A conversation

             with the author

 

Why did you write this book?

Today the world financial system is still near a dangerous tipping point of uncertainty and chaos. The mortgage crisis was only the beginning. Yet our politicians, from both political parties, fixate on the trivial. Our financial house is on fire, yet our leaders are squabbling over arranging the furniture in the front parlor. Instead, they desperately need to develop a “big think” doctrine that defines America’s economic and financial future in the world.

The title The World Is Curved is sure to draw comparisons with Tom Friedman’s book The World Is Flat. Why did you select the title? Why is the world now curved? Was it ever flat?

Friedman brilliantly presents the first installment of the globalization story, concentrating on the revolutionizing (flattening) of the global supply chain. But there is a second installment—the financial side of the story where the world is not flat; the world is curved. You can’t see over the horizon. Sight lines are limited. As during the subprime mortgage crisis, we are forced to travel down an endless, dangerously twisting and turning road of volatility with steep valleys and risky mountainous climbs. We can’t see financial risk ahead. A small village in Arctic Norway can see its entire financial future destroyed because its financial managers invested heavily in a Citigroup product called a collateralized debt obligation.

How does The World Is Curved differ from other books about our current economic state?

The book demystifies the complicated and terrifying world of international finance. This is a practical, insider’s guide to the revolution in global financial markets. I offer numerous anecdotes about my behind-the-scenes experiences in the hedge fund world and in key meetings with prime ministers, finance ministers, and central bankers, from Alan Greenspan to Ben Bernanke to the European Central Bank’s Jean-Claude Trichet. The book is both frightening yet hopeful.

Why did you feel that now was the time to write this book?

Globalization, the great paradox of our time, has been an impressive wealth-creating, poverty-reducing machine. In the last quarter-century of globalized markets, the Dow jumped from 800 to well over 12,000. To match that success the next twenty-five years, the Dow would have to exceed 170,000. Yet the fruits of globalization are distributed unequally. Globalization itself produces huge pangs of anxiety for average working Americans. Oil and food prices have skyrocketed. There is no denying the globalized financial system both enables and threatens our national well-being. In this year’s election, candidates must confront this paradox.

How would you define the future of globalization?

It depends on how politicians and policymakers respond to the fallout from the Great Credit Crisis of 2007–2008. The subprime mortgage crisis exacerbated an ongoing collapse of confidence in the sophisticated financial instruments banks use to diversify and reduce risk. The Federal Reserve, in particular, was caught asleep at the switch. Ultimately, however, the greed-driven bankers and investment bankers deserve the most blame. They set up dubious, off-balance-sheet vehicles to hide risk. The lack of transparency created a global crisis of confidence that nearly tanked the world economy and now threatens the future of liberalized capital markets.

Are we still in trouble?

The world still faces a trillion-dollar credit problem. When the credit crisis hit in August 2007, the world’s central banks flooded the global economy with liquidity to avoid immediate disaster. Luckily, today’s policymakers have learned from the mistakes made in the 1930s. The Federal Reserve also placed all U.S. financial institutions under the government “safety net.” Sounds reassuring, but the credit contraction is still likely to linger for years, and could become worse if policymakers aren’t careful. In the face of today’s powerful ocean of capital, there are limits to the effectiveness of government solutions.

Are the banks still at risk?

Consider the case of UBS, Switzerland’s largest bank with major links to the United States. Today, UBS’s total financial exposure is more than four times the size of Switzerland’s GDP. Translation: In a crisis, the government couldn’t bail out the bank even if it wanted to. The rest of the world faces a similar scary situation. True, central banks can forever print money to try to prop up the banks, but even then there are limits because of the potential outbreak of inflation.

So what happens when the next financial crisis hits?

The survival of the world financial system, including our ability to protect the savings and livelihoods of average families, depends on an elaborate game of confidence. Confidence comes from market participants believing policymakers know what they are doing in a system of relatively complete and open transparency. Whether we’re prepared for the next crisis depends on the job our policymakers do in restoring confidence.

Why was it so monumental that the Fed stepped in with the Bear Stearns situation?

Friends of mine at the Fed say there was no other choice. I have no reason to doubt them. A collapse of the Wall Street firm Bear Stearns, as the devastation rippled throughout the financial system, would have savaged the pocketbooks and pensions of every working American. Still, policy moves have unintended consequences. The Fed appears to have placed a government guarantee under the entire U.S. financial system, not just the banks. Sounds great, but some new, all-encompassing regulatory structure is therefore needed to protect the public interest at a time of financial deleveraging. That means the profitability of the U.S. financial services industry will decline. The bad news is that the health of a nation’s financial industry is key to future levels of entrepreneurial initiative and overall prosperity.

You talk about the “incredible shrinking central banks.” What does the decline in power of the central banks mean for the future of the world economy?

