Reviewed by Kirsten Wandschneider (Occidental College)
Published on H-Diplo (August, 2009)
Commissioned by Christopher L. Ball
Analyzing Global Finance
Martin Wolf’s book Fixing Global Finance provides an excellent description of international financial relations in the recent period. The title is slightly misleading, since the book is not so much a prescription for fixing global finance, but a careful account of the emergence of many of the current problems. Historians, especially, will appreciate Wolf’s careful description of the 2007 sub-prime housing crisis in the United States, within the context of other financial crises in the post-World War II era. For Wolf, the recent experience in the United States is a logical consequence of international financial developments during the 1990s. The instabilities and recurrent crises of the international financial system encouraged some emerging market countries, especially in Asia, to run large current account surpluses and accumulate enormous dollar reserves. Hence, the United States was flush with international credit and could afford to run up large current account deficits. This perspective on the present malaise then shapes Wolf’s recommendation for the future: focus on rebalancing the international financial system.
In chapters 1 and 2, Wolf lays out the key elements of the current financial crisis, and discusses the risks and benefits of financial globalization and government (de)regulation of financial markets. Wolf is a strong defender of financial globalization, but not oblivious to its risks and overall provides a balanced perspective.
A particular strength is the middle part of the book (chapters 3, 4, and 5) in which Wolf builds his argument that the experience of financial crises in the 1990s stimulated a pattern of over-saving in many Asian countries. All three chapters reflect Wolf’s careful reading of the current academic debates and recent publications. Wolf also uses graphs and illustrations very effectively to convey the recent development of these financial imbalances and the magnitude of some of these changes to his readers. Chapter 3 describes the history of financial crises in the postwar era, while chapter 4 highlights the development and size of the current imbalances. Here Wolf succeeds in the extraordinary task of explaining the international balance-of-payments relationships, which are often hard to grasp even for trained economists, to the lay reader. Chapter 5 then carefully analyzes the different approaches for evaluating the sustainability of the U.S. current account deficit. Wolf concludes that while the trends in these external imbalances may theoretically be sustainable, they may not be desirable, which sets the stage for his recommendations in the last part of the book (chapters 6, 7, and 8).
These last chapters describe the necessary adjustment processes that would need to take place domestically and internationally to arrive at a different international financial regime. This last part of the book is probably its weakest, but one should recognize that it must have been the most difficult to write. At the time of writing in the summer of 2007 the current financial crisis was barely starting to unfold, and its size and severity were forecast by only a few. So Wolf’s recommendations for fixing global finance feel lukewarm and too small to effect the drastic changes that are necessary in today’s environment. It is obvious by now that the Chinese government has recognized some of the risks of its extensive dollar holdings, and a continuation of the current trends seems unlikely. Wolf does not question the key pillars of the international financial architecture, such as competition between key currencies and flexible exchange rates. Nor does he consider the political willingness of the key players to commit to credible change. His recommendations rely on the emerging market countries that have to expand their consumption and start running current account deficits to reverse the current trends. To enable this change, the international system needs to be stable enough for emerging market economies to feel comfortable with lowering their reserves and maybe even reverting to net importers of capital. Wolf also argues for deepening domestic financial markets in emerging market economies and recommends reforms of the International Monetary Fund to turn the fund into a more effective financial regulator.
All in all, the book is an excellent read, maybe not as a plan for how to fix global finance, but as an analysis of how we reached the current situation and an exposition of the severity of the issues at hand.
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Kirsten Wandschneider. Review of Wolf, Martin, Fixing Global Finance.
H-Diplo, H-Net Reviews.
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