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on October 28, 2008
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.
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on January 8, 2009
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.
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on February 19, 2009
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.
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on March 31, 2009
Martin Wolf's submission on the global train wreck is short, written in a readable, journalistic style, and duly supplemented with graphs and tables. While one does need to know the basic terms, an economics degree is not a requisite for reading it. This is all the good that can be said of it.

Fixing Global Finance is a misleading title - possibly intentionally. This is an economic tract sketching the macro background to the financial crisis. Only peripherally does it deal with finance meant as banking or the markets, and the book provides no suggested fix to their problems. Indeed, Wolf would have us believe that the financial crisis has nothing to do with bankers, market supervision, or monetary policy mistakes. It is all the fault of a `savings glut' and disembodied trade flows, or of that little Chinese saver and his over-parsimonious government. That America and Europe's banks paid hundreds of billion (yes, hundreds) in bonuses in the half-decade that preceded their collective failure has nothing to do with their current trouble. That the Fed and the ECB allowed investment banks and markets to dictate monetary policy (a practice known euphemistically as `signalling'), thus engendering the greatest credit bubble in generations, was perfectly all right. That the same public institutions refused to regulate the credit derivatives market, praised opaque securitisations, and encouraged no-equity borrowing on mortgages and corporate buy-outs alike was all blameless.

To be fair, much of Wolf's book seems to have been written in 2007 or early 2008, before the full, horrific scale of the bust was apparent. But one only has to read his more recent editorials in the Financial Times: it is the same story of innocent financiers who must be bailed out with ever greater subsidies, tax cuts, and toxic asset clean-ups. And even Wolf's purely macro-economic view does not hold water. Thanks to the Fed's irresponsible policy of wide open monetary taps, credit growth in the US averaged US$4 trillion per year in the last three years of the boom; this dwarfs reserve accumulation by China of a few hundred billion in total.

If you would like a less superficial, more honest if hard-hitting account of the crisis, I recommend the long article by Simon Johnson (an ex-IMF official) in The Atlantic. This can be found on [...] If, by the time you read this, the link is gone, the piece is worth looking for on Google (Simon Johnson, The Quiet Coup). It is also more succinct than Wolf's brief yet quite forgettable book.
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on May 2, 2010
It is said that generals are always fighting the last war. The thesis of Martin Wolf's "Fixing Global Finance" is that the saying holds also for economic planners. The current economic crisis is, at least in part, the outcome of the lessons learned from the Financial Crises of the 1990s.

In the 1980s and 1990s, several East Asian economies were growing fast. Labeled as "Emerging Markets", and perceived as the cutting edge future of the world's economy, they attracted a great deal of foreign finance - leading to a strong economic boom. But money kept pouring into these countries, as governments and corporations found it easy to borrow - but crucially, in foreign currency, not in the local currencies.

The investments in Asia have become a bubble, and like all bubbles, it eventually burst. Foreign Investors headed to the exit. They started to try and collect their loans. Businesses and investors tried to dump Bahats, Wons and Rupiahs and get their hands on dollars, Deutsch Marks and Yen. The local currencies depreciated sharply. Businesses and governments which had assets denominated in local currencies, now found these dwarfed by the size of their liabilities, as the dollar and Deutsch Mark value of their assets plummeted along with the currency. Many of them were unable to meet their obligations, and went out of business. Havoc ensued.

But there was a silver lining, at least for those of the Asian countries with export based economies. The low exchange rate made local products much more attractive in the world markets. With strong exports, they climbed out of the crisis with astonishing speed.
So the lesson was learned - the influx of foreign money caused indebtedness that would end with a crisis, and appreciated the currency, hurting exporters. The solution? Keep the foreign money out, keep the exchange rate low, and float to economic prosperity on the back of export induced growth.

But if you sell to foreigners, you get foreign currency. This would appreciate the exchange rate and put an end to the exporter's nirvana. That is... if you spend it.

The emerging markets' governments, and especially China's, chose not to spend the money. Rather, they saved it - in America. America, with its dollar enumerated debt, could not go bust, as the Asian economies had. The result was a topsy-turvy world, one in which the poor of the Earth lend money to the rich.