People picture central banks as having magical powers to step in and save the day. Dream on. I have known most of the world’s central bankers in recent decades, including Paul Volcker, Alan Greenspan, and Ben Bernanke. All would admit the power of the central bank is rapidly diminishing. Worse, in the case of the United States, interest rates have increasingly become a captive of global financial forces. To a certain extent, therefore, Americans are no longer in complete control of their own monetary policy. That is why central banks, led by the Fed, have become a kind of grand global theater. Because the world’s ocean of capital is so huge and powerful, the central bankers have had no choice but to become the lead actors. They use their dramatic skills to try to tease, persuade, charm, and bluff the markets. And of course the Lawrence Olivier of this process was Alan Greenspan. It’s not quite like The Wizard of Oz with the little man behind the curtain pulling the levers, but the analysis is not completely off the mark. In the end, the incredible shrinking of central bank influence over financial markets is a primary reason the world is curved.

So what’s the future of the world financial system?

The financial world is still a dangerous place. That’s because the world is flirting with moving away from the last quarter-century’s model of globalization and free-flowing capital markets toward something more reminiscent of the nineteenth-century mercantilist economic model. What I’m describing is an era of backroom rivalries, deal making, and tensions based on ambitious national political agendas with capital flows, and commodities led by oil, increasingly controlled by governments. One does not have to be a rocket scientist to see the picture emerging: financial wealth and power are moving away from the United States, Europe, and Japan.

What does this shift mean for the United States in particular, for the jobs and savings of average Americans?

Globalization has produced an ocean of capital that swirls around the world at the push of a button. The good news is that despite the United States running current account and budget imbalances since the 1980s, real interest rates have steadily declined and the economy has prospered with vigorous job creation. Yet America must still put its fiscal house in order and set out on a path toward energy independence. Ultimately, however, the future depends on whether the American economy can remain an attractive target for global capital as a focal point for financial safety and entrepreneurial creativity. On this question the jury is still out. Policy matters. If in the next few years our leaders make the correct choices, we can avoid catastrophe and continue the prosperity. But there is no denying the world is at serious risk.

Your comments about doing business in China seem to counter the popular perception that it’s a place where businesses and entrepreneurs should focus their energy. Why do you feel that way?

Absolutely nothing about the churning cauldron we call China can be taken for granted. With its rising social, political, and financial instability, China represents a powerful case for why the world is curved. When the Chinese bubble bursts—and they almost always do—the entire world economy will be at risk, most likely from a massive deflationary spiral that will, when all is said and done, hit everyone’s pocketbooks. If transparency is the key to the long-term stability of global financial markets, what do any of us really know about the future of China? Economically speaking, China today is the size of three Hollands. Yet recently, China overtook the United States as the largest source of greenhouse gases. Therefore, China’s environmental policies are now on a dangerous collision course with its trade goals. In general, the Chinese leadership is attempting to control and direct an unwieldy, chaotic, highly unpredictable economic and financial beast. The job may be impossible.

Where does Japan fit into the global picture?

Japan is the perfect object lesson for how not to run things in the new global economy. A highly successful economy requires a continual process of entrepreneurial reinvention, which is not occurring in Japan. Moreover, Japan is what the United States could become if American policymakers are not careful—so overloaded with debt that monetary policy becomes largely ineffective at stimulating the economy. Today, the Japanese financial system has become far more decentralized. Who now controls the bulk of the country’s savings? Housewives, who increasingly bypass low-yielding Japanese investments and purchase foreign bonds over the Internet. The housewives control the largest pool of money in the world. They have become a major force in foreign exchange markets, and a significant wild card.

What do you hope readers take away from The World Is Curved?

The global financial system is near a tipping point of uncertainty and could come crashing down to the detriment of all of us. Protectionist and class warfare policies, and other policy prescriptions to curb reckless volatility, may be well-intended efforts to deal with the anxieties of global trade and financial markets. But the danger is that they produce unintended consequences that could send us over the edge.

What’s the most important thing to watch in the years ahead?

Without a doubt it’s whether policymakers allow the continual free flow of international capital to keep globalization’s bloodstream pumping. Kill capital flows and you’ll kill the global economy. The problem is that the world today lacks a financial doctrine, or even much in the way of a set of informal understandings, for establishing order in a crisis. Instead, we grope and manage incrementally, like trying to perform delicate brain surgery with one hand tied behind our back and the other wearing an ill-fitting boxing glove. Today is very similar to an earlier period of globalization and prosperity, from 1880–1914, which ended with World War I. Soon the seeds were planted for an economic depression. The world can’t let that happen again. My book calls for a new financial order and offers other recommendations for surviving and prospering in a “curved” world.

