Fixing Global Finance (Forum on Constructive Capitalism) [Hardcover]

Martin Wolf (Author)

Book Description

Publication Date: September 23, 2008 | Series: Forum on Constructive Capitalism

The latest book from Financial Times columnist Martin Wolf explains why global imbalances cause financial crises—including the one ravaging the United States right now—and outlines the steps for ending this destructive cycle.

Reviewing global financial crises since 1980, Wolf lays bare the links between the microeconomics of finance and the macroeconomics of the balance of payments, demonstrating how the subprime lending crisis in the United States fits into a pattern that includes the economic shocks of 1997, 1998, and early 1999 in Latin America, Russia, and Asia. He explains why the United States is now the "borrower and spender of last resort," makes the case that this is an untenable arrangement, and argues that global economic security depends on the ability of emerging economies to develop robust financial systems based on domestic currencies.

Sharply and clearly argued, Wolf’s prescription for fixing global finance illustrates why he has been described as "the world's preeminent financial journalist."

Editorial Reviews

From Publishers Weekly

In his latest, author and economics journalist Wolf (Why Globalization Works) pronounces the current, "nearly inevitable" global economic crisis the product of a "perfect storm" of global macroeconomic imbalances: the scale of net borrowing by the U.S. and the lack of corporate demand for outside funding, exacerbated by aggressive monetary easing, consequent financial excess, and the housing bubble. Wolf's writing is hardly popular economics, requiring some work to understand and absorb, but it bridges a gap in economic understanding not yet addressed by Congressional subcommittees or the media, whose only suspects thus far have been Republican free market policy and Wall Street greed. The primary problem, argues Wolf, is global reliance on the United States as the borrower of last resort. Whether Wolf is correct is another question-determining that would require putting his suggested policies into action. Domestic financial housecleaning aside, Wolf's plan includes countries like China finding domestic uses for their enormous account surpluses and emerging countries creating first-world financial systems that complement but don't depend upon global financial markets, goals requiring significant international cooperation. Heavy but rewarding, Wolf's analysis fills in a lot of blanks for those seeking to understand the new U.S. recession in a global context.
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Review

Heavy but rewarding, Wolf's analysis fills in a lot of blanks for those seeking to understand the new U.S. recession in a global context.

(Publishers Weekly 2008)

This is an ambitious book by one of the most respected financial journalists of our time... He does a terrific job, taking us through the plethora of theories that were put out to explain the imbalances, debunking the more popular but flaky ones with gusto.

(Financial Times 2008)

Wolf is adamant: global trade and global finance ride in harness, and global finance requires controls —controls that cover all nations. Agree or not, get the book and expand your understanding of precisely what has brought the United States to its current flirtation with disaster.

(Arthur Jones The Desk )

In the diligent Fixing Global Finance, the Financial Times editor and columnist takes on the imbalances that have made the world economy lopsided.

(Andrew Bast Newsweek 2008)

An extremely helpful guide to the origins of today's problems and to possible solutions... Written before the crisis, it is unhindered by minutiae about the crescendo of ad hoc measures that several governments took throughout the fall.

(Harold James Foreign Affairs 2009)

If Mr. Wolf were to rewrite his book... he would no doubt shift his emphasis. But his first run at the subject... holds up remarkably well despite all that has happened.

(Economist 2009)

The only inkling of hope is that policy makers everywhere have been so shaken by events that they will heed what Wolf advises. This book is a great and important contribution to everyone's welfare on the globe. It can be paid no higher accolade.

(Will Hutton Guardian 2009)

The coverage of history alone is worth the price of the book... also a worthwhile read because of the story Wolf weaves to explain the development of the imbalances in world markets that resulted in the current financial and economic crisis.

(John M. Mason Seeking Alpha 2009)

Give the world's current economic crisis, Wolf's book is timely.

(Choice 2009)

Fixing Global Finance marks a turning point in his worldview... offers important pointers to the way ahead.

