essential difference
between loan sharks and banks -

Eventually, in late 1 862,
production all but ceased.

to study in Chicago,

ln a bull market,
that's when share prices are rising,

and they'd come back convinced
of the need to baIance the budget,

between Shylock and the Medici.

For one thing, this wasn't
a coolly logical Planet Finance.

even the smartest investors can succumb

tighten the money suppIy,
and IiberaIise trade.

to what the former chairman
of the American Federal Reserve,

These were the Chicago Boys,
Friedman's foot soIdiers.

lt was still dear old Planet Earth,
inhabited by emotional human beings

And here's the proof that it worked.

Alan Greenspan,
famously called ''irrational exuberance''.

This cotton miII in StyaI, south of
Manchester, empIoyed around 400 workers,

Instead of putting
their own money at risk,

And yet the most radicaI of their ideas

Page after page of Giovanni's assets,
decIared for tax purposes

with a stampede mentality.

sub-prime Ienders
immediateIy soId the Ioans on

went beyond what Friedman
had recommended to Pinochet.

But when the herd changes direction,

but that was just a fraction
of the 500,000 peopIe

There was, however, another
reason why Long Term failed.

to banks here, in and around WaII Street.

sometimes in reaction to nothing more
than a change in the wind,

It amounted to a fuII-scaIe
roIIing back of the weIfare state.

and cuIminating in the grand totaI
of 91 ,089 fIorins. In those days

And the banks then
securitized the Ioans,

empIoyed by King Cotton
across Lancashire.

their mood can also change
from euphoria to gloom.

Their risk models were working
with just five years' worth of data.

The conservative economic revoIution
didn't begin in Thatcher's Britain,

which means they bundIed them
together and then sIiced and diced them

ObviousIy, with no cotton
there was nothing for peopIe to do.

that was serious money.

The herd stampedes.

By the end of 1862,

so that at Ieast the top tier

or Reagan's America.

lf they'd gone back even 1 1 years,

couId be cIassified as tripIe-A-rated,
''investment grade'' securities.

It began right here in ChiIe.

haIf the entire workforce
of Lancashire had been Iaid off.

they'd have captured
the 1 987 stock market crash.

One cow gets scared,

A quarter of the popuIation
was on poor reIief.

When Giovanni died in 1 429,

and that fear just transIates
to the whoIe herd and they aII take off.

And the banks then soId these securities
to investors 1 ,000 miIes away from Detroit

And if they'd gone back 80 years,

his last words were an exhortation
to his heirs

The mastermind behind this wholesale
dismantling of the welfare state

They caIIed it the ''Cotton Famine'',
but this reaIIy was a man-made famine.

And the rest of them
don't know why they're scared.

they'd have captured
the last great Russian default

who were happy to pay

to maintain his standards
of financial acumen.

They just feeI that fear and they run.

for just a few extra hundredths
of a percentage point in interest.

was a young economist called Jose Pinera.

after the 1 91 7 revolution.

His funeral was attended by 26 men
of the name Medici,

Fear overwheIms aII rationaI thinking.

To put it bIuntIy,
the NobeI Prize-winners

Britain was in the doldrums.

ChiIe's economy was destroyed.
We have had 50 years of protectionism,

had known pIenty of mathematics,
but not enough history.

And the South's cotton bonds
were riding high.

all paying homage to the man who had made
the business of banking respectable -

UntiI it's over.

The key to securitization
was the distance

They'd perfectIy grasped
the beautifuI theory of PIanet Finance,

Yet the South's ability
to manipulate the bond market

ln market jargon, the buyers have turned
into sellers, the bulls into bears.

state intervention -
Iike sociaIism, if you want -

and profitable -
as it had never been before.

between the mortgage borrowers
in, say, Detroit,

but not the messy reaIity
of PIanet Earth.

depended on one over-riding condition -

and the people who ended up
receiving their interest payments.

and that was exacerbated
during the AIIende government.

And that, quite simpIy, is why
Long Term CapitaI Management

that investors could be sure of taking
physical possession of the cotton

Despite the zooIogicaI imagery,

By the time small towns in Norway
bought these securities,

For his son Cosimo, the accumulation
of wealth combined seamlessly

turned out to be Short Term
CapitaI Mismanagement.

We had created a sort of weIfare state,

which underpinned the bonds if the South
failed to make its interest payments.

the point is that markets are mirrors
of the human psyche.

they had no idea what was
really behind their investment.

and that, of course,
was going bankrupt in ChiIe.

The big question is whether such a crisis
couId repIay itseIf today, ten years on,

with the accumulation of power.

Like homo sapiens,
they are prone to mood swings,

Within 20 years of his father's death,

from greed to fear.

They can suffer from depression.

Cosimo de' Medici
was the Florentine State.

FinanciaI aIchemy?

Between 1979 and 1981 ,

onIy this time invoIving
so many hedge funds,

And that's why the fall of New Orleans
on April 28, 1 862,

WeII, it was a business modeI
that worked beautifuIIy

And sometimes they can experience
compIete breakdowns.

Pinera and his coIIeagues erected
a radicaIIy new pension system for ChiIe,

and on such a Iarge scaIe,
that it simpIy couIdn't be baiIed out?

as Iong as interest rates stayed Iow,
peopIe kept their jobs,

That happens rather more often

As the Pope himself put it - ''Political
questions are settled at his house.

WeII, the answer to that question

was the real turning point
in the American Civil War.

than some financiaI theories
wouId Iead you to expect,

giving every worker the chance to opt out
of the oId pay-as-you-go state system.

Iies not on another pIanet,
but on the other side of this one.

and reaI-estate prices continued to rise.

but not so often that we're ever
quite ready for the next breakdown.

Now that the South's main port
was in Union hands,

''The man he chooses holds office.

Instead of a payroII tax,

''He it is who decides peace and war
and controls the laws.

any investor who wanted to lay his hands
on Southern cotton

each worker now couId put
10% of his wages aside

Unfortunately, none of these things
happened in Detroit.

had to run the Union's
formidable naval blockade.

into an individuaI
personaI retirement account,

''He is King in everything but name. ''

lf movements in financial markets

to be managed by private
competing companies.

ln 2006 alone,

were statistically distributed
like human heights,

sub-prime lenders
injected more than a billion dollars

This BotticeIIi is mainIy famous
for the beauty of its young subject.

There was aIso a smaII premium
for disabiIity and Iife insurance.

there would hardly be any crashes.

Most months would be clustered
around the average,

The idea was to give each worker a sense

But it's actuaIIy intended as a tribute
to a dead banker, Cosimo de' Medici.

into those areas of the city
where home values were already falling

To some, financial history is just
so much water under the bridge -

that the money being put aside
was his own property,

with only a tiny number
witnessing extreme ups or downs.

and unemployment and mortgage rates
were already rising.

That's him there on the medaIIion,

ancient history,
like the history of lmperial China.

his own capitaI.

and you can just make out the inscription
Pater Patriae -

GUITAR PLAYING, MAN SINGING

Let's face it, not many of us are below
four feet in height or above eight feet.

Some young traders don't even
remember the 1997 / 98 Asian crisis.

The Confederates
had overplayed their hand.

the father of his country.

They had turned off the cotton tap, but
then lost the ability to turn it back on.

Where Detroit led,
other cities soon followed.

In fact, if they came into
the markets after 2000,

Pinera gambled. He gave workers a choice -

By 1 863, the mills of Lancashire
had found new sources of cotton

they had seven bumper years.

This is the cIassic beII-shaped curve,

ln 1 50 years, the Medici had transformed
themselves from backstreet moneylenders

Stock markets worIdwide boomed.

stick with the old system
of pay as you go,

where things are distributed
according to their frequency -

So too did bond markets.
So did commodity markets.

in China, Egypt, and lndia

or opt for the new
personal retirement accounts.

and investors were rapidly losing faith
in the South's cotton-backed bonds.

the most commonIy occurring
cIustered here around the middIe

to the most powerful financial force
in Europe.

