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Fixing Global Finance (Forum on Constructive Capitalism) Hardcover – September 23, 2008
"Warlight" by Michael Ondaatje
A dramatic coming-of-age story set in the decade after World War II, "Warlight" is the mesmerizing new novel from the best-selling author of "The English Patient." Learn more
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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.
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
"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)
"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)
"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)
"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)
"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)
"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)
"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)
"Give the world's current economic crisis, Wolf's book is timely."(Choice)
"Fixing Global Finance marks a turning point in his worldview... offers important pointers to the way ahead."(Robert Skidelsky New York Review of Books)
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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?
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.
I ordered, and received the Kindle version of this book, read chapter 1, was going to continue reading today, and had an overlaying message on my screen that this book was not available due to some acronym protection status (PDR?)and would have to order the Kindle version. Yikes! I had ordered the Kindle version, had read a chapter, and then the notice appeared. Then, within seconds, the book selection was gone from my Kindle!! Ideas? Thanks, Michael
Most recent customer reviews
This book desperately needed an editor and an outline.Read more