| Fixing Global Finance: How to Curb Financial Crises in the 21st Century |
| Martin Wolf, Yale University Press, 2009, 224 pages, £18.99. |
| Any list of the causes of the financial crisis and global recession will likely include the US housing bubble, a broader credit bubble, lax lending and regulation, and excessively low interest rates. Martin Wolf argues that there was a deeper, underlying cause – the world savings and investment imbalances, manifested in the huge US current account deficit and matching, mostly Asian, surpluses. He is a strong believer in the view that it was Asian ‘excess savings’, holding down long-term interest rates, rather than over-expansionary Fed policy, which created the housing bubble and led to the crisis. |
| But this book, despite the title, is not really about the current crisis. Its origin was a series of lectures the author gave in 2005-6 telling the story of how emerging-market crises in the 1990s gave way to global imbalances as the US became the borrower and consumer of last resort. Although published in January 2009, it was finished in 2007 and the reader will find no mention of Bear Stearns or Lehman Brothers, no analysis of banks’ liquidity or leverage ratios and no lament about derivatives to name just a few of the issues we are confronting today. |
| However, it still makes fascinating reading partly because the writing is so good and the accompanying charts are excellent, but also because the reader can compare Wolf’s pre-crisis thinking to the way the story has unfolded. On that score, it is clear that the US crisis was not triggered in either of the ways that emerging-country crises typically arise. It did not occur because the US current account deficit could no longer be financed, as was the case in Latin America in 1982 or Russia in 1998, nor did it arise because of a collapse in the currency, like Chile in 1981 or Asia in 1997. Instead it bears more resemblance to the Japanese crisis in the 1990s, with the bursting of a bubble leading to a financial crisis and de-leveraging. |
| Over the last year the global imbalances have shrunk, but this is mainly a result of the recession and particularly the unfolding vicious inventory correction. There is a danger that the imbalances will open up again as we emerge from global recession, though this time the counterpart to a US current account deficit looks set to be an enormous budget deficit rather than a private-sector borrowing binge. |
Wolf has some good chapters on what the world needs to do to reduce imbalances. There is a plea for more domestic spending in the surplus countries. He also emphasizes the fragility of the financial system, as repeatedly demonstrated in emerging countries but now in the major countries too. He offers a blueprint to help emerging countries stay clear of crises in future which includes suggestions such as creating “a sound financial system, which entails fiscal and monetary discipline and elimination of severe distortions in the financial system”. It is ironic that this recommendation, as well as many of the others in his list, now sounds like a good plan for the US and UK too.
John Calverley |
| John Calverley |
| Head of Research North America, Standard Chartered Bank |
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