Fixing Global Finance
By Martin Wolf
Johns Hopkins University Press, 2008
At the present time Martin Wolf is probably the best economics journalist in the world—his ability to focus on and sometimes anticipate global finance issues and to provide understandable analysis is unparalleled. His last book, Fixing Global Finance, represents a little bit of both—anticipation of the global risk due to growing trade and capital imbalances (the book was originally researched in 2007 before the crisis exploded in its virulence) and comprehensive analysis.
In the book, Wolf lays out the sequence of events of this new globalization process, which started approximately three decades ago. After the abandonment of the Bretton Woods agreement, the shift to a multicurrency system ushered in a period of instability, as all the players involved started to adjust to the new rules. The mix of freely floating currencies, partially floating currencies, and fully pegged currencies provided a backdrop for increasing imbalances and instability.
One of the leading elements of this new crisis is the large deficit of current accounts in the United States, matched by large surpluses by most emerging markets (China especially) and commodity producing countries. The failure of the system to adjust is, in Wolf’s view, the major issue in the global financial framework.
Wolf links the failures of the system to the following concerns:
- the failure to understand properly the inherent risks of all liberalized financial markets,
- the failure to appreciate cross-border finance,
- the failure of indebted countries to understand the risks inherent in borrowing in foreign currencies (a major problem in the 1998 crisis, which led to radically changed behavior by many emerging countries and to artificially high current-account surpluses),
- the failure of creditors and debtors to understand currency exchange risk,
- the failure to modernize global institutions in time.
Throughout the book, Wolf provides a significant amount of data in the form of charts and tables. While this information may seem to disrupt the reading experience, it is absolutely necessary to fully grasp the issues discussed. The data also represent excellent reference material for additional work.
The book ends with some general recommendations on how to stabilize global finance. Some of Wolf’s suggestions work toward creating a system that allows promising emerging countries to import capital, with some degree of safety. That may end countries’ reliance on the United States as the borrower and spender of last resort.
Wolf advocates that countries running large current-account deficits should rebalance and increase domestic demand. He also advocates a reduction of the U.S. current-account deficit, but not its complete elimination. Lastly, he encourages a set of rules designed to facilitate the following:
- inflows of foreign direct investments and portfolio equity,
- borrowing in domestic currency,
- monitoring and possibly regulating the state of national balance sheets.
Since the publishing of this work, international finance suffered a near-death experience, and the situation has been in constant flux. Wolf has been advocating additional ideas in his columns in the Financial Times, such as the concept of narrow banking, an issue recently picked up by the current administration. I believe this issue will be fundamental to the debate for quite some time, with potentially significant ramifications for all.