Customer Reviews

The World Is Curved: Hidden Dangers to the Global Economy

5 star:		(17)
4 star:		(11)
3 star:		(6)
2 star:		(5)
1 star:		(9)

 

 

Smick uses a fascinating series of facts and stories to paint a picture of the world-to-be that is frightening, enlightening, awe-inspiring and hopeful (for the person that knows how to exploit the opporunities). I haven't read a book that changed my world view this much since How to Measure Anything: Finding the Value of "Intangibles" in Business by Doug Hubbard (which Smick could probably have used on a couple of points in his book).

Smick takes, I think, a more realistic view of the world than Friedman's The World Is Flat 3.0: A Brief History of the Twenty-first Century. Where Friedman optimistically sees a move toward an equalibrium of an "even playing field" between all of the world's economic participants, Smick sees something less even - and not entirely in the favor of the developed West. Smick sees market uncertainties, the mortgage crisis, and consumer debt as evidence of a trend toward increasing uncertainties. China is the new economic giant, but lends itself to much less predictability than the relatively solid advances of the western world in the last quarter century.

I have to wonder if Smick makes the "narrative fallacy" as explained in Taleb's The Black Swan: The Impact of the Highly Improbable or his earlier Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. Still, Smick seems to make a convincing case, even if at times anecdotal.

Smick discusses the possibility of a Chinese financial bubble alongside the details of US monetary policy. Utterly unnerving and engaging, it will should eclipse "Flat" as the "must read" for long-term thinkers.

This extremely well-written book describes the current financial problems of globalization. It is easy to follow, easy to understand, and eliminates jargon. It's a great example of communication out of the Frank Lutz 'words that work' school.

The problems of globalization, as the book described' are critical as a major period of entrepreneurial prosperity may be coming to an end. The availability of `oceans of money' started with a liberalized program in the USA during the early 1980's and later elsewhere with the rejuvenation of pension funds and other financial instruments. Capitalization/reserve requirements of banks were reduced, capital gains taxes were cut and a variety of new investment vehicles freed up large sources of capital. Smaller businesses were funded as the need to invest capital continued to grow and consequently, new wealth, new jobs and prosperity resulted. Moreover, many countries established sovereign funds that needed to be invested too. Rapid machine computation facilitated an explosion of capital transfer and global investment. Because the USA was perceived as the safest haven with the highest level of global transparency, it benefited from these changes. Moreover, the USA with labor market flexibility, higher education, a benign political environment, innovative strategies and quality of corporate management is considered the prime country in which global funds invest. However, the USA is not an island, but is interconnected and therefore subject to global economic events. But is it fading?

The downside was securitization, a process of spreading out investment into multiple income streams to reduce risks. Securitization also involves arcane practices that are difficult for most policy makers, bankers and financial institutions to fully understand. In the process are no longer tied to the risk of the borrower, making capital easier to lend. Even riskier is the overlay of lack of transparency in many countries, including China. Eventually, underpriced and hidden risk will lead to major market corrections, as we have seen recently. Moreover, global forces and lower international trade barriers have diminished the role of government to influence their own economies.

We now see increasing political risk in the USA that may kill the goose that laid the golden egg. The rising tendency of anti-global trade pacts, envy, class warfare, and populism, are placing the US at economic risk. American politicians, according to Smick, have only one option and that is to make the American economy the most attractive destination for global investment on a LONG-TERM basis.

The wild card in all of this is China and I cannot detail the intricacies in Smick's chapter. China's approach includes widespread investment for strategic advantage, and a lack of transparency. Also it is involved in widespread commodity stockpiling. There, foreign investment is controlled. Chinese banking does not understand credit risks and are viewed instead as social and political instruments. In short, their economic system is extremely unstable and a bursting of its bubble will have worldwide cascading consequences

The chapter on Japan's economic activities is well worth reading, as is the chapter on the sterling crisis of 1992.

But perhaps the biggest change during the past 25 years is the diminishing role of central banks. As private entrepreneurs and government sovereign funds accumulate large amounts of cash, the role of central banks has diminished. With diminished governmental roles, people's vulnerabilities are increasing and one of the consequences is political pandering in the form of abetting class warfare,. We see it today. That is the underlying cause of the current backing-off by congressional democrats from free trade. It is a disaster in the making
The closing chapter on "Surviving and prospering in this age of volatility" would require a long review in itself. It is not only worth reading, but needs to be reread to fully comprehend the economic mess we are in today and possible solutions out of that mess.

Other reviewers have suggested both major presidential candidates should read this book. I can only concur. In fact, everyone needs to read this book to navigate the choppy waters ahead.