(Robert Skidelsky New York Review of Books 2009)

College-level libraries strong in global business need this [book].

(Midwest Book Review 2009)

[Martin Wolf] the must-read Financial Times columnist.

(Wayne E. Yang Asian Review of Books 2009)

Martin Wolf’s book Fixing Global Finance provides an excellent description of international financial relations in the recent period... an excellent read

(Kirsten Wandschneider H-Net Reviews 2009)

Martin Wolf is the world's preeminent financial journalist. This book should be read by anyone who cares about the future of the international system, which, given recent events, is anyone who cares about the global economy or their economic future.

(Lawrence H. Summers, former U.S. Secretary of the Treasury )

An extraordinarily cogent and thoughtful look at the contemporary United States borrowing binge, which stands as the leading macroeconomic and financial puzzle of our time. Wolf rigorously critiques the cutting-edge academic debate with depth, thoroughness, and readability that one will not find anywhere else.

(Kenneth Rogoff, Harvard University )

The global financial imbalances of the twenty-first century will have a profound impact on international politics and American foreign policy. In this brilliant, compelling and readable book, Martin Wolf explains what has happened to the global financial order and what can be done to avoid the shocks of international finance.

(Michael Mandelbaum, author of Democracy's Good Name: The Rise and Risks of the World's Most Popular Form of Government )

No one understands and explains international economics and exchange rates better than Martin Wolf. This short book comes at a time when everyone can benefit from a deeper understanding of these issues.

(Martin Feldstein, Harvard University )

See all Editorial Reviews

Product Details

• Hardcover: 248 pages
• Publisher: The Johns Hopkins University Press (September 23, 2008)
• Language: English
• ISBN-10: 0801890489
• ISBN-13: 978-0801890482
• Product Dimensions: 9.2 x 6.3 x 0.9 inches
• Shipping Weight: 1 pounds (View shipping rates and policies)
• Average Customer Review: 3.7 out of 5 stars  See all reviews (20 customer reviews)
• Amazon Best Sellers Rank: #878,894 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

39 of 40 people found the following review helpful

4.0 out of 5 stars Nobody does global flows better October 28, 2008

By David R. Harper VINE™ VOICE

Format:Hardcover

This version (i.e., Forum on Constructive Capitalism) might be different than Mr. Wolf's yet-to-be-released book of the same name. I don't know. But, regardless this an eye-opening book. Previously, I have studied the US credit crunch from a retail/Wall Street perspective: that is, subprime loan originations and securitizations. Before Mr. Wolf, I understood the crisis as an utterly avoidable debacle triggered by greed and enabled by certain financial instruments.

But the book opened my eyes to larger forces at work in global finance. Sort of like, if i before saw the crisis as an inept swimmer drowning, now I see the swimmer as more of a victim caught up inexorably in a powerful undertow beyond his control. To see it his way, there was a degree of inevitability due to unsustainable imbalances. Mr. Wolf is absolutely expert on the dynamics of international capital flows. A good portion of the book makes vivid something he covers in his columns: the U.S. has been the world's "spender and borrower of last resort;" okay, you knew that, but the breakdown between government, companies and households is where it gets scary. While the US government used deficits to spur demand (and absorb other countries, like China's, excess savings), US households went into an unprecedented deficit. Our problem is that our current account deficit is met with excess spending rather than investment. Mr. Wolf has great charts in the book to illustrate this perfectly; a few of his simple line charts elicited a visceral reaction for me (fear, specifically).

Also, for those who haven't read Mr. Wolf before, he is the consumate professional giving counter-arguments their just due. You learn just as much while he's weighing the idea he doesn't agree with. But by the time I was done with it, he had convinced me formally around a nagging suspicion: that the U.S. has been reacting to global patterns as much as instigating them (i.e., that our Fed and policy makers aren't all powerful - he even dubs them "victims" in some respects).