So did derivatives markets. In fact,
every kind of asset market boomed.

and the reIativeIy rare dwarves
and giants out here at the extremes.

lt paid off.

MEN READ OUT ADDRESSES

And so too did the markets
for those products that are in demand

The consequences for the Confederate
economy were disastrous.

Convinced by Pinera's argument,

That's why it's quite a steep curve,

80% made the switch
to a private pension plan.

But it's this painting,
BotticeIIi's Adorazione dei Magi,

when the bonuses are big, Iike
vintage Bordeaux and Iuxury yachts.

because most human heights
are quite cIose to the average.

It's Thursday at noon
and I'm witnessing a twice-daiIy rituaI

With its domestic bond market exhausted
and onIy two paItry foreign Ioans,

But if you do the same thing
for financiaI markets,

which more than any other captures
the transfiguration of finance

for daiIy moves in the stock market,

here on the steps
of the Memphis Courthouse.

the Confederacy reaIIy had no aIternative
but to print paper doIIars,

But was it worth it? Was it worth
the huge moraI compromise

you end up with something
that Iooks more Iike this,

the Medici had achieved.

About 30 homes are about to be
auctioned off here, and the reason is

like these ones here in the Louisiana
State Museum, to pay for the war.

that the Chicago Boys
and the Harvard man made

On cIose inspection, the three wise men
are Cosimo de' Medici,

with reIativeIy fewer smaII movements

that the mortgage Ienders have forecIosed
on the homeowners

But these boom years
were also mystery years.

and reIativeIy more
big movements down or up.

when they got into bed with
a torturing, murderous dictatorship?

ln all, 1. 7 billion dollars' worth.

washing the feet of Christ,
and his sons Piero and Giovanni.

for faiIing to keep up
with their interest payments.

For markets soared at a time
of rising short-term interest rates,

And these are what the statisticians mean
when they taIk about Iong or fat taiIs.

The answer to that question very much
depends on whether you think their reform

2926 South Radford Avenue...

Now, it's true that the North
aIso printed paper money,

The young man on the Ieft is Lorenzo.

Memphis is reaIIy becoming
ForecIosure City these days.

glaring trade imbalances
and escalating political risk.

but by the end of the war its ''greenbacks''
were stiII worth around 50 pre-war cents,

has heIped pave a peacefuI way back
to a sustainabIe democracy in ChiIe.

The painting had been commissioned
by the head of the Bankers' GuiId

In the past five years,
something Iike one in four househoIds

lf stock market movements
were distributed like human heights,

The key to this seeming paradox
lay here in China.

as a tribute to the famiIy.

whereas a Southern ''greyback''
was down to just one cent.

And I think they did.

Perhaps it shouId reaIIy have been caIIed
The Adoration of the Medici.

has received a notice
threatening them with forecIosure.

a drop of 1 0% would happen
only once every 500 years.

What's more, with more and more of
this cash chasing fewer and fewer goods,

Having once been damned,
bankers were now cIose to divinity.

Since the sub-prime mortgage market
began to turn sour

And stock market crashes of 20%
in a year would be unheard of,

infIation in the South simpIy expIoded.

ln 1 980, Pinochet
conceded a new constitution

in the early summer of 2007,
shockwaves have been spreading

By January 1865, the price of some goods
was up by a factor of 90.

rather like people just six inches tall.

Chongqing, on the banks
of the mighty River Yangtze,

Nothing could better illustrate
the extraordinary ascent of money.

that prescribed a ten-year transition
back to democracy.

Whereas in fact, there have been
seven such crashes in the past century.

through all the world's financial markets,

wiping out hedge funds,
obliterating venerable investment banks

is deep in the heart
of the Middle Kingdom,

For what the Medici had achieved

Ten years later,
he stepped down as president.

The South had bet everything
on manipulating the bond market

over a thousand miles from the coastal
enterprise zones most Westerners visit.

was nothing less than
the birth of modern banking.

and costing the survivors
hundreds of billions of dollars.

Democracy was restored,

and had lost.

As it turned out, those who feared
that the brief panic of October 1 987

Others had tried before,

lt would not be the last time in history
that an attempt to do so

and by that time,
the economic miracle was under way

but the Medici were the first bankers
to hit the poIiticaI big time.

that helped to ensure its survival.

Remember that pillar of the 1 930s
New Deal mortgage market,

would end in ruinous inflation.

Yet this is the fastest-growing city
on the planet.

would turn into the next great crash
were proved wrong.

And they did it
by Iearning one cruciaI Iesson -

Fannie Mae?

The market had one
really bad month, then rallied.

With its younger brother, Freddie Mac,
it grew to own or guarantee

in finance, smaII is seIdom beautifuI.

For the pension reform not only created
a new class of property owners,

Today the global market
for bonds is still bigger

By making their bank bigger
and more diversified,

But that bubble provided a golden
opportunity for corporate crookery.

around half of all American home loans.

each with his own retirement nest egg,

I've traveIIed aII over the worId
making this series,

ln September 2008, Fannie and Freddie

than the all the world's
stock markets put together.

the Medici had found a way
of spreading their risks.

it also gave the Chilean economy
a massive shot in the arm.

and I must say, I have never
seen anything Iike this.

What John Law's Mississippi Company
had been to the bubbIe

were effectively nationalised

lt's still a market
that can make or break governments.

And by focusing on currency trading
rather than just Iending,

WeIcome to Chongqing,
the fastest growing city in the worId.

to avoid a complete collapse
of the mortgage market.

that Iaunched the 18th century,

they'd reduced their exposure
to defauIts by borrowers.

so another company wouId be
to the bubbIe that ended the 20th.

Established Wall Street names
like Bear Stearns, Lehman Brothers

It's construction heaven.
If you Iook over through the fog,

These brokers at the Banco de ChiIe

For Cosimo and his famiIy,
it was a truIy beautifuI business modeI.

are investing ChiIean workers' pension
contributions into the stock market.

Does it surprise you that its key player

It was a company
that promised its investors

you can just about make out one of
the 30 bridges they're currentIy buiIding,

and Merrill Lynch have vanished.

began his money-making career
in the casinos of Las Vegas?

weaIth beyond the dreams of avarice.

And they've been doing
a pretty good job of it.

Unlike savings and loans, this crisis
extends right around the world.

and down there,
one of the ten Iight raiIways.

It was a company that cIaimed to have
reinvented the entire financiaI system.

Average returns on the personaI retirement
accounts has been over 10%,

Yet not even the Medici
were invulnerable.

I was a bIackjack pIayer.

And it was a company that used
its impeccabIe poIiticaI connections

The four Norwegian municipalities of Rana,
Hemnes, Hattfjelldal and Narvik,

One of the first professionaI
bIackjack pIayers, not to brag,

The bank suffered heavy losses

refIecting the fact that
in the 20 years after 1987,

AII around me, there used to be
prime farmIand, untiI six months ago,

to ride aII the way to the top
of the buII market.

as a result of over-generous loans
to blue-blooded debtors

but in the Iate '60s, I went to Vegas

the ChiIean stock market
has gone up by a factor of 18.

which had invested their citizens' taxes
in sub-prime backed securities,

Named by Fortune Magazine
as ''America's Most lnnovative Company''

when they started constructing
IiteraIIy miIIions of square metres

who felt no compunction
about defaulting on their obligations

and appIied a card-counting system
to try and beat Vegas.

are now sitting on an investment worth
roughly 1 5% of what they paid for it -

of new office space.

and telling the bankers to get lost.

for six consecutive years,
that company was...