Overall I enjoy the many interesting discussions in the book on macro-economics, international finance and issues on public policy decision making. But the materials presented by the author often lack clear direction. You will find the author presents a large number of ideas without giving a clear conclusion or summary at the end of the chapters. After I read through each chapter, although interesting, I had a sense of not knowing what exactly I just learnt. May be this is the nature of macro-economic issues, which are often complex and the various factors affecting the outcomes can have different effects if observe / apply at different times. But I still think the author can do a better job of summarizing his ideas and present his materials in a more organized way.

Excellent overview of the current (29 Sept 2008) macroevents and the how we got here. Fascinating for me as I remember the 70's gas lines and lived in DC in the 80's -- Mr. Smick, clearly walked the halls of power and understand how we got into this mess. Note - he seems to be quite balanced in that both Dem's and Republicans are at fault. He gives Bill Clinton a lot of credit for pushing thru NAFTA, Welfare reform and cutting Capital Gains by 30% thus allowing all of us to benefit from globalization.

He also suggests that China is in a large bubble and what the impact is to us. I was there a few years ago and they and Dubai are clearly over the top (dot commish even) so it will likely get ugly for all of us when China blows.

The only disappointment I have is the last chapter "Surviving and Prospering in This Age of Volatility". This is about how to govern better not what you can do in your personal investments. Interesting but not something I can act on, except perhaps voting.

Best quote was from Marc Leland, former US Treasury official... "Globalization is like the two institutions we know as democracy and marriage. Both institutions at times can be problematic, but the alternatives are highly unattractive" Reminds me of Churchill's famous quote "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."

The impact of so-called free trade agreements has been a Pandora's Box for many in the United States who have had to suffer through off-shoring and trade imbalance. Smick argues persuasively that the influx of capital from globalization has fueled a level of growth and innovation that is unprecidented and that tampering with that with protectionism or poorly conceived legislation to control complex financial instruments, such as Mortgage Backed Securities, will result in a contraction in the global economy that could be catastrophic. Americans need to understand what has been created. Given that the Chinese are consciously accumulating vast reserves that they can use as an ocean-sized war-chest to exert vast global influence, we must find a way to safely level the playing field. I did not appreciate how difficult that might be until I read this book. It is very well written and terrifying!

11/10/09 Update: In retrospect and after reading "Saving Capitalism" by Pat Chaote, this book glosses over the salient aspects of globalization and balance of trade. It's well-written, but I can no longer recommend it as more than a beginning point.

I picked up this book based on David Brook's gushing recommendation four months back. The majority of the book is mildly informative with a constant undertone (as has been mentioned in earlier reviews) of self-promotion. A similar feeling I got when I read Robert Rubin's "In Uncertain Times" a few years back.

If you're not just looking to kill time, or don't need a lot of historical background to be laid out for you; get to the meat of the issues by reading Michael Lewis' December 2008 Article "The End" and his January 4, 2009 NY Times Op-Ed "The End of the Financial World as We Know It", then go to the library and read the last chapter (9) of this book.

You'll be the wiser and have saved some money too!

I began reading The World is Curved with great hope and anticipation. The book has some good insights, but in the end I felt disappointed. Smick's basic points include:

- Global capital today flows from one investment to another in the blink of an eye, regardless of borders or culture. As a result, central banks have less control over their economies.

- Global capital exceeds the number of good investment opportunities, creating the potential for bubbles (i.e. too much debt has expanded the worlds money supply beyond what's financially healthy).

- The securitization of debt is a primary villain, because the bank that originates the mortgage suffers no consequence if the loan goes bad. (But I worked at Countrywide in the mid-1990s - they were securitizing mortgages back then and there were no problems at that time).

Smick says that the bond rating agencies and the government regulators were simply not up to the task of anticipating the problems. In reality, some Republicans belatedly questioned the lending practices that were occurring pre-meltdown, but the Democrats in power at the time denied there were problems! These same Democrats are still in power today.

Smick expresses concern that the current political trend is toward over-regulation, protectionism and class warfare, all of which will cause the global pie to shrink. And we don't want "financial executives working desperately to avoid civil suits and criminal prosecution."

In my opinion, a good share of the blame must go to Alan Greenspan who kept interest rates too low for too long. Smick does a good job of trying to protect Greenspan from criticism. I agree that Greenspan did a good job for most of his career, and multiple factors contributed to the today's meltdown, but I can't ignore his obvious role in creating this fiasco. But then again, I don't have a book with Alan Greenspan's glowing endorsement on the cover either!

Smick says the solution is to have smarter politicians, like Democrat Charles Schumer. Smick's opinion is based, in part, on Schumer inadvertently insulting a Japanese audience. If this is brilliance, then no wonder the world is in trouble.

