Fixing Global Finance

Title Fixing Global Finance

Author Martin Wolf

Publisher Johns Hopkins University Press

Year 2008

Pages 230 pp.

ISBN 801890489

Price $24.95

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The current financial crisis poses a fundamental challenge to globalization and to its many analysts. All are now considering what the recent meltdown means -- the euphoric globalizers, few of whom are left; the tragic globalizers, who see the benefits of interdependence but worry about a great crash ahead; the managerial globalizers, who would like a better way of controlling the process; the critical globalizers, who are pushing for radical reform; and, of course, the antiglobalizers. Which global institutions might manage the international economy, and how? they all wonder. European leaders, for example, have called for a new Bretton Woods Conference to reconsider the architecture of the international financial and trading systems.

What kind of crisis is this, and what are its likely implications? Some crises are cathartic and push policymakers to take corrective measures; others, like the Great Depression, are radically destructive. Over recent decades, there have been blowouts at the financial center and storms at the periphery. After the meltdown in Latin America in the 1980s came a decade of stock-market and housing booms in the United States that eventually went bust. The Asian financial crisis of 1997-98 was also followed by a run on U.S. assets, causing a bubble (and the dot-com boom) that then burst. Is the latest financial collapse a first step on the road to a profound backlash against globalization? A decade ago, after the Asian financial crisis, Washington and various international financial institutions held up the U.S. system as a model to Asian governments. Today, it is Asia, especially China, that may be entitled to give Americans a lecture.

MASSIVE FAILURES

Martin Wolf, the Financial Times' chief economics commentator, has been a persistently insightful analyst. He has not forecast that financial globalization will necessarily end in disaster, but he has warned of its dangers and tried to address its shortfalls. Most recently, he has done so in Fixing Global Finance, an extremely helpful guide to the origins of today's problems and to possible solutions.

The book was completed before the financial turmoil hit this past fall but was released in its midst, and in some respects this awkward timing makes for peculiar reading. Wolf seems to have been offering an eloquent defense of financial globalization even as it was being execrated -- not only by the usual church leaders and moralists, the French president, and the German finance minister but also by the candidates in the U.S. presidential election, who were calling for less greed from investors and more regulation by the state. Mostly, however, the book's timing is an advantage. Written before the crisis, it is unhindered by minutiae about the crescendo of ad hoc measures that several governments took throughout the fall: injecting liquidity, purchasing toxic assets, capitalizing banks, and, finally, nationalizing entire banking systems.

Fixing Global Finance begins by surveying the achievements of finance-driven economic integration over the past two decades and the vulnerabilities caused by the system's periodic crises. In a previous book, Why Globalization Works, Wolf devoted a great deal of attention to the benefits of globalization. He argued then that it was "on balance highly desirable" and that it reduced poverty, enhanced prosperity, and promoted peace and democracy. There has been no fundamental change in his main argument. In this new work, Wolf expertly relays the debates that followed the Asian financial crisis of 1997-98 and the extraordinary ballooning of the U.S. current account deficit in the first years of this century -- debates that asked whether the global imbalances that had prompted these crises were extraordinary threats or permanent features of the world economy. For Wolf, these imbalances are extraordinary, and it is they, rather than globalization itself, that threaten the stability of both mature and emerging markets.

In a move that may seem odd today, given the current talk about the end of capitalism, Wolf's book casts the American model of financial liberalization as a hero and Chinese mercantilism as a villain. Wolf argues, for instance, that China's "inordinately mercantilist currency policies" have caused dangerous imbalances. In order to maintain its exports' competitiveness on the world market and keep a vast (and potentially restive) work force occupied, Beijing prevented the Chinese currency from appreciating against the dollar and thus from driving up the price of China's exports. The result was a vast trade surplus. A byproduct, largely unintended, was the piling up of reserves of U.S. dollars, which Beijing then placed mostly in U.S. government securities. (It also invested in quasi-state institutions, such as Fannie Mae and Freddie Mac, thereby indirectly enabling their recklessly aggressive lending.) This is Wolf's international spin on Alaskan Governor Sarah Palin's explanation for the crisis -- "Darn right, it was the predatory lenders" -- only his predators are the Chinese.

As it happens, Beijing's decisions have also turned out to be more of a mixed blessing for China than is generally understood. Since 2000, Chinese assets abroad have earned very poor returns -- and with the depreciation of the dollar, by some measures they have even performed negatively. As Wolf points out, because the U.S. government was -- as it still is -- at liberty to print as many dollar bills as it wanted, it could always in effect expropriate assets denominated in its currency. The rapidity of U.S. monetary expansion in the era of Federal Reserve Chair Alan Greenspan made this more than a theoretical risk. China, or rather its citizens, paid a high price for Beijing's mercantilism.