Bullish On Books

The World is Curved

“There is nothing quite like the potential for the world economy’s coming to an end to focus the mind and shake up a quiet summer.” This is how David M Smick begins his book, “THE WORLD IS CURVED Hidden Dangers To The Global Economy.”

It is as David Brooks wrote in the New York Times, “an astonishingly prescient” book one that has garnered rave reviews from world leaders including a former president, academics, money managers and thought leaders.

Smick is a global economic policy strategist and has had the ear of many of the world’s most powerful and most successful.

It is a must-read in Washington, London, on Wall Street and yes, on Main Street since it clearly and vividly tells us how we all got into this mess, outlines what needs to be done to get out of this mess and of equal importance how to thrive while in the midst of this mess.

Smick also explains:

• “Why the churning cauldron we call China (the next great bubble to burst) represents a powerful threat to everyone’s pocketbooks”
• “How Japanese housewives have taken control of their nations savings – and why it matters to us”
• “How greed-driven bankers and investment bankers have put everyone’s pensions and 401(k)s at risk”
• “Why today’s “incredible shrinking central banks” may not be able to save us when the next crisis hits”

I recently exchanged emails with David Smick:

Your first chapter is called, "THE END OF THE WORLD" and for many people it seems like this is indeed the end of the world especially since we are in such a crisis of confidence - what needs to be done - and who needs to be taking the lead?

The first step is for our policymakers to realize the credit crisis reflects something more fundamental than a serious problem of mortgage defaults. Global investors, now on the sidelines, have declared a buyers’ strike against the sophisticated paper assets of securitization financial institutions use to measure risk. In recent years, our banks, borrowing to leverage their assets at unheard-of levels, produced mountains of financial paper instruments (called asset-backed securities) with little credible means of measuring their value. Incredibly, these paper instruments representing one of the main arteries of our financial system were insured by more dubious paper instruments. Therefore, the housing crisis was a mere trigger for a collapse of trust in paper, followed by a de-leveraging of the entire global financial system. As a result, we are experiencing the painful downward reappraisal of the value of virtually every asset in the world.

You have said our leaders need to develop a "big think" doctrine that defines American's economic and financial future in the world - can you elaborate on what would constitute a "big think" doctrine?

Our policy leaders in Washington are thinking domestically when the solution to the credit crisis will be global. It is not that the world lacks money; it is that the world’s money is sitting on the sidelines — more than $6 trillion in idle global money markets alone. The challenge, beyond removing the toxic waste assets from bank balance sheets, will be to reform our financial system quickly to draw that global capital back into more productive uses. The first step should entail efforts to make the global market for future asset backed paper more transparent and credible. Securities in the future must be standardized with some “DNA” designation clearly visible showing the issuer, what’s inside, and the liability for fudging the content. We need a private/public global bank clearing facility. The bankers don’t trust each other. The central banks, working with the private institutions in providing enhanced data, need to begin to refashion the world’s financial architecture so that some entity can take on counter-party risk. We have such a clearing facility in the futures markets. And while those reforms are coming on stream, the major governments of the world, including the Chinese, should begin major fiscal efforts to stimulate their weakening economies. Last but not least, we need to reconsider the viability of today’s global imbalances and the dangerous effect of a rising tide of excess savings that distorts markets.

You are quoted as saying, "The greed-driven bankers and investment bankers deserve the most blame" for the crisis - really are they really to blame – WHY?

In recent years, the bankers and investment bankers used dangerously excessive amounts of leverage. In the process, they deployed off-balance-sheet vehicles to hide risk, shoveling mortgage-backed securities out the door to these independent vehicles as fast as possible. This was a mad grab for fee income based on the calculation that if the independent vehicles collapsed from defaulting mortgage backed securitized debt, the parent institution would not be affected. Bad bet. The global financial markets tied both the parent and independent vehicle together by reputation, collapsing the stock of the parent organization. The rest is history.

You say your book is both frightening yet hopeful – we are all looking for hope - can you elaborate on what you mean by your book is hopeful?

The world will face a serious credit crunch in 2009 regardless of how much money government spends to remove bad assets from bank balance sheets. Policymakers have no means of forcing the banks to start lending short of nationalizing the entire financial system. The cost of money is rising and the availability shrinking. Still the U.S. was the first to fall into this credit malaise and, after a tough period, we will be the first to emerge. The dollar is strengthening as world investors move to safety, but there is also a sense that as bad as things are in America, the rest of the world could become worse. I’m encouraged because our policy leaders in Washington, who normally think domestically, are in recent days being forced to think globally. Better late than never. There are trillions of global investment dollars sitting idle on the sidelines waiting for Washington policymakers to reform our opaque financial system. When credible reforms are in place, those sideline investors will look first to the U.S. The U.S. financial system could reliquify faster than we think.

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