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David M. Smick


Subtitle: "Hidden Dangers to the Global Economy; The Mortgage Crisis was only the Beginning - Penguin Group NY., 2008, index, bibliography. .


Reviewer Comment - The title is a response to Thomas Friedman's book The World Is Flat: A brief History of the Twenty-first Century. The author's central theme is that we are now in a truly global economy - a multinational economy created by globalization. The book is the opposite of Bailout Nation and in another way of In FED we trust.The author's thesis is that the globalization of the world economy during past 25-30 years is responsible for the massive gains in wealth all around - for the lifting out of poverty of billions of people, but also has created new problems. And his 'hidden dangers' is that he sees governments likely to revert to anti-globalization through currency controls, tariffs, subsidies and protectionism in general. This is what James Rickards terms 'Currency War' in his book of that title.
Apparently the author's background and claim for knowledge is a result of being in personal contact with practically every official and unofficial leader in international finance, an experience he never is shy to highlight by 'dropping' names and more names. Some of his stories tend to support a theory or conclusion but it does get tedious to read about one breakfast, luncheon or dinner after another.


Prologue - Here he explains why he undertook the task of informing the readers of his disagreement with Tom Friedman's book - The World is Flat: A brief History of the Twenty-First century. It seems that Friedman's book does not include the 'financial side of the story.' That is about globalization. Smick continues, "nothing about the world's current political, economic, and financial predicament is new. Indeed, today's world economy bears a striking resemblance to the integrated markets and overwhelming prosperity of the period from 1870 to 1914". Indeed, and that was an era of deflation and stable monetary values. Smick warns that 'policy makers' today could 'reverse the wealth creation' that Smick in the book credits with globalization of financial markets.


Chapter 1` - The End of the World - The chapter is about the Financial crisis of 2007-2008 and the panicked reaction of government and financial leaders. It is about the how and why global financial markets froze and liquidity evaporated. He notes, "In essence, the survival of the world financial system depends on an elaborate global game of confidence." And, "Liquidity, therefore, to a significant degree depends on the market's confidence that policymakers in the near future won't make a series of huge blunders." There is a lack of confidence by the market that the financial system can "truly measure risk." Well, Nassim Talib shows it does not. Smick again, "For today's policymakers, financial market panics represent the ultimate enigma." He continues with discussion of the 1987 crash - more on that later. Then, "What is clear is that financial instability is here to stay." And, "The Great Credit Crisis of 2007-2008 is the ultimate case in point." His point is that American 'policymakers' can upset the entire world ocean of liquidity by foolish actions that will 'cause the global wealth machine to shut down." Smick is a big fan of globalization - and especially financial globalization that has created this 'ocean of liquidity' - unprecedented quantities of cash floating around, on which the wealth of the world rests. He cites various U. S. politicians who are 'anti-globalization." Further, "The worrisome question is whether politicians realize how little they can control this global system with legislative or regulatory tinkering without producing unintended negative consequences." ".... the global economy is becoming increasingly beyond the positive control of the governments." "In this new world, governments are struggling for relevance." The chapter continues on this theme.


Chapter 2 - A Dangerous Ocean of Money - The chapter begins with one of Smick's personal stories, an interview with Lee Kuan Yew in Singapore soon after the 1987 crash. This gives him the opportunity to recount his conversation in which he pointed out that he had just come from Tokyo where he had met with 'all' the top financial players and had learned they were planning on major investments in the U. S. which would revive the market. It was an example of Smick's theme that the world has had a fundamental change and the financial system is global. The interest in this story is that I have not seen any other accounts that mention the Japanese as major rescuers - Greenspan typically gets all the credit. He continues, "Conventional wisdom holds that in the last quarter-century, the capital of the rich alone rejuvenated the U. S. economy- the so-called trickle-down theory of prosperity." Smick claims the reality is that world wide globalization and reduction of financial restrictions were responsible. - Liberalized capital flows were the cause. He continues to describe this 'huge global pool of savings that can flow around the world in a second." And, "The critical point is this: Whether the U. S. financial system avoids catastrophe depends on more than merely correcting financial imbalances, as important as that goal remains."


Chapter 3 - Entrepreneurs in a World of Private Equity - This chapter begins with Smick's visit to Paul Tudor Jones and his subsequent invitation to Jones' huge hunting preserve in Maryland. Smick's theme is the role of hedge fund and private equity firms in the entrepreneurial explosion. This is critical because banks are too conservative - they "find entrepreneurial capitalism disconcerting." He provides pages and pages of examples. Moreover, the 'international race' is beyond national control.