Although this policy seemed to ensure growth for the emerging countries, it made little long term sense; The fast growing but still poor Asian countries needed the money much more than America did. Furthermore, they got remarkably low interest rates, and stood to lose a great deal when the inevitable day of reckoning would come, and the US dollar would depreciate against their currency.

So far so good; But this argument is made elsewhere (for example in The End of Influence: What Happens When Other Countries Have the Money), usually in a more readable albeit less detailed form.

Wolf's other points I found more interesting. The first is that the saving glut in the emerging economies is bad for the American economy, and thus also for the world economy. This is not an obvious insight - it would seem that being given a lot of essentially free money is not so bad. But the cheap credit which entered the United States was a major cause (but not the only one) of the market distortions which led tour ongoing subprime and financial crisis. The low interests created a bubble, and when the bubble burst, havoc ensued.

The second interesting insight is about what has to be done. There the answer is simple but far from straightforward - the saving countries must reduce their current account surpluses - they must start to append and borrow.

But the key lesson of the financial crisis of the 1990s was the danger in debt for countries borrowing in foreign currencies. Thus Wolf arrives to a simple and elegant conclusion: "Under adjustible exchange rates, the only safe way to borrow is in one's own currency". (p.174).

Wolf discusses at length how countries could borrow in their own currency - I particularly liked a suggestion of an international body, perhaps the IMF, acting as an intermediary. But he does not answer the more important question - how do you convince emerging markets, and particularly China, that starting to spend is good for them?

I'm wondering whether the West has to give the emerging countries a taste of their own medicine. At one point, Wolf describes the strategy taken by the emerging countries as "Exchange Rate Protectionism". Remember that tariffs and other barriers on trade were not removed because the importing countries realized that they were bad for their own economies. Rather, they were reduced via threats of retaliatory tariffs and import duties. It would surely not be easy, but isn't there a chance the same methods would be useful in curing "Exchange Rate Protectionism" as well as the more traditional kind?
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on January 18, 2009
There are three views on how the global economy got into its current mess, and Martin Wolf is a passionate advocate of one of them. One theory is that the crisis was made in New York, born of arrogant efforts to eliminate risk, of reckless lending practices, and of regulators who thought nothing of curbing excess. A second crowd blames the crisis on Washington: the Fed's monetary policy was loose, cash was plentiful, and credit was cheap. Either inflation or an asset bubble was inevitable, and the subsequent correction was bound to come and be painful.

The third view - the one Mr. Wolf subscribes to - puts the onus on global imbalances: credit was plentiful not because the Fed made it so, but because savings in Asia, the oil exporting countries and some European states outstripped investment, pushing down global interest rates. These countries ran persistent trade surpluses to accumulate foreign reserves and insulate themselves against financial crises, which were recurrent and costly in the 1980s and 1990s. Surpluses were also the corollary of "export-led" growth, relying on exports rather than domestic demand as the path to development.

In that system, the United States emerged as the borrower and spender of last resort, absorbing the world's excess savings. To have done otherwise would have requires either an adjustment in policies abroad (including more domestic spending) or a recession at home: "in this world, the tail wags the dog of US macroeconomic policy" Mr. Wolf says; "The United States is at least as much the victim of decisions made by others as the author of its own misfortunes."

Mr. Wolf, whose book on globalization is one of the most readable and eloquent on the topic, is at his best when weaving together the latest thinking on his subject. His book, after all, builds on the "savings glut" argument by Fed Chairman Ben Bernanke. But Mr. Wolf's can create a whole that is more than the sum of its parts. His language is often technical and his thoroughness in dealing with alternative views can dissuade the general reader. But he never loses sight of the broader argument, and his usage of simple numbers makes the argument easy to follow. Once again, Mr. Wolf has written a book against which others will be measured and tested.
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on February 13, 2009
I prefer my Martin Wolf in smaller bits as found in the Financial Times.

This book desperately needed an editor and an outline. Several chapters stand on their own and are worth reading but, taken as a whole, the message is lost in a sea of data which will be incomprehensible to most of the people (read politicians) who would benefit from an understanding of Mr. Wolf's view of global finance.

