The World Is Curved:
Dangers to the Global Economy
David M. Smick
Portfolio, 272 pp., $26.95
Feel free to disagree, but for my
money the best anecdote in this entertaining and informative guide to the
international economy comes near the end, when the author likens the United
States of America to an obese Italian woman named Maria.
Let me explain. The author, David
Smick, is a well-traveled, well-connected financial consultant who has
journeyed to Rome, among other places. It was in the Eternal City in 1989,
Smick writes, that he dined with "an important strategic Italian financial
adviser"--or ISIFA for short--and "at least two dozen" other
people, including the ISIFA's wife, Maria. Maria was a homely bambina.
Smick tells us that she "was carrying at least an extra eighty or ninety
pounds." Also--and this is important--she didn't speak English.
Late in the evening, after many
glasses of wine, the ISIFA rose to deliver a toast. Maria, gazing upon her
successful husband from the far end of the table, beamed with pride. What
happened next was, well, horrible:
Our host, her husband, continued [in
English]: 'And now we must toast Maria, the most beautiful flower in the
desert.' Maria beamed more upon hearing her name, but the guest sitting next to
me, an Italian investment banker, whispered, 'Oh boy, here it comes,' as if he
had witnessed on other occasions what was about to take place. 'To Maria,' (she
beamed some more), the host said again as everyone raised his glass, 'my wife,
my rare gem. To Maria THE PIG!'
Smick was aghast. And yet the ISIFA
kept calling Maria a pig, and Maria kept smiling, as she had absolutely no idea
what her cruel husband was saying. Eventually, Smick continues, the
"bizarre, perhaps even offensive," episode concluded. But he took
from it a lesson. It was not that rich guys can be--and I mean this in the
nicest possible way--insufferable little jerks; Smick probably knew that
already. The lesson he drew was that "Maria is America--overloaded with
debt, self-doubt, and self-absorption--and, more important, unable to
communicate its message to the world." The United States, as they say, has
And what issues! America's twin
budget and current account deficits (the government spends more than it takes
in, and the value of the goods coming in to the country is more than the value
of the goods going out); the rising price of oil; the weakening dollar; the
mortgage and credit crises; rising protectionist sentiments--the list goes on.
Smick has a knack for explaining these economic problems in everyday language.
His is a friendly authorial presence. The book reads like a pleasant
conversation at a cocktail party. The topic of the conversation--what's going
on outside the party--is not so pleasant, however. Not pleasant at all.
Actually, it's frightening.
The fundamental problem is simple.
What we call globalization--free trade, international capital flows, relatively
pro-market public policies worldwide--has led to unprecedented prosperity. But
the engine of globalization is an international banking and financial system
that is subject to frequent turbulence. Fortunes rise and fall overnight. Jobs
appear and vanish with astonishing speed. The very hint that authorities lack
confidence in the system can cause a panic. No one is entirely in control. And
that means no one is entirely accountable.
"Today's world economy,"
Smick writes, "bears a striking resemblance to the integrated markets and
overwhelming prosperity of the period from 1870 to 1914." Look how that turned
The World Is Curved is a discursive book, ranging from Tokyo to Martha's
Vineyard, from European Central banker Jean-Claude Trichet to the decidedly
non-European New York senator Charles Schumer. The attentive reader will
quickly grasp two key themes. The first is that the so-called information
economy is imbued with ignorance. A lack of transparency rules. "[I]n the
new global economy," Smick writes, "this crazy ocean of global
liquidity has not only increased the number of unknowns but also re-arranged
their relationships and relative importance." What you don't know really
can hurt you.
The "Great Credit Crisis of
2007-2008" is a case in point. When real estate prices tanked in 2006, the
world's most prestigious investment banks became saddled with bad debt from the
subprime mortgages which lenders had issued in the belief that anyone--anyone--could
own a home, and that home values would never fall. (Oops!) During the boom
years, pools of subprime mortgages had been "securitized" or
auctioned off, contaminating the financial system. But the invisible right hand
didn't know what the invisible left hand was doing. So the problem now is that
the masters of the universe are stumped: Exactly how much bad debt is there?
Where is it? What does it cost? Wall Street doesn't have a clue.
And it gets worse. If everyone is
less knowledgeable than was previously thought, they are also less powerful.
This is Smick's second theme. Treasury Secretary Henry Paulson has wielded
considerable power during the crisis: arranging for the sale of one investment
bank, allowing another to collapse, nationalizing a major insurer, taking over
Fannie Mae and Freddie Mac, preparing a massive bailout plan that would give him
ever more discretion than he already possesses.
Yet Smick warns us that even Paulson
can only do so much:
The size of the financial markets,
relative to the governments, has become so monstrously huge, there is no other
means of maintaining stability than to establish a psychology of confidence.
The governments themselves cannot by edict restore order. They can only project
to the markets a sense that they know what they're doing.
That is what Paulson is trying to
As the government's power recedes,
new forces emerge. Global hedge funds, oil-producing nations, and sovereign
wealth funds (pools of capital associated with and often controlled by foreign
governments) wield considerable leverage over the international markets. These
new actors do not necessarily have the interests of the American citizen in
mind. Nor do the individuals empowered by the market or by governments who
increasingly make decisions affecting the livelihoods of hundreds of millions
Smick writes that the "industrialized
world has surrendered control of its financial system to a tiny group of five
thousand or so technical market specialists spread throughout investment banks,
hedge funds, and other financial institutions." And when that tiny group
of specialists truly messed things up, the future of the global economy was
placed in the hands of two individuals--Paulson and Fed Chairman Ben
Bernanke--whom no one had elected and whose decisions often were made outside
any democratic mechanism. Nationalize AIG? Turn Fannie and Freddie into
conservatorships? Congress passed no legislation on these matters. Paulson
decided. And it was done.
David Smick is right to point out
globalization's significant achievements, the value of entrepreneurial
risk-taking, and the risk that "class-warfare" and protectionism pose
to global prosperity. His timely book risks being overtaken by events, however.
Events which suggest that our free-market system is not as free, and our
democracy not as democratic, as we like to think.