The global credit crunch that erupted last August turned out to be only the foretaste of a greater crisis, one that has thrown central bankers and policymakers into a frenzy as they scrap for fixes that will not come quickly or easily. Credit markets have all but frozen up. Banks and insurers have failed or needed government rescues. A crisis of confidence is roiling a financial architecture that thrived on risk.
Before the crisis went full-tilt this summer, few people saw disaster in their crystal balls. David M. Smick, however, was one of them, as he shows in his clearheaded book The World Is Curved, published in September by Penguin. Mr Smick, a consultant and founder of a macroeconomics magazine, The International Economy, lays out how a smallish cadre of bankers and investment pros devised structures that diced up, securitised and obscured underlying risks, a disappearing act that engendered panic and losses when those hidden risks blew up in their faces. Mr Smick explains how banks moved risk off their books so they could lend more money and take on more risk, increasing their profits but also upping the chances of a meltdown.
His central argument is that while globalisation makes sense when it comes to goods and services - the case Thomas Friedman makes in The World Is Flat - the same notion can't apply to financial markets, which are "curved." The free flow of capital between countries is good, Mr Smick argues, but because of the special perils finance, banks and investment companies must be surgically regulated to prevent crises like the one we are all now faced with. When money moves as fast as it does these days economies can get twisted and skewed in an instant. In such an environment, risk engineering and toxic assets can infect the whole system. But our main risk now, Mr Smick says, is that governments will over-regulate in response to the excesses that produced the crisis. That, in turn, could choke off the wealth-generation machine that globalised finance promises. We can only hope politicians and regulators listen to advice like this than to those who advocate protectionism and a full-on restructuring of the financial system. Publisher: Wiley, 2007 Ratings Explained ★★★★★Excellent ★★★★Very good ★★★Good ★★Poor ★Dire email@example.com