The aim is to turn Chongqing into
the financiaI capitaI of western China.

a loss of $1 00 million.

Enron.

There is a downside
to the system, to be sure.

Now this master of understatement
is the King of the Bond Market,

WeII, if they keep this up, it'II soon be
the financiaI capitaI of the worId.

Bad debts - money owed by borrowers
who go bust -

Seven years after its collapse,

Thanks to growth like this, there are now
345,000 dollar millionaires in China

most of us have consigned Enron
to the dustbin of financial history.

controller of the biggest bond fund
in the world.

In the EngIish-speaking worId,

are the perennial problem
that any bank confronts.

we tend to think of property
as a one-way bet.

Since not everyone in the economy
has a regular full-time job,

So what has this got to do
with you and me?

Yet it pioneered many
of the dubious business practices

The simpIest way of getting rich
is to pIay the property market.

Yet for a time, it seemed as if modern
bankers had solved this age-old problem.

not everyone ends up
participating in the system.

Well, when Gross buys or sells bonds,

and over 1 00 billionaires.

it doesn't just affect financial markets
and government policy,

In fact, you'd be a mug
to invest your money in anything eIse.

that continue to plague us today.

Not only has China
left the colonial era far behind,

Which leaves a substantial chunk
of the population

They really thought
they were smarter than the Medici.

it affects the value of our pension funds

with no pension coverage at all.

But the remarkable thing
about this supposed ''truth''

the fastest-growing economy
in the world has also managed

and the interest rates
we pay on our mortgages.

is how often reality gives it the lie.

to avoid the kind of crisis

There's only one thing
that Mr Bond is afraid of

ln the three years up to August 2000,

that has periodically blown up
in the other emerging markets.

I'm standing in front of
the Communist Party headquarters

For like stock markets,
property can soar in value

shares of the Houston energy company
had gone through the roof.

and it's not Goldfinger.

Memphis, Tennessee
is a long way from Florence.

here in La Victoria, a suburb of Santiago,

One reason for China's
crisis-free ascent has been the fact

Once a small-time
gas company in Nebraska,

only to crash
in the most spectacular way.

Rather, it's inflation.

which was once one of the hotbeds
of opposition to the Pinochet regime.

And the world economy has come a long way
since the Renaissance.

that most Chinese investment
hasn't been financed by foreigners,

Enron was now the fifth largest company
in the United States,

The lethal danger that inflation poses

Because most peopIe here
are either unempIoyed

is that it undermines the value of being
paid a fixed rate of interest on a bond.

ln Britain, between 1 989 and 1 995,

but out of China's own savings.

with stated revenues
of 1 1 1 billion dollars.

A crucial part in that transformation

or work in the informaI sector,

There has been foreign investment,

they don't, or can't,
pay into the pension system

has been played by the spread of
modern banking from its ltalian birthplace

but most of it has been
direct investment

the average house price fell by 1 8%.

If infIation goes up to 10%

Enron was the darling of Wall Street.

which means they don't get
anything out of it.

in the form of things Iike factories

to a country where money has increasingly
taken the form of easy credit.

which you can't easiIy Iiquidate
and send home in a crisis.

This is the kind of neighbourhood
where Che Guevara is stiII the IocaI hero,

and the vaIue of a fixed-rate interest
is onIy five,

But that was nothing compared
with what happened here in Japan.

Indeed, so enormous have China's
savings become in recent years

not Jose Pinera.

Yet a little historical knowledge might
have made Enron's investors think twice.

then that means that the bond hoIder
is faIIing behind infIation by 5%.

The United States
has been built on borrowed money.

that they have enabIed gIobaIisation
to do the most aImighty U-turn.

The poor of Chile may not have
a private pension plan,

PreviousIy, it was the rich
EngIish-speakers who Ient money

lndeed, the story of Enron was like
a re-run of the Mississippi Bubble

But whereas the Medici tended to lend
only to the relatively well off,

That's why, at the first whiff
of higher inflation, bond prices fall,

and may have to make do with a meagre
government handout in their old age...

to the poor Asian periphery.

The view's good.

until the present credit crunch at least,
American banks seemed willing to give

But now it's the Chinese who are
Iending money to rich Americans.

and in some cases, keep falling.

280 years before.

Very Austin Powers decor.
I'm Ioving that.

..but even they've benefited from
Chile's rapidly growing economy.

WeIcome to the strange new hybrid
country of China and America.

just about anyone a loan.

John Law's plan had been to revolutionise
French government finance.

Oh, that's the boiIer.

Memphis is famous for blue suede shoes,
barbecued ribs and bankruptcies.

I caII it ''Chimerica''.

To see just how bad things can get
when the inflationary genie escapes

(Jose Pinera) Growth makes
a difference in the Iife of every citizen.

OK, weII, Iet's cut to the chase.

Ken Lay, the chairman of Enron,

How much is this pIace going to cost
if I put the money down now?

from the bottle you just have to look
at the example of Argentina.

planned to revolutionise
the global energy business.

The poverty rate in ChiIe
has gone down from about 50%

You can tell people here are a little...
How shall l say it? ..a little sub-prime.

SPEAKS JAPANESE

to 13%.

So that wouId be cIose to $2 miIIion.

So this has been reaIIy a huge success

OK, that's Iike a miIIion...

You onIy need to Iook at the shopping maII
for the seriousIy poor.

and the pension reform
has been a criticaI eIement in this.

This extraordinary place
is the South Western Stock Exchange.

a miIIion pounds buys me
this bijou apartment in Tokyo.

For years, the industry had been
dominated by huge utility companies,

Many Argentines date the steady
decline of their economic fortunes

lt's where hundreds of Chongqing's
residents come to have lunch,

And the ubiquitous no-friIIs eatery.

The improvement in ChiIe's
economic performance

to a day in February, 1 946,

which both produced the energy, pumped
the gas and generated the electricity,

But this is a smart neighbourhood, right?

since the Chicago Boys' reforms
is reaIIy very hard to argue with.

Then there's a tax advisor who can teII
you how to cIaim your Iow-income credits.

play ping pong and invest -

when the newly elected President,
General Juan Domingo Peron

That may sound like a lot, but in recent
Japanese history, it's a real bargain.

and sold it on to consumers.

In the 15 years before
MiIton Friedman's visit,

or is it gamble? -
their savings on the stock market.

came here to the Central Bank
in Buenos Aires.

the growth rate here
was a measIy 0. 1 7% a year.

This is what defines
the Chinese economy today.

Lay's big idea was to create
a kind of energy bank,

A shop where you can borrow money
on the equity you own in your car.

lncreasingly, it's what defines
the world economy.

In the subsequent 15 years,

which would act as the intermediary
between suppliers and consumers.

He was astonished at what he saw.

Between 1 985 and 1 990,

it increased by a factor of nearIy 20.

Chinese investors trying to work out
what to do with their abundant savings.

And a pIace where they'II give you
an advance on next week's pay cheque...

The poverty rate here's down to 15%,

''There is so much gold, '' he marvelled,

property prices in Japan rose
by a factor of roughly three.

His dream was to make Enron
the greatest energy company in the world.

compared to 40%
in the rest of Latin America.

''you can hardly walk
through the corridors. ''

After years of instability,

Banks fell over themselves
to ride this wave.

And when you Iook down at Santiago's
shiny new financiaI district,

Chinese households save
an unusually high proportion

..not to mention a pawn shop
the size of a department store.

Caught up in the heady spirit of the times

The very name Argentina
suggests wealth and plenty -

you can see why the ChiIean pension reform

of their rapidly rising incomes,

was senior Enron executive,
Sherron Watkins.

in marked contrast to Americans,
who these days save none at all.

it means ''The Land Of Silver''.

has been imitated right across the region
and, indeed, around the worId.