Unlike Smick, I WANT the upcoming crop of financial execs to fear "civil suits and criminal prosecution." If the system is too complex for regulators and politicians, then the only thing that will bring prudence to the financial elite is the threat of punishment for screwing up.

Sadly, the financial policies of Bush and Obama are geared toward maintaining the status quo by further borrowing, and by giving money to the very people who got us into this mess. In the end, we'll have more bubbles and greater financial problems. I agree with Smick that too much regulation will kill the golden goose and we need to encourage entrepreneurs, but I walked away feeling that Smick, who is well connected to the world of high finance and politics, is part of the problem, rather than part of the solution.

This book will delight anyone who enjoys reading Greenspan. The first 100 pages are simplistic banal ECO001 clichés disguised by the magic of the written word as "powerful deep thinking" and highly recommended as a much safer alternative to sleeping pills for the insomniac bibliophile.

Even better, the sleeping pill has been especially designed for disciples of Greenspan, Paulson or Bush: all the financial delusion/fantasm they share are present and this will comfort the typical Wall Street reader in these troubled time (the book was released sep 4, 2008) and lead them in an (at last) comforting sleep.

Especially, when the eminent author compares China, which banks

"do not understand credit risk management, not to mention even the rudimentary rules of financial transparency"

with ...

"large American and European financial institutions" that "look like paragons of financial purity". (p. 108)

No kidding!

You can hardly be more delusional than that!

The author is remarkably candid about his ability to evaluate the global economy. When he learned on aug 10, 2007, that inter-bank loan market had seized and the stock market had dropped 3%, the author, who "confers with central bankers (such as Alan Greenspan and Ben Bernanke) and advised top Wall Street executives and investors", reasoned:

"None of this makes sense, I though. The markets had become hysterical over losses in the so-called subprime market...why a near-global market meldown and a collapse of lending simply because of some mortgage foreclosures? After all, the problem loans amounted to, at worst, $200 billiom in exposure in a global market worth hundreds of trillions"

Sorry, but any reasonably alert investor who would have read Buffett 2002 letter to investors, or listened to Nouriel Roubini (IMF 2006) would have known exactly what was going on ... months in advance!

That smart investor only had to put his money in his mattress and he would have made more money during the ensuing 1.5 year than the sum of the 4 largest investement bank and 5 biggest bank in the world COMBINED, institutions, let us remind, repleted with "genius traders", managed by CEO worth $10 millions/yr, and last, but not least, enlightened by highly paid consultant such as Mr Smick.

The author was a consultant to Greespan and Bernanke and hadn't a clue on the importance of the bursting of the housing bubble and its amplification by the derivative structure even in the month leading to it. Unbelievably frightening reality.

Before completing the book, I had read enough. It was clear that this book's return on investment (time and money wise) was already too negative to continue.

I will retun it for a full refund. I feel it would be immoral and unconscionable to financially support such writing.

ADDENDUM

One could wonder why such as book got such lavish endorsement by Greenspan, Trichet, Summers, etc.
Very simple.
The author by initiating international banking conferences acted as a middle man between a significant number of high-level financial personalities. True to form, the book contains a few sycophantic pages on each of them to the point that one could be easily led to believe that the true purpose of the book is a public relation exercice to rescue the reputation of the financial actors involved. Highly grateful, they, not surprisinly, are enthusiastically "endorsing" the book.

And surely, those people are indeed in desperate need of hagiographers:

Remember Greenspan's deep insight of the financial market? :

"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions" (Greenspan, May 2005)

Remember Trichet management at Credit Lyonnais?:

Trichet was prosecuted because as "directeur du trésor" with the complicity of others he had knowingly signed on a falsifed 1992 annual report of the nationalised Credit Lyonais which dramatically reduce its loss and therefore adroitely prevent it from becoming insolvent. He was later rewarded for his brilliant service by being named head of the French Central Bank and the entire world was waiting for him to take the helm of the European Central Bank when, very inconveniently, a stubborn prosecutor continued to press the case forward which threatened to prevent France from having its man at the helm of the ECB. In the end some others were given slap-on-the-wrist sentences and he was himself completely absolved (in 2003) by the judge (the defense being more or less that he had notified/warned the board of director), conveniently just in time to take on his new job.