I gave it four stars only because the book was tough work for me. For a trained economist (not me, I am a financial analyst), probably it deserves five stars. I needed extra time and a macroeconomic reference to sort through some of it. (that's why i remove one star. If you are going to make me break out Mankiw's macroecon text to keep pace, i am going to have to ding you!). It looks harmless, without equations and such, but it's way dense. This is one of those that books that is easy to buy but hard to read all the way through. So, the four stars is only for the time it required on my part. I would not exactly call it accessible. But Mr. Wolf is a national treasure.

18 of 20 people found the following review helpful

5.0 out of 5 stars Best analysis of international capital flows January 8, 2009

By Gaetan Lion TOP 1000 REVIEWER

Format:Hardcover

This book has almost nothing to do with the current housing and credit crisis. Wolf only says in the last couple of pages that part of the world savings glut was recycled in excess US residential investment. And, that's it. If you are interested in studying the current crisis I recommend instead those two excellent books: The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics), and to a lesser degree The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It.

Martin Wolf excellent analysis focuses on capital flows. He observes that the global savings glut generated by huge Current Account Surplus (CAS) from Asian exporting countries is matched by the US Current Account Deficit (CAD). He advances that if not for the US ability to absorb excess savings, the World economy would be in a recession. That's why he calls the US the borrower and spender of last resort. Wolf supports this savings glut theory by stating that:
1) Asian countries pegging their currency level is an explicit policy choice to boost exports;
2) US money supply growth has been reasonable; and
3) US Inflation and inflation expectation are low.

Martin Wolf explains how Asian countries came about to generate such huge CAS. Since 1980 emerging markets suffered many financial crises with huge fiscal costs ranging from 10% to 55% of GDP. Those crises were due to large foreign debt. When such countries Current Account Deficit (CAD) increased, their domestic currencies plummeted. And, they defaulted on their exploding foreign debt. If a currency devalues by 50% a country's foreign debt doubles! In response to the 1997 currency crises, Asian countries eliminated foreign debt by managing their currency exchange rate at low levels to stimulate exports. This resulted in their building huge foreign exchange reserves and CAS. China has $1.2 trillion in foreign exchange reserves and a CAS of 12% of GDP. Other Asian and oil exporting countries espoused the same policies to eliminate foreign debt.

These emerging markets policies have caused a global imbalance of capital flows from poor countries to rich ones. Given that the EU is a protectionist trade block, the world savings glut flows to the US.

The US is now the borrower and spender of last resort. Its huge financial markets combined with strong consumer demand absorb 70% of the world savings glut. The US Current Account Deficit (CAD) equals 7% of GDP. Such a large CAD is not worrisome since the US borrows in $. The US has benefited from foreign capital by maintaining high domestic investments despite low domestic savings.

Wolff is concerned about the US CAD sustainability. He notes that between 1992 and 2005, the financial balance of the household sector moved from +3.7% to - 3.6% of GDP due to a decline in personal savings from 7.5% to 2.5% of GDP and an increase in residential investment from 3.7% to 6.1% of GDP (the housing bubble). Since the 80s, US household debt nearly doubled from 70% to 135% of disposable income. But, because of declining rates debt service has increased moderately from 10.5% to 14.5% of disposable income.

Many economists believe the US CAD is unsustainable. If an economy runs a CAD of 7% of GDP and grows its GDP by 5% nominal, its net external liabilities will equal 140% of GDP. These economists believe the $ would have to depreciate by 30% for the CAD to shrink back to 3% of GDP. Such a depreciation could entail a run on the $, higher rates, and a recession. They also consider the US CAD unsustainable because it results in foreign countries amassing huge levels of $ and large related foreign exchange losses. Also, foreign exchange interventions by foreign central banks can cause inflation, excess credit, asset bubbles, and financial collapse.