The author is brilliant. The book is not.
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on January 25, 2009
This is one of the most important books on international finance written in two decades. In 196 pages, Wolf offers an eloquent, understandable explanation for the financial collapse now pushing the world toward a depression.

For years, critics have pointed to the profligate habits of Americans, i.e., buying too much and saving too little, as the cause of the growing imbalances that have plagued the international economy for almost a decade. Wolf offers a different and more sophisticated view. In his opinion, "deliberate policies adopted by countries burned by the emerging market crisis, both as victims and as onlookers" are just as responsible. In particular, China's leaders, observing the economic catastrophes that befell Thailand, Indonesia, Russia, and South Korea in the late 1990s, acted to make sure their country never had to turn to the IMF or other international financial institutions for help. China achieved this goal by encouraging saving, particularly at the corporate level. The consequence was a huge surplus on the current account. Since China's surpluses must be offset by deficits in other countries, the United States was forced to become the "borrower of last resort."

Wolf also offers several important policy recommendations for resolving the economic problem. His most important message, though, is that blame for the situation must be assigned equally. In that light, Treasury Secretary designate Timothy Geithner's recent accusation regarding China manipulating its currency becomes much more understandable.

Fixing Global Finance is masterfully written. It should be read carefully by every individual with an interest in what caused the current economic collapse. While Wolf does not address some aspects of the financial meltdown, such as the auto industry's failure, he does identify the important underlying causes. Without a clear understanding of these causes, those now seeking to fix the world's financial ills will certainly fail.

Posted by Kim Pederson for Dr. Philip K. Verleger, Jr., President, PKVerleger LLC, and David E. Mitchell/EnCana Professor in Management at the Haskayne School of Business, University of Calgary
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on October 20, 2009
Most books on the mechanics of financial crisis have taken a focus on either the Minsky type instability that was building up from the securitization business or the micro level greed that many percieve as the foundation for the housing bubble and subsequent collapse. This book tackles a different issue, primarily global finance and balance of trade. The financing of that trade and the embedded "reserve value" of currencies and how they can deviate from their purchasing power.

As a subject most people read about the topics Martin Wolf describes either from a either defending or dismissing the value of the dollar. The subject Mr Wolf tackles is extremely important, and very open ended in terms of perspectives as well as solutions. And the currency volatility that has been witnessed (in terms of aggregate high/low moves) has been strong evidence that global finance is not nearly as stable as it ought to be under exchange regimes in which agents act under purchasing power or balance of trade perspectives studied by economists.

Most of the "problems" and crises that Wolf describes originate from the fact that capital and in particular the sentiment that drives the capital flows can move faster and more violently than it ever should in terms of underyling economics when uncertainty (from capital loss perspective) spikes. In particular the stability of reserve currencies can impact and lower cost of funding relative to pure return on capital maximization (manifestation of US deficits despite low economic growth) and beg the question of what is the steady state for these dynamics? In a sense wolf shows examples of the "madness of crowds" that can take over cross border capital flows instead of the "wisdom of crowds" that most economics presumes.

There arent solutions to this problem nor do we even have much predictive power (at all) of where the capital flows will go or when- there are some handwavy type arguments about only ever funding local long term project with local currency and thus the need for local bond market depth (which would help but i think unrealistic as an endgame). This book does highlight an area of research that needs more work on both, how should one match their dependency on foreign capital and the benefits of open markets, with the volatility that it can create in periods of hightened fear and uncertainty, and what the steady state of the lower long run reserve cost of capital will be (for say the US). I doubt there exist systematic solutions, but we can undoubtedly do better than we have in the past. This book gives a good starting point to understand the risks and rewards of global open market finance, with a highlight on the risks of course.
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on February 12, 2009
Fixing Global Finance (Forum on Constructive Capitalism)

The book is quite orthodox in its viewpoint and not really very original (which for a famous english author is at least unexpected.)
It dwells in the well known problem of trade and current account deficits and surpluses (no doubt the real culprit in this and a few other previous crisis) but in a quite boring manner not always totally uninspiring.
There is an internal contradiction between the "justification" of big current account deficits in the richest countries and the search for a model that allows flows into emerging economies. It seems to me quite obvious that, basically, the latter countries suffer from the former ones wasteful ways and not the other way round as the author states.

Guillermo Visedo
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