The author addresses that the past quarter century of impressive economic growth prior to this subprime mess was made possible mainly due to globalization of capital and increased international trade coupled with vigorous entrepreneurship, and the almost entire world benefited from the growth. As we see the subprime debacle being unfolded with more and more severity felt day by day, development such as excessive regulations, protectionism, class warfare between the haves and the have-not, etc., the author forewarn the enormous negative consequences of potential demise of globalization, of which signs is noticed everywhere today. Such reversal must be avoided through visionary leadership in policymakers together with both private and government sectors with due care to avoid unintended bad consequences of policies.
In a nutshell, it appears to me that the book addresses the obvious in somewhat vague way with somewhat less effective presentation of structural analysis of the issue and lack of specific solutions. Although some insightful thoughts are found here and there such as the possible/potential consequences of SWFs (sovereign wealth funds) awash with foreign reserve in some countries with less democratic and transparent systems, or those of ever increasing over-capacity in manufacturing sector (e.g. steelmaking, auto, etc.) regardless of global supply-demand equation and the associated natural resources to be consumed, I could not help the impression that each chapter does not necessarily serve as effective building blocks to address the coherent theme of this book, and personal anecdotes included seem unnecessarily lengthy, overly detailed, and in some cases tautological, and of little, if not any, relevance to serve as good analogies. Plus, no single chart or table is provided in the book in spite of reference to many numbers, which can leave readers wondering whether the author's points or logic are well supported by the numbers he refers to. As mentioned in other reviews, it remains a bit of mystery to me as to why so many prominent policy makers, congressmen, economists, and investors provide advance praise for this book.

David Smick's excellent book offers an insider's view of our current financial calamity mixed with a healthy dose of economic theory. This combination makes for a book that is both a page turner and instructive.

Specifically, Mr. Smick makes several key points. These points are especially relevant given the current political tides we are experiencing in the United States:

First and foremost, he makes a very cogent and compelling argument for the importance of free trade. As opposed to more academic arguments for free trade such as those found in a macroeconomics textbook replete with supply and demand graphs, his case is made from first hand experience as an advisor to large hedge funds and proprietary trading departments of major financial institutions. Especially refreshing is his lack of bias toward one political party. Though having a belief system some might see as conservative, he credits the Clinton administration with doing an outstanding job of promoting free trade and positioning America as a country friendly to business in the modern international arena. (In fact, Mr. Smick argues persuasively that Bill Clinton was even more of a free-trader than Ronald Reagan, and that the U.S. political community, if it rejects free trade and the free market, is at risk of creating a global financial disaster.) In a time of great stress in the U.S. economy, which has led to unprecedented Government intervention, the free trade message and pro-capitalistic message is especially important and urgent.

But it is Mr. Smick's real world experince that drives all this home. He fills his book with many first hand accounts of dealing with those in the inner circles, such as Alan Greenspan and Japan's Finance Minister Hashimoto. Here is an example: He discusses how hedge fund managers earnings, which have been ridiculously prodigious, are taxed as capital gains rather than ordinary income. This amounts to a big tax break for already highly compensated individuals and sounds patently outrageous. But Mr. Smick then points out that were this tax law changed, in the flat global environment we live in, the hedge funds could with little more than a flick of a switch relocate overseas. And then the U.S. would get zero tax revenue and lose out completely.

Second, he emphasizes the importance of maintaining an environment in which the US is friendly to entreprenurial capital. He cautions against over-regulation of the financial markets, and argues that America's past success has stemmed precisely from Wall Street's cowboy like approach to risk and fast reactions to market developments. Regarding taxation, he emphasizes that during a period of fiscal imbalance, it is easy to resort to class welfare and raise taxes on the wealthy. He takes Warren Buffett to task for supporting massive task hikes conveniently after Mr. Buffett has accumulated his fortune. The danger of class warfare is that everyone loses as the US becomes less competitive as a place to attract capital and locate businesses worldwide.

Third, his concept is the world is "curved" in that one, no matter how smart or well informed, can see over the horizon. With massive oceans of global capital flowing around the world today under free market conditions, the economy becomes quite volatile and impossible to prognosticate - like the weather. This is brought home by the speed and surprise of the magnitude of the world economic disaster that recently began with a small crisis in the US subprime real estate market. And I find an additional meaning in the "world is curved" metaphor: Perhaps things are more complicated than they seem, and easy answers (like the Government bailouts and calls for increased regulation of the financial markets) may not be as clear cut as one would think.

Fourth, Mr. Smick examines several foreign countries, including Japan and China. Especially enlightening is his look at China, which he sees as a kind of totalitarian bureaucatic oligarchy, and his view of China's future, which is rather pessimistic compared to many more rosy forecasts.

I recommend this book. It throws light on the most difficult issues facing us today. It corresponds with my view that for America to prosper economically, it is necessary to make the US a competitive place for business to locate and operate. If not, America will continue to lose wealth and jobs to our global competitors.