The river flowing past the capital is
the Rio de la Plata, ''The Silver River''.

It was very eIectric.

But it wasn't a wave.
lt was a bubble.

And finaIIy, when you've no possessions
Ieft to pawn or to seII,

You feIt Iike you couId...
If you came up with a good idea,

there's just one option Ieft.

Enron wouId give you the money and
you couId go for it at a very young age.

For Britain's Margaret Thatcher,
the general from Chile

And in 1 990 it burst.

And that's to head on down to ZLB PIasma

So plentiful are Chinese savings
that for the first time in centuries,

and the professor
from Chicago were heroes,

Like John Law,
Ken Lay had friends in high places.

where you can seII your own bIood
for $25 doIIars a pop.

Once upon a time, there used to be
two Harrods in the world.

Prices here in Tokyo fell...

who demonstrated that only
by rolling back the welfare state

the direction of capital flow
is not from West to East,

He contributed generously to
George HWBush's presidential campaign.

TaIk about being ''bIed dry''.
It's amazing reaIIy -

One in London, in Knightsbridge, and
the other here, in the Avenida Florida,

..by 7 5%,
wiping out all the previous gains.

could governments revive economic growth.

but from East to West.

an entire economic sector
based on peopIe who are broke.

in the heart of Buenos Aires.

As President,
Bush duly pushed through legislation

And it is a mighty flow.

Founded in 1912,

Yet one country where
this recipe has not been tried

this other Harrods is a reminder
that Argentina used to be a rich country.

This costs Ł1 miIIion now.

that deregulated the energy industry.

How much did it cost back in 1990,
at the peak of the property bubbIe?

is the country
that's come to need it most.

Riding a global wave
of energy privatisation,

At one time, its per capita income was
18% Iess than that of the United States.

ln 2007, the United States
needed to borrow around $800 billion

ln some ways, it rather reminds me
of the East End of Glasgow.

Enron snapped up assets
all over the world.

- So roughIy three times the vaIue.
- Three times?

Japan.

Yet there's a world of difference
between this world

Investors who fIocked
to buy Argentine bonds

ln Latin America alone, the company
had interests in Colombia, Ecuador,

So cIose to...possibIy $6 miIIion.

from the rest of the world.

That's more than $4 billion
every working day.

and the world where loan sharks extract
their pounds of flesh

hoped that Argentina wouId become
the United States of South America.

So successful was the Japanese
welfare superpower

Ł3 miIIion. Wow!

Peru and Bolivia, where they laid a huge
pipeline across the continent to Brazil.

We think we've had a property crash in the
West, but this is a reaI property crash.

China, by contrast,
ran a current account surplus

from petty defaulters.

that by the 1 97 0s, life expectancy
was the longest in the world.

Well, Argentina's history since then

equivalent to more than
a quarter of the US deficit.

Here in sub-prime America,
defaulting on your debts is easy.

And thanks to the intervention of
Ken Lay's personaI friend, George W Bush,

is a classic illustration that all the
resources and talent in the world

And a remarkably large
proportion of that surplus

Well, pretty easy.

can be set at nought
by chronic financial mismanagement.

has ended up being lent
to the United States.

Enron was abIe to acquire
a controIIing stake

The problem was

So no, property isn't
a uniqueIy safe investment.

that Japan's welfare state
was too successful.

in the Iargest naturaI gas
pipeIine network in the worId,

ln effect, the People's Republic of China

House prices can go down
as weII as up.

here in Argentina.

MUTED CONVERSATION

This is Richie.
He's in the repo business -

And as assets go,
houses are pretty iIIiquid,

has become banker
to the United States of America.

Today, the programmes run here
at Japan's Ministry of WeIfare

There have been many financial crises
in Argentine history.

which means you can't unIoad them in
a hurry if you get into a financiaI jam.

snatching cars
from under their owners' noses

Above all, however, Enron traded.

reIy on an ever-smaIIer number
of active workers

when they haven't made their payments.

Not only in energy,
but in virtually all the ancient elements

But the crisis
that hit the country in 1 989

And that, pretty much, is the downside

lt may seem a little bizarre.

He grabbed that boIt action, he went
''chh'' and I watched the rifIe sheII

to support an ever-rising
popuIation of retirees.

of the idea
of a property-owning democracy.

of earth, water, fire and air.

was unparalleled.

The average American has an income
of around $44,000 a year,

The question now
is whether we EngIish-speakers

lt even traded in internet bandwidth.

Back in 1960, there were
something Iike 1 1 active workers

go in the barreI and he Iunged it
towards me and hit me right here

whereas the average Chinese, despite
this country's 100-pIus biIIionaires

have any business trying to export
our modeI to the rest of the worId.

for every one retired person.

Enron led a Wall Street surge unnervingly
reminiscent of the Mississippi Bubble.

But by 2025,

and aII the ostentatious signs of
new money here in centraI Chongqing,

that number couId sink as Iow as two.

and aImost knocked me down.

In other words,
there'II be one oId-age pensioner

is on around $2,000.

He said, ''Either you drop the truck
or I'm dropping you.''

Despite his half-hearted warnings
against ''irrational exuberance'',

So why wouId the Iatter
want to Iend money to the former

for every two bureaucrats
working here at the Ministry.

The real flaw in the property-owning
democracy, as recent events have proved,

At the beginning of February,

And I said, ''Yes, sir,''
and I dropped the truck.

the country was suffering
one of the hottest summers on record.

In just 30 years, the cost
of sociaI security benefits

this bull market was propelled upward

who's roughIy 22 times richer?

You know, you make it sound so attractive,
maybe I... I shouId switch jobs!

WeII, here's how it works.

by the chairman of the US Federal Reserve,
Alan Greenspan.

is that the housing market, like any asset
market, is prone to booms and busts.

ln Buenos Aires, the electricity system
just couldn't cope.

has risen in reIation
to Japan's nationaI income

Five-hour power cuts were commonplace.

I teII you what, it's interesting.

by a factor of four.

But maybe there's another
way of looking at property -

As in John Law's time,
a stock market bubble could only happen

Until recently,
from China's point of view,

Today, virtually all Japan's
health insurance societies

But these, as it turned out,
were the least of Argentina's problems.

as a means of unlocking new wealth

if money was abundant.

ln the bankruptcy capital of America,
repossessing cars is a routine matter.

the best way of employing
its vast population

are in deficit.

by providing collateral
for aspiring entrepreneurs.

And the pension funds
are nearly out of money too.

And by raising interest rates only once
between February 1 995 and June 1 990,

was through exporting manufactures
to the insatiably spendthrift US consumer.

As is almost always the case,

Japan's once so-super welfare state

Could property ownership be
the answer to the problems

there were several well-trodden steps
to monetary hell.

Greenspan made sure that it was.

To ensure that those exports
were irresistibly cheap,

is threatening to bankrupt the nation.

of the world's poorest countries?

BUZZ OF AUCTION ROOM

In step one, the government
spends more, much more,

The rewards for investors were immense,

China had to stop its currency
strengthening against the dollar

and aIso for the managers here
at the company's Houston headquarters,

You've heard of sub-prime borrowers.
Well, welcome to a sub-prime country...

than it can raise in taxation.

by buying literally billions
of dollars on world markets.

UsuaIIy, but not aIways,
it's because of a war.

who were generousIy incentivised
with share options.

lnsurance. lt seemed such a brilliant idea

In Argentina's case, there were two.

..Argentina,
where economic underachievement

In the space of just three years
after 1997,

$16,000...

One, a civiI war between GeneraIs
and the Left in the 1970s,

in the calculations
of those Scottish ministers,

And, until recently, this seemed
to be to America's benefit too.

the Enron stock price rose
by a factor of very nearIy five,

and even more brilliant in Japan's
all-encompassing welfare state.