Chapter 4 - Tony Soprano Rides the Chinese Dragon - The chapter begins with Smick meeting Herman Kahn who was giving a lecture in the 1970's in which he predicted that the country which would 'dominate' the world would be France." So much for predictions. The chapter is a detailed examination of China from the financial point of view. Smick is dubious. "When the Chinese bubble bursts (and bubbles always do, in one fashion or another), China could instantly become a deflationary threat to the world." He devotes pages to analysis showing that trouble is coming. "If you are not convinced of the seriousness of the risk within the Chinese financial system, a risk heightened by the recent rise in inflation, take a close look at the prospectus of any of the Chinese banks that have recently gone public."


Chapter 5 - Japanese Housewives Take the Commanding Heights - This chapter describes all the typical thought about how bad off Japan is due to is decade of 'stagnation'. Yet, I don't see the problem. He notes right off, "Japan is sitting on the world's largest pool of private investable savings." Great, I say - they are looking ahead to their demographic facts of life and a retirement that will need all the savings they can accumulate. He continues, "The so-called low-interest rate 'yen carry trade" has financed economic expansion worldwide (because Japanese interest rates are far lower than the rates throughout the rest of the industrialized world...." Great again, the Japanese will be able to return their capital with profit when they need it. But what I do not understand is what the problem for the Japanese is - they clearly have everything they want and could buy more, but know they must save for the future. The criticism of Japan is based on the false Keynesian theory that everyone must CONSUME and not worry about the future. Smick follows Keynes, "The answer is that Japan is the perfect object lesson for how NOT to run things in the new global economy," Well, so what I say, if Japan is not the world leader. Smick notes that Japanese corporations have benefited from policy and so have the housewives - whose methods he uses for the chapter title. He describes their investment methods in detail. Yes, as Smick notes, Japan has been in a deflationary spiral. Great, I say, the best periods in history have been deflationary. Now, amazingly, he claims that the Japanese 'problem' was created by the 'weak yen' yet right now everyone is thrilled that the new Japanese prime minister has instituted a policy to 'weaken' the yen. Much of the chapter is devoted to Smick's story about hosting the Japanese Finance Minister to a day cruise on Chesapeake Bay.


Chapter 6 - Nothing Stays the Same: The 1992 Sterling Crisis - In this we get the inside story of the actual role George Soros played in bringing down the British pound. - Clue, Germany played a role also.


Chapter 7 - The Incredible Shrinking Central Banks - Smick begins with more name dropping - "During my career, I have known most of the world's major central bankers. (names follow). This is a lead into his pitch (no doubt correct) that the central banks have 'limitations' and worse. He summarizes at the start. "In this chapter, I will show how, when financial panics arrive on their doorstep, central banks today lack the same effective options to respond that they enjoyed even a few years ago." And he fulfills his prediction. Naturally, this involves Smick's meetings with Chairman Greenspan.


Chapter 8 - Class Warfare and the Politics of Globalization - as noted above, Smick is a great fan of financial globalization. But he does also note, "Today's global ocean of capital continually measures political risk." He credits a combination of Presidents Reagan and Clinton with being champions of globalization and liberalized financial markets. But he fears, "Both political parties in America today are quickly backing away from the pro=globalization policies championed by Bill Clinton." Yes, Smick met Reagan during preparatory meetings for the latter's presidential campaign. But, "Today's class warfare politicians are betting that American's have some deep-seated resentment toward those who are financially successful." "Washington's political elite has begun to tease financial markets with the rhetoric of class war populism." Smick takes a well deserved swipe at Warren Buffett for aiding this practice. One of Smick's recommendations is to greatly expand the size of the investor class by eliminating taxes on investments of low and middle income Americans. "American policy makers have no choice but to devise some creative means of dramatically expanding the financial capital ownership base."


Chapter 9 - Surviving and Prospering in This Age of Volatility - Smick writes, "Today the financial world is a very dangerous place and our leaders need to open their eyes." He describes many actions they must undertake. He begins again with the collapse of Long Term Capital management in 1998. Then he digs deeper into the Great Credit Crisis of 2007=2008. No one comes off looking at all good. The bankers were greedy, on purpose concealed there expanding risks. The regulators and credit rating agencies were asleep. The government politicians also failed to understand or act in time. Everyone panicked.


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