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"From the chief economic commentator for the Financial Times, a brilliant tour d'horizon of the new global economy and its trajectory There have been many books that have sought to explain the causes and courses of the financial and economic crisis which began in 2007-8. The Shifts and the Shocks is not another detailed history of the crisis, but the most persuasive and complete account yet published of what the crisis should teach us about modern economies and economics. The book identifies the origin of the crisis in the complex interaction between globalization, hugely destabilizing global imbalances and our dangerously fragile financial system. In the eurozone, these sources of instability were multiplied by the tragically defective architecture of the monetary union. It also shows how much of the orthodoxy that shaped monetary and financial policy before the crisis occurred was complacent and wrong. In doing so, it mercilessly reveals the failures of the financial, political and intellectual elites who ran the system. The book also examines what has been done to reform the financial and monetary systems since the worst of the crisis passed. "Are we now on a sustainable course?" Wolf asks. "The answer is no." He explains with great clarity why "further crises seem certain" and why the management of the eurozone in particular "guarantees a huge political crisis at some point in the future." Wolf provides far more ambitious and comprehensive plans for reform than any currently being implemented. Written with all the intellectual command and trenchant judgment that have made Martin Wolf one of the world's most influential economic commentators, The Shifts and the Shocks matches impressive analysis with no-holds-barred criticism and persuasive prescription for a more stable future. It is a book no one with an interest in global affairs will want to neglect. "-- "The book identifies the origin of the crisis in the complex interaction between globalization, hugely destabilizing global imbalances and our dangerously fragile financial system. In the eurozone, these sources of instability were multiplied by the tragically defective architecture of the monetary union. It also shows how much of the orthodoxy that shaped monetary and financial policy before the crisis occurred was complacent and wrong. In doing so, it mercilessly reveals the failures of the financial, political and intellectual elites who ran the system. The book also examines what has been done to reform the financial and monetary systems since the worst of the crisis passed. "Are we now on a sustainable course?" Wolf asks. "The answer is no." He explains with great clarity why "further crises seem certain" and why the management of the eurozone in particular "guarantees a huge political crisis at some point in the future." Wolf provides far more ambitious and comprehensive plans for reform than any currently being implemented"--… (more)
User reviews
Each section addresses the "high income" countries, emerging countries and Eurozone countries. Wolf's view is that the underlying cause of the the interlinked global and Eurozone crises was what he calls a "global savings glut" driven by global trade and capital imbalances. China and the other emerging Asian countries, the oil exporting countries, Japan and Germany built up huge trade surpluses at the expense of the US and "peripheral Europe." In the US, this was partially a result of a dollar that was stronger than it ought to have been due to currency interventions against it by the exporters, and partially the result of Federal Reserve actions meant to equalize the imbalances and still maintain maximum employment. In "peripheral Europe" it was the result of being able to finance large current-account deficits at very low interest rates made possible by having the Euro as a common currency with the current-account surplus country of Germany. These imbalances were the result of long-term trends of increasing liberalization (freer markets), globalization,innovation, leverage and incentives toward greater risk taking within companies.
Wolf is skeptical that the voluminous reams of of newly adopted and proposed regulation will prevent another financial crisis. He points out the the most important legislation in response to the Great Depression was the Glass-Stegall Act of 1933 which ran 37 pages in it's entirety. The response to the 2007 crisis was the Dodd-Frank Act of 2010 which ran 848 pages BUT which requires nearly 400 pieces of detailed regulatory rules which have added an additional 8,843 pages to date and it's only 1/3 finished! He also points to thousands of pages of regulations currently being written in Europe and points out the inconceivability that something so complex can be understood and actually work. He instead calls for larger capital reserves and "macroprudential supervision" which means attempting to regulate the stability of the financial system as a whole. He acknowledges that this will not be easy and might not even be work, but thinks it needs to be tried.
He is also rather pessimistic about the survival of the Euro which he likens to a bad marriage. He proposes a banking union in which eurobonds would represent some percentage of the GDP of all the member countries with each individual country responsible for financing their debt above that level. Those eurobonds would then be very liquid and provide "safe" assets to back the system instead of relying on the bonds of Germany. He holds Germany culpable for the way they've handled the Eurozone and acknowledges that they are not willing today to accept the reforms that he proposes, but he thinks something must be done for the Euro to survive.
Wolf also doesn't believe that the current move toward government austerity was wise. He thinks there should have been more fiscal stimulus in order to keep the world's economy growing while the healing takes place.
The book is not an easy read since it deals with heavy subject matter and a lot of inter-related economic concepts. I have had to re-read some sections of it and feel I gained a better understanding of the material the second time around. The book is a take on the financial crises of the past few years that is different from anything else I've read. I think anyone with a strong interest in economics and markets will enjoy it.
Full disclosure: I received a free ARC of an uncorrected proof via a Goodreads First Reads giveaway.