It's got the Ieather, the top...

has been a way of life for a century.

the other a foreign war against Britain
over the FaIkIand IsIands in 1982.

Each week, United Auto Recoveries
sells 500 repossessed cars.

from beIow 20 doIIars a share
to above 90.

But as we've seen, the best-laid schemes
can be thrown into disarray

Here in America, the best way
to keep the good times roIIing

By 1989, the financiaI system
was about ready to bIow.

It was the Mississippi Company
aII over again.

These slums on the outskirts
of Buenos Aires seem a million miles

The cars are auctioned off to the trade,
ending up in the same car lots,

in recent years has been to import cheap
Chinese goods by the container-Ioad

by an unexpected turn of events.

So is there any better way of
managing risk in an uncertain world?

from the elegant boulevards
of the Argentine capital's centre.

to be sold to much the same people

By February, inflation had already
reached 1 0% - per month.

and seII them in out-of-town
superstores, Iike this one.

and, when they can't keep up
with their monthly payments,

Even a city used to extravagant
oil-fired living had seen nothing like it.

But are people here
really as poor as they look?

repo'd and recycled once again.

For companies Iike WaI-Mart,
outsourcing to China

Disasters Iike 9/1 1 and Katrina

Banks were ordered to close as the
government tried to lower interest rates

has been a way of reaping vast profits
from cheap Chinese Iabour.

expose the Iimits of both
traditionaI insurance

TechnicaIIy the Memphis repo men
are simpIy doing what debt coIIectors do

One man didn't believe so.

and the weIfare state.

and stop the currency's
exchange rate from collapsing.

In 2006 aIone,

But insurance and weIfare
aren't the onIy ways

This is where Ken Lay
and his Enron executives used to live,

Peruvian economist Hernando de Soto
saw the shabby residences like these

WaI-Mart out-sourced no Iess than
$9 biIIion-worth of goods from China.

the worId over.

to buy yourseIf protection
against future shocks.

The difference, apart from the sheer
mind-boggIing scaIe of the thing,

lt didn't work.

in River Oaks, Houston's
most exclusive neighbourhood.

These days, the smart way
of doing it is by being hedged.

ln just a month,

in developing countries all over the world
as representing

But at the same time,

is the reIative ease
with which the bad debts are wound up

the austral fell 1 40%
against the dollar.

by seIIing biIIions of doIIars of bonds
to the PeopIe's Bank of China,

ln the final year of its existence,
Enron paid its top 1 40 executives

literally trillions of dollars
of unrealised wealth.

Now, everybody's heard of hedge funds,

and the coIIateraI is soId off.
For the debtors,

the United States has been abIe
to enjoy much Iower interest rates

but what exactIy does ''hedging'' mean
and where did it come from?

there's virtuaIIy no sociaI stigma
and nobody seems to be getting hurt.

At the same time, the World Bank
froze lending to Argentina,

an average of 5.3 million dollars each.

than wouId otherwise
have been the case.

Luxury car sales went through the roof.

saying that the government had failed
to tackle the root cause of inflation -

The big mystery is why the worId's
most successfuI capitaIist economy

It's what they caII at business schooI
a win-win situation.

The probIem is
that the peopIe who Iive here,

and in countIess shanty towns
around the worId,

To most of us, hedge funds are a mystery.

a bloated public-sector deficit.

is based on a foundation of more or Iess
painIess economic faiIure.

don't have secure IegaI titIe
to their homes.

(Sherron Watkins) You got muItipIes
of your annuaI base pay.

With no cheap Ioans forthcoming
from the WorId Bank,

But the one thing we do know

This is the wonderful
dual country of ''Chimerica'',

is that they can make you
stupendously rich.

That's bad, because without
a IegaI titIe to property,

the government tried to finance its
deficit by seIIing bonds to the pubIic.

You were reaIIy Iess thought of
if you got a percentage,

accounting for 33%
of the world's economic output

One hugely successful hedge fund manager
paid $60 million for this Cezanne.

you can't use it as coIIateraI
to borrow money.

even if it was 75%
of your annuaI base pay.

But investors were hardIy IikeIy
to buy bonds with the prospect

and more than half of all global
growth in the past eight years.

Oh, you were getting a percentage.
You wanted muItipIes.

And if you can't borrow money,

Here in Tennessee,
when the house has been stripped bare

then you can't possibIy raise the capitaI
you need to start a business.

You wanted two times
your annuaI base pay,

that their reaI vaIue wouId be wiped out
by infIation in just a matter of days.

And he owns this Degas too.

and the repo man has taken your car,

three times, four times
your annuaI base pay, as a bonus.

Not to mention a Jasper Johns
he paid $80 million for.

you end up in the hands of one
of Memphis's bankruptcy lawyers,

Nobody was buying.

Chimerica seemed like
a marriage made in heaven.

The government was running out of options.

Part of the trouble is that in poor
countries, it's a bureaucratic nightmare

He's also given hundreds of millions
of dollars to charity.

along with around 1 3,000 other people

And Lay, the pillar of society,

who filed for bankruptcy here
in the past year.

The East Chimericans did the saving.
The West Chimericans did the spending.

espoused the highest moral
standards for his company.

ln April, furious customers
overturned shopping trolleys

to establish secure legal title
to property.

Of course that's one thing that's making
you... Bumping your payments up so high.

(Ken Lay) Enron is a company that deaIs
with everyone with absoIute integrity.

after one supermarket announced
over the loudspeaker

lt can take months - sometimes years -
longer than in the English-speaking world.

But there was a catch.

that prices were being raised by 30%
immediately.

Every week, bankrupts gather
here with their lawyers

We pIay by aII of the ruIes,
we stand by our word,

For Hernando de Soto,

Ken Griffin is the founder
of the Citadel lnvestment Group,

The more China was willing
to lend to the United States,

breathing financiaI Iife
into aII this dead capitaI

to hammer out deals with their creditors.
There's even a fast track lane.

we mean what we say,
we say what we mean.

Shops emptied of goods as owners weren't
making enough money to buy new stock.

the more Americans
were willing to borrow.

one of the world's biggest hedge funds.

is the key to providing the poor
with a more prosperous future.

The only problem was that,
like John Law's system,

Chimerica, in other words,

Last year, he navigated his way through
the credit crunch so successfully

was the underlying cause
of the flood of new bank loans,

the Enron system was an elaborate fraud.

he was able to pay himself
more than a billion dollars.

In this case it's a mortgage
and it's a car, or two cars.

bond issues and derivative contracts
that swept Planet Finance after 2000.

PHONE RINGS

The shanty town of Quilmes,
on the southern outskirts of Buenos Aires,

To most of us, risk is scary,

I can't see anything eIse in there
that they're...they're having to pay off.

provides a natural experiment
to test De Soto's theory.

but all of Griffin's vast wealth has come
because he's found a way of managing risk,

That, in turn, was the underlying
reason why the US mortgage market

- ActuaIIy there are three cars.
- Three cars?

ln this tape, an Enron trader

with a mixture of mathematical
precision and brilliant intuition.

On one side of the town, there are some
of the most squalid slums l've ever seen.

is discussing with
the El Paso Electric Company

was so awash with cash in 2006

The third car is...
the neighbourhood titIe Ioans,

that sub-prime mortgages were
being sold to people with no income,

how to hold California's
consumers to ransom

has a... has a Iien on the car,
they are hoIding the titIe.

(Ken Griffin) Nothing is constant.
Nothing is the way it's aIways been.

But just a few miles away,
it's a very different story.

by closing power stations
to restrict the supply of electricity.

no job and no assets - Ninjas.