Fortunately, the case for US CAD sustainability is good. Richard Cooper from Harvard states that excess savings in the rest of the World are permanent due to demographic trends (low birth rate, aging societies in Japan, Germany, China). He adds that the US generates close to 30% of the world GDP and 50% of the World financial securities. Thus, it is reasonable for the World to invest its surplus savings in such a dominant economy. Cooper adds that if the CAD continued at $600 billion while the US economy grows at 5% nominal, the ratio of net foreign claims to GDP would stabilize at 50% and the CAD would fall to 2.5% of GDP within a few years. Also, the impact of the CAD is moderated by the depreciation of the $ and the US higher return on its foreign investments vs foreigners returns on their US investments. The US higher return is because its investment mix is tilted towards direct investments while foreigners' are tilted towards Treasuries. The US CAD is also sustainable because Asian governments willingly incur fx related losses on their reserves to promote exports.

Wolf in his concluding remarks suggests that China needs to increase consumption lower excessive savings (near 60% of GDP) and reduce its CAS (12% of GDP). The US CAD should decrease but not disappear as it absorbs demographics related excess savings from Japan, Germany, and China. Emerging markets need to upgrade their financial system to make it safe to lend and borrow in their domestic currency to avoid the foreign exchange crisis of the past.

Smick in his excellent The World Is Curved: Hidden Dangers to the Global Economy has a pessimistic view regarding China undertaking the reform Wolf recommends. Thus, trade and capital flows imbalances are likely to remain with us for a while.

13 of 15 people found the following review helpful

3.0 out of 5 stars Inaptly titled, excellent discussion of the US current deficit phenomenon February 19, 2009

By Mendicant Pigeon

Format:Hardcover

This book really isn't about fixing global finance. In fact, the author dedicates less than 10% of the book to that prospect and his solutions, rather blithely stated are for 1) developing countries to reform their economic governance so that they can issue own-currency debt (or the pie in the sky fix, to do away with single sovereign currencies); and 2) the IMF specifically and world economic organizations generally to reform themselves (the pie in the sky solution being that participating countries pool their reserves).
Well, golly (long golly ala Gomer Pile) you just done fixed global finance, Sarge!
Thank you, but I think we already know what economic Nirvana looks like and hoped for something other than nostrums as fixes, something like concrete suggestions, say.
Alas, I know, the task is too big for a single man and as such perhaps you may be allowed to take a pass on even attempting to tackle the problem right here and now, Mr. Wolf....but then there is the little issue of the title of the book. H'mmm.
No, this book is more interesting for its extended discussion of the various schools of thought surrounding the phenomenon of the US Current Account deficit. In other words, how the various schools explain the reason for it, and whether it can continue to grow or even remain the same size. The author's discussion of this is mostly transparent and always lucid even if it does take a bit of getting through at times. Reading it will definitely give one a more complete appreciation of what the phenomenon is and how it is caused, if not, perhaps, the exact reasons for it.
In short, it seems that developing countries are willing to lend the US money at very poor rates of return (good for the US) because they have an aversion to undertaking 'hard currency' debt thereby facing the potential for disaster if currency fluctuation or other large scale economic events occur which cause them to default.
The way out of the problem is for them to reform their governments and for the IMF and World Bank to reform themselves and allow developing countries a greater say in how these organizations dispense monetary aid.
One wonders if the author rushed this book out before the full effects of the presently unfolding crisis began to be felt. For, by doing so the book was published at a time when it was still relevant. As it is, the entire discussion has been rendered moot by events.
In fact, now developing countries are buying USA's debt for an entirely different reason than any mentioned by Mr. Wolf: They fear global depression, and our currency is considered a safe haven.
I'd wager that if Mr. Wolf were to begin his book today, it would have some discussion of the necessity of forming a new kind of 'gold standard,' perhaps that single currency which he hinted at but didn't spend much time on.
Indeed, things have changed so radically since the recent publication of this book that it should only be read by those who want to know what the various schools of thought said about the creation of the current account deficit of the USA prior to 2008.