Government bond prices plunged

(NiaII) So putting this reaIIy simpIy,

So what I find is that peopIe
who are reaIIy good at this

as fears rose that the Central Bank's
reserves were running out.

what were they supposed to be paying
and what are they now paying?

It was in the earIy 1980s
that a group of squatters here

have great intuition, great instinct.

With no foreign Ioans
and no-one wiIIing to buy bonds,

It wasn't as if the sub-prime mortgage
crisis of 2007 was hard to predict.

Iobbied the government
for secure IegaI titIe to their homes.

WeII, that payment was reduced
from 241 . 1 1 ...

Their gut actuaIIy teIIs them something.

there was onIy one thing Ieft for an
increasingIy desperate government to do -

The mathematics are important

OK.

because they demonstrate
you understand the probIem.

They were successfuI, and those wiIIing
to pay a nominaI rent were granted Ieases

- down to 107.
- OK.

Months before it bIew up,
I was in Tennessee and in Michigan,

get the CentraI Bank IiteraIIy
to print more money.

Quite an improvement.

But uItimateIy, the decision about
whether or not to take a given risk

Cutting their monthIy obIigations
by more than haIf.

which, after 20 years,
converted into fuII ownership.

seeing for myseIf
how many poorer househoIds

But they couIdn't even get that right.

The results were not only
the higher prices Enron wanted,

I think is reaIIy a human judgement caII
in every sense of the word.

were heading for mortgage defauIt
and forecIosure.

You can teII they're owner-occupied
by the fact that there's a fence,

but also, despite there being
plenty of power available,

What was much harder to predict

the waIIs are painted,
there's even a rather excitabIe guard dog.

was how a smaII tremor in America's
very own home-grown emerging market

On Friday April 28th,
Argentina literally ran out of money.

repeated blackouts for consumers.

From 1 996 to 2006 there were between one
and two million bankruptcy cases a year

After aII, owners tend to Iook after
properties better than tenants.

wouId cause a financiaI earthquake
aII around the worId.

''lt's a physical problem, ''

The origins of hedging,
appropriateIy enough, are agricuIturaI.

And some of the owners here

the Central Bank Vice-President
told a news conference.

are even reaIising the vaIue of their
properties by putting them up for saIe.

Enron's money was stolen
in more ways than one.

in the United States,
nearly all of them involving individuals

For a farmer, nothing is more important
than the future price of his crop

Not many people foresaw that
defaults on sub-prime mortgages

The company's stated assets
were vastly inflated.

who elected to go bust
rather than meet their obligations.

What he meant was that Argentina's mint
had run out of paper to print new notes,

after it's been harvested
and brought to market.

But its key financial innovation was to
remove its debts from the balance sheet

Yet there seems to be a flaw in
the theory, for owning their own homes

would send such a shockwave
around the world

But that can be higher,
or much Iower, than he expects.

and the printers had gone on strike.

that a British bank would suffer
the first run since 1 866

ln medieval ltaly - or in the Glasgow
of my youth, for that matter -

hasn't made it significantly easier
for people here to borrow money.

A futures contract aIIows him
to protect himseIf

and hide them in so-called
''special purpose entities'',

and end up being nationalised,

bankruptcy was seen as a disaster.
But not here.

by committing a merchant to buy
the crop when it's brought to market

or that one of the greatest names
in American investment banking,

Just 4% of them
have managed to secure a mortgage.

dubious names like Chewco and Raptor.

at a price agreed when the seeds
are being pIanted.

Lehman Brothers, would go bust.

In fact, this abiIity to waIk away
unscathed from unsustainabIe debt

The reaIity is that owning property
doesn't give you security -

Each quarter, the company's executives
had to use more smoke and more mirrors

''l don't know how we'll do it,

The farmer gets a floor
below which the price can't sink.

And not many people saw

''but the money has got to be there
on Monday, '' he declared.

and start again has been a defining
characteristic of American capitaIism.

it just gives your creditors security.

that as other banks started to write down
hundreds of billions of losses,

The merchant gets a ceiling
above which it can't rise.

to make actual losses
look like bumper profits.

ReaI security comes
from having an income,

inter-bank lending
would simply seize up,

There were no debtors' prisons here
in the earIy 1800s,

By signing a futures contract,

lt couldn't last.

as the Duke of Buckingham
discovered in the 1840s,

Yet the faster the printing presses
rolled, the less the money was worth.

both the farmer and the merchant
have hedged their bets.

When you cook the books
and then you try to hide it,

driving the US Treasury
to propose a $7 00 billion bail-out

at a time when EngIish debtors couId
Ianguish in jaiI for years. Since 1898,

as Detroit homeowners
are discovering today,

(Ken Griffin) Both parties are better off,

you're toast.

The government was forced to print higher
and higher denominations of notes.

and as I suspect the peopIe of QuiImes
wouId probabIy agree.

for the financial system as a whole.

When they sensed
the game would soon be up,

and because of that, the worId
as a whoIe is much better off.

every American has been entitIed
to fiIe for Chapter 7 - Iiquidation,

For that reason,
it probabIy isn't necessary

Lay and his cronies started to unload

ln May, the price of coffee went up
by 50% in a week.

It encourages capitaI formation,

for every entrepreneur in the deveIoping
worId to take out a mortgage on his home

hundreds of millions
of dollars worth of shares,

or Chapter 13 -
voIuntary personaI reorganisation.

it encourages investment,

while at the same time
reassuring the public

it encourages peopIe to do
what is needed to be done

CertainIy, by June 2008.

For rich and poor aIike,

Farmers stopped bringing cattle to market
as the price for one cow

or, for that matter, on her home.

that the share price
would continue to soar.

an American recession
seemed more or Iess inevitabIe.

bankruptcy has become
as much of an inaIienabIe right

In fact, property ownership may not be
the key to weaIth-generation at aII.

to make the worId a better pIace.

was now the same as for
three pairs of shoes.

But the end of the worId?

as ''Iife, Iiberty
and the pursuit of happiness''.

Like John Law's desperate attempts

Looking around
the streets of Hong Kong,

to stem the freefall
of Mississippi Company shares,

With the development of
a standardised futures contract,

I don't see much sign
of a recession here.

all Ken Lay's reassurances were in vain.

agreed rules,
and an effective clearing house,

Can it be that
the Chinese haIf of Chimerica

The theory is that American law exists
to encourage entrepreneurship -

the first true futures market was born.

has successfuIIy decoupIed itseIf
from the American haIf?

On November 1 5th 2001, Alan Greenspan,
head of the US Federal Reserve,

to facilitate
the creation of new businesses.

By June 1989, infIation in Argentina
had reached a monthIy rate of 100%,

This is Betty Flores.

And that means giving people a break
when things don't work out the first time,

And its birthplace was here
in the Windy City.

The idea that China can somehow walk
away unscathed from the American crisis

received the Enron Prize
for Distinguished Public Service,

She runs a small coffee shop in El Alto,

Chicago.

or even the second time.

an annuaI rate of roughIy 12,000%.

a poor suburb of the Bolivian capital,
La Paz.

is certainly seductive.

The born risk-takers don't get wiped out
as they learn through trial and error

adding his name to a roll of honour

To put that into concrete terms,

Betty is one of an increasingly large
number of women around the world

After the city's futures exchange
was established in 1 87 4,

that included Mikhail Gorbachev
and Nelson Mandela.

Despite declining exports
to the recession-hit West,

if you wanted to go out for dinner
in Buenos Aires on a Saturday night,

how to make that first million,

and a stock market crash,
booming domestic demand

Greenspan deserved it, because without
his monetary policies in the late '90s,

hedging commodities
became standard practice.

who have borrowed money
with no security at all.

because today's bankrupt
might be tomorrow's billionaire.

in May you'd pay 10,000 austraIes.

seems set to keep China's economy
growing at at least 8% a year.

By June, you'd have to pay 20,000
for the same meaI.

She's the personification

the Enron bubble, and the dotcom bubble
that coincided with it,

The next step was for a conditional
kind of future to evolve.

of an extraordinary new financial movement
known as microfinance.

lt's a theory that seems to work.

And by the foIIowing month,
it wouId take 60,000.

But remember, we've been here before.

would surely have been impossible.

Many of America's greatest successes
failed in their early endeavours,

The option.

A hundred years ago,

Did you borrow the money
to set up this coffee stand?

You've heard of a fistfuI of doIIars.

in the first age of globalisation,

Some of this really is the financial
equivalent of rocket science,

Just two weeks after the award ceremony,
Enron filed for bankruptcy.

including the author Mark Twain,

WeII, you needed a drawer fuII
of austraIes just to buy a square meaI.

many investors thought there was
similarly symbiotic relationship

COMPANION TRANSLATES

but the underlying principle is simple.

The company owed billions.

the comedian Buster Keaton,

between the world's
financial centre, Britain,

Because they're derived
from underIying assets,

SHE REPLIES IN SPANISH

and Europe's most dynamic
industrial economy.

But just how many billions?

Yes, to make the...the stand.
She borrowed money to make the stand.

aII futures contracts
are known as ''derivatives''.

and none other than the great
industrialist Henry Ford himself.

That economy was Germany's,

ln June, popular frustration erupted

When Enron decIared bankruptcy,
December 2001 ,

But an even smarter kind
of derivative is an ''option''.

and the breakdown of that
relationship ended in war.

in two days of intense rioting and looting
by hungry mobs.

they met with their creditors to say,

Has she paid it aII back?

The buyer of a caII option

All of these men eventually flourished

has the right, say,
to buy a barreI of oiI for $120

''Erm, guys, I know on our baIance sheet,

- She's paid it off a Iong time ago.
- Oh, I see.

At least 1 4 people died.

not least because they were given a chance
to try, fail and start over.

''we have reported 13 biIIion doIIars
of Iong-term debt.

As before 1 91 4,

in a year's time.

For their part, the banks simply assume

ln a country where a steak
and a bottle of wine

there's a fine line that separates
symbiosis from rivalry and conflict.

Now, if the price of oiI rises
to $150 a barreI,

Stories Iike Betty's point
to one of the great reveIations

''Our true Iong-term debt picture
is 38 biIIion doIIars.

that a proportion of the loans
they make will go bad.

were on practically every table every day,

of the microfinance movement
in a country Iike BoIivia.

then the option is in the money

After all, most people going bankrupt
owe relatively trivial sums.

thousands were eating in soup kitchens
or going hungry.

''There's 25 biIIion doIIars
in off-baIance-sheet debt''.

According to one estimate,
China's gross domestic product

and the smart guy makes a profit of $30.

It turns out that women are actuaIIy
a better credit risk than men,

CLOCK CHIMES

But if that doesn't happen,
if the price of oiI stays the same,

could exceed that of
the United States as early as 2027.

A Chapter 1 3 doesn't wipe their debts out,
it just reschedules them.

(NiaII Ferguson) Did those numbers
come as a shock to you?

with or without a home
as security for the Ioan.

lt's obvious enough who loses
from hyperinflation.

You knew there were probIems,
but not on that scaIe.

or actuaIIy decIines,

By that time
some critics of free trade argue

It aII rather fIies in the face
of the conventionaI image

Yes, I mean, I think
we were aII fIabbergasted.

he's under no obIigation
to carry through the deaI.

Very rapidly rising prices are bound
to wipe out

AII he does is to write off
the cost of the option itseIf.

of the spendthrift femaIe.

that virtually nothing may remain
of American manufacturing industry.

anybody who's dependent on an income
that's fixed in cash terms.

The day before 4,500 employees at Enron's
HQ were given their marching orders,

WeII, it's by buying and seIIing compIex
smart derivatives Iike options

Groups Iike academics and civiI servants
on infIexibIe monthIy saIaries,

These women are hardly what
you would call good financial risks.

So it's a mistake to think,
as Shakespeare's Antonio did,

And the worse things get
in the United States,

that Ken Griffin has become a biIIionaire.

the louder such complaints will grow.

of moneylenders as mere leeches,

They probably have
just a few dollars between them.

a final round of bonus cheques
were issued to grateful executives.

oId-age pensioners and, particuIarIy,

TRADERS SHOUTING

sucking the life's blood
out of unfortunate debtors.

bondhoIders Iiving off the interest
on their investments.

Yet with no security, they are being
lent money. Here in Bolivia,

ln theory, derivatives offer a new way
to hedge against an uncertain future.

On a day Iike today, when the
Hong Kong stock market is down sharpIy,

Buenos Aires is absoIuteIy fuII
of antique shops Iike this one,

ln May 2006, Ken Lay was convicted on all
six counts of securities and wire fraud.

lenders have come to realise

it's tempting to ask whether
anything couId trigger

A much smarter way
than boring old insurance.

Credit and debt are the building blocks
of economic development.

Iaden down with jeweIIery and watches
and cutIery,

that creditworthiness
may in fact be a female trait.

a comparabIe breakdown in gIobaIisation
Iike the one that happened in 191 4?

And much more profitable.

His sidekick, Jeffrey Skilling,
was sentenced to 24 years in prison.

aII soId off by middIe-cIass famiIies
who just ran out of cash.

But it takes banks to elevate
that relationship

The obvious answer
is some kind of confIict

beyond the tie between
a loan shark and his hapless victim.

Carmen Velasco set up Pro Mujer

ln the past decade, derivatives have
seemed to take over the world of finance.

between the United States and China,
whether over trade, Taiwan, Tibet,

ln the 1 920s, the great economist
John Maynard Keynes had predicted

to provide finance
to poor but enterprising women.

Lay died before sentencing,
while on holiday in Aspen, Colorado.

the euthanasia of the bondholder,

By the end of 2007, the notional value
of all derivatives contracts

or some other unforeseeabIe
bone of contention.

Because the loans
are unsecured by property,

anticipating that inflation would eat up
the paper wealth

Yet the fraudulent practices
that propelled Enron's rise and fall

It's onIy when borrowers Iike the ones
on this GIasgow housing estate

What starts with competition
for Olympic medals

the challenge is to get the women
to pay them back...but they do.

reached a staggering $596 trillion.

of financial families
like the Rothschilds.

could end in a battle over dollars

have access to efficient credit markets

didn't die with Ken Lay.

From day one, they have to know
that they have to repay on time,

That's 43 times the size
of the American economy.

if the Chinese one day decide to cut off
their credit line to the American empire.

that they can escape the cIutches
of the ShyIocks and the Ioan sharks.

On the contrary, the habit
of hiding debt off-balance-sheet

As inflation swept through the world
in the 1 97 0s,

that they have interest rates
and they have to save.

It's onIy when savers can put
their money in dependabIe banks

Keynes seemed to be proved right.

that Enron pioneered subsequently spread
throughout the Western financial system.

Maybe, as its name suggests,

So it's a process of Iearning,
and at the beginning it's very difficuIt,

that it can be channeIIed
from the idIe to the industrious.

There are tremendous economic
benefits for peopIe that work here.

ln our time, however,

Chimerica is nothing more
than a chimera -

we've seen a miraculous resurrection
of the bondholder -

because they are not used to
handIing a Ioan.

The unravelling of this dodgy accounting

$20 biIIion in the hands of 1 ,000 peopIe

But wait, l hear you ask,
if banks are the answer,

the mythical beast of ancient legend
that was part lion, part goat,

But IittIe by IittIe, they get used to it,
and they feeI so proud when they repay.

a comeback by Mr Bond...
even in Argentina.

has been a key component
of the current crisis.

is reaIIy a 21st century phenomenon.

part dragon.

In many respects, I think
the Enron probIem was in a Petri dish

This never happened 50 years ago.

how could so many have collapsed
so spectacularly in the past year,

The bond market is back,

terrifying American officials as they
try to fund a massive financial bailout

and the germ has spread
throughout the financiaI markets.

throwing the financial world
into turmoil?

I must say, I'm hugeIy impressed
by what I'm seeing here at Pro Mujer.

A Chinese-American conflict
may sound implausible,

Yet there are downsides to hedging too.

Some of which comes from
Enron traders and finance foIks

by - you guessed it - selling billions
of dollars of freshly minted bonds.

You can sense in this hive of activity

but one of the key points of this series

To understand why bad debts
in places like Memphis

When biIIionaire investor Warren Buffet

that are gainfuIIy empIoyed at banks
and energy trading houses.

the transformation that microfinance
has brought into these women's Iives.

is that the really big crises
come just seldom enough

described derivatives as
''financiaI weapons of mass destruction'',

could cause such chaos,
you need to understand

So that rot is everywhere
in the financiaI markets.

The key to Mr Bond's revival

how the relationship between
banks and borrowers broke down

he aII but prophesised the downfaII
of American insurance giant AIG.

to be beyond the living memory

And behind me
you can see the bottom Iine...

of the people who run today's
companies, banks and funds.

has been a growth
in the number of bondholders...

as loans came to be ''securitised''
and sold on to unwary investors.

women Iining up
to repay their Ioans punctuaIIy.

Their European headquarters
are there behind me.

Maybe it's time to change that oId
catch phrase from ''as safe as houses''

Brought Iow not by seIIing
insurance poIicies,

Just because all the swans
you've ever seen are white

The joint stock Iimited IiabiIity company
truIy is a miracuIous institution.

..which brings us back to ltaly,

but by seIIing derivatives
that bIew up in its face.

doesn't mean there are no black swans.

to ''as safe as housewives''.

where the bond market was born
600 years ago.

Once upon a time, being a banker
was reaIIy rather boring.

And yet throughout financiaI history,

Of course, it would be a mistake
to assume that microfinance

there have aIways been
a few crooked companies,

You Iived by the 3-6-3 ruIe,

is some kind of economic magic bullet.

just as there have occasionaIIy
been irrationaI markets.

which meant you paid 3% on deposits,
coIIected 6% on Ioans

ltaly is now a country with one of the
most rapidly ageing populations in Europe.

Just giving out loans won't necessarily
consign poverty to the museums.

Indeed, the two go hand in hand,

Today's financial world is the result
of four millennia of economic evolution.

because it's preciseIy when the buIIs
are stampeding most enthusiasticaIIy

and were on the goIf course by 3 o'cIock.

Our basic human urge
to protect ourselves against risk

But then, betting everything
on the house won't do that, either.

But in our time, banking became
reaIIy rather too interesting.

ln such a greying society,

that peopIe are most IikeIy
to get taken for the proverbiaI ride.

has proved frustratingly
difficult to satisfy.

there is a growing demand
for fixed-income securities like bonds.

A whoIe series of financiaI innovations

But there's also a strong fear
of inflation eating up

made it possibIe for
common or garden Ioans

THUNDER RUMBLES

Yet despite the unprecedented
complexity and diversity

lnsurance companies let us down.

Financial illiteracy may be rampant,

to poor foIks in pIaces Iike Memphis

the real value of pensions and savings.

of the modern financial system,

As we've seen in the past year,

but somehow we were all experts
on one branch of economics -

to metamorphose
into weird and wonderfuI things

the path of financial markets can
never be as smooth as we would like.

Planet Finance remains
as vulnerable as ever

Central bankers suspected of being
soft on inflation

Welfare states sink into insolvency.

the property market.

with names Iike
''coIIateraIised debt obIigations''.

have to answer to the pensioner's friend -
the bond market.

to the age-old problem
of booms and busts,

Since the current credit crunch began,

And derivatives turn out to be
a double-edged weapon too.

We all knew
that property was a one-way bet.

WeII, this financiaI aIchemy -
turning Iead into goId

some stock markets around the world
have fallen by as much as 50%.

irrational exuberance
and manic depression.

And treasuries planning to spend billions
to bail out banks that have gone bust

or toxic waste
into giIt-edged securities -

Except that it wasn't.

Maybe all this complexity has actually
increased our vulnerability to crisis.

GUNSHOT

was onIy possibIe
because the ascent of banks

in the current credit crunch
have to tread warily, too,

So long as human expectations
of the future veer

And so for many families,

was foIIowed by the ascent
of the second great piIIar

All over the world, it seems,
property prices are falling...

if they expect to raise the money
by selling yet more bonds.

For 4,000 years, from ancient
Mesopotamia to modern China,

providing for the future
now takes one very simple form -

from the over-optimistic to
the over-pessimistic, from greed to fear,

of the modern financiaI system -
the bond market.

the ascent of money has been one of
the key factors in human progress,

an investment in a house,

..from Memphis to Santiago,

stock prices will tend to trace a line

In modern Europe,
as in Renaissance ItaIy,

the value of which
is supposed to keep going up

not unlike the jagged
and irregular peaks of the Andes.

an equiIibrium has been struck between
poIiticaI power and financiaI exposure.

from London to La Paz.

an extraordinary story of innovation,
intermediation and integration

until the day the breadwinners
need to retire.

Encouraging home ownership
may weII create

that had done as much as anything

Today, as much as ever,

As an investor, you just have to hope

to heIp peopIe escape from the drudgery
of subsistence agricuIture.

it seems it's the bond market,
our oId friend Mr Bond,

that when you have to come down
from the summit of euphoria,

a poIiticaI constituency for capitaIism.

lf the pension plan
falls short, never mind.

But it aIso distorts the capitaI market by
persuading peopIe to bet the house on...

And yet PIanet Finance
can never quite escape

it'll be on a nice, smooth ski-slope,
and not over a sheer cliff.

that reaIIy ruIes the worId.

There's always home, sweet home.

from the gravitationaI force
of PIanet Earth,

weII, the house.

But what if,
rather than lending to governments,

because the quants can never take
fuII account of the human factor -

As a pension or an insurance poIicy,

But is there nothing
we can do to protect ourselves

PeopIe need to borrow money, of course,

you prefer to use your money to buy
a share in a company?

this strategy has one very obvious fIaw -

to start up businesses
or to buy expensive assets.

our tendency to underestimate
the probabiIity of bIack swans,

from real and metaphorical falls?

it represents a one-way,
totaIIy unhedged bet

Would that be more or less risky?

But it seems dangerous to Iure them
into staking everything

our propensity to veer from
euphoria to despondency,

As we'll see in the next episode
of The Ascent Of Money,

More or less profitable?

on a singIe market,
the property market.

on the far from risk-free property market.

our chronic inabiIity
to Iearn from history.

ln the next episode
of the Ascent Of Money,

But as we'II see in the next episode
of The Ascent Of Money,

finance is as much about risk
as it is about return.

From Buckinghamshire to BoIivia
to bonny ScotIand,

we'll discover why we find it
so hard to learn from financial history,

And that's why the course
of financiaI history -

a bet on bricks and mortar,

the key is to strike the right baIance
between debt and income.

And the big question is,

Iike that most human of emotions,
Iove - never runs smooth, and never wiII,

or good oId Japanese wood,

are you insured?

And next week I'II be suggesting
that the entire worId economy

not even here, on the magicaI and quite
possibIy mythicaI country of Chimerica.