What others are saying

“This is a very inspiring and intellectually stimulating book that makes remarkably transparent a number of factors behind the booms and busts of today’s global finance.”
—Jean-Claude Trichet, President, European Central Bank

“The World Is Curved presents a brilliant picture. It is a ‘must read’ for investors, policymakers, and anyone worried about the challenges facing today’s global financial system.”
—Stan Druckenmiller, Duquesne Capital Management

“David Smick, who founded The International Economy and made it into a highly respected magazine on world economic affairs, now offers us a trenchant and timely analysis of the downside of financial globalization. Capital flows are the soft underbelly of globalization; and no one who values the enormous benefits of globalization of trade and multinational direct investments can afford to miss out on reading this important book.”
—Jagdish Bhagwati, Columbia University, and author of In Defense of Globalization

“There are at least three reasons to read this book. First, it is an incredibly thoughtful insight into the workings of global finance, written by the ultimate insider in a highly engaging way that any reader of the New York Times could easily digest. Second, its central theme about the extreme fragility of the world economy will keep you up at night and force you to think hard about issues that are not yet out in the public. And third, it provides a realistic roadmap out of the horrendous mess we are in, one that should capture the attention of policymakers, financiers, and, yes, even the next American president.”
—Jeffrey E. Garten, Yale School of Management, former undersecretary of Commerce for International Trade, and former managing director, the Blackstone Group

“Lively, well-written, and insightful, The World Is Curved by David Smick probes and thoughtfully examines the strains and imbalances in the global economy and international financial markets. Smick also presents a series of innovative recommendations and observations designed to address the problems he describes, and challenges us to come to grips with them before they worsen.”
—Robert Hormats, vice chairman, Goldman Sachs International

“This book is excellent. It is hard to read The World Is Curved without being concerned by recent trends. David Smick offers a thoughtful and readable analysis of globalization’s flaws and benefits. This is an important book.”
—Frank C. Carlucci, former U.S. Secretary of Defense

“David Smick knows as much about world financial markets as any man alive today. In his fascinating (or maybe terrifying) book, The World Is Curved, he lays out the potential for disasters in this new intricate global financial marketplace. This book is an easy read even though it deals with unbelievably complicated (i.e., ‘curved’) subjects.”
—William Seidman, chief financial commentator, CNBC, and former chairman, Federal Deposit Insurance Corporation

“David Smick has identified a dangerous gap that separates the policy world and the financial world. The World Is Curved will go a long way towards bridging that gap, which is essential to ensure stability and prosperity in the global economy.”
—Lee H. Hamilton, president and director, Woodrow Wilson International Center for Scholars

“David Smick’s The World Is Curved couldn’t come at a better moment. I couldn’t lay the book down. It offers an unusually knowledgeable insight into the world of international finance. The World Is Curved is highly relevant to today’s situation.”
—Karl Otto Pöhl, former president, Deutsche Bundesbank

“Smick’s ‘dos and don’ts’ for future economic policymakers are so readable they can be easily understood by those without economic degrees.”
—Carla Hills, co-chair, Council on Foreign Relations, and former U.S. Trade Representative

“David Smick is a fascinating tour guide to the construct of our present financial system over the last three decades. He takes us from the financial salons of Europe, to the Asian bureaucratic ministries of unfathomable wealth, to the back rooms of the Washington power elites, to the chaotic trading rooms of Wall Street. It is a great read.”
—Louis Bacon, Moore Capital Management

“David Smick turned The International Economy magazine into the must-read magazine on world economic affairs. He does the same with globalization in The World Is Curved. Globalization is the game changer of our time, and David Smick’s insights on global capital flows are significant. Anyone who wants to understand financial globalization and its policy implications will want to read this book.”
—R. Glenn Hubbard, dean, Columbia University Graduate School of Business

“David Smick has written a first-class book on ‘possible dangers’ of globalization. I found it difficult to put it down.”
—A. W. Clausen, former president, World Bank

“A timely and important analysis, The World Is Curved offers a whirlwind tour of the dynamics across the globe that are driving the gears of the world’s financial markets. Accessible and instructive for layperson and policymaker alike.”
—Yoichi Funabashi, editor-in-chief, Asahi Shimbun

“The World Is Curved examines the fragile international financial system and finds it rather treacherous and not easy to fix. Rather than being flat, our new globalized world is rather bumpy.”
—James Schlesinger, former secretary of energy, secretary of defense, and director of the Central Intelligence Agency

“David Smick takes the reader into the inner sanctum of the global financial system as no one else can. With riveting stories, he leaves no doubt that this complex system has created huge benefits, but has left us facing grave risks. And he offers a solution.”
—John B. Taylor, Stanford University

“David Smick is right: The global world is curved. We cannot foresee the precise future, especially not in crisis situations.”
—Hans Tietmeyer, former president, Deutsche Bundesbank

“A worthy successor to Tom Friedman’s The World Is Flat. The World Is Curved takes up where Friedman left off, lucidly explaining the vital but poorly understood role of the financial system that provides the essential underpinnings of the world economy.”
—Murray Weidenbaum, Washington University in St. Louis

“The world is curved. Even a high-flying satellite can see no more than half of it at a time. But David Smick takes us to both sides—from Washington to Beijing and beyond.”
—Peter B. Kenen, Princeton University

“The World Is Curved makes for fascinating reading showing how politics and economics are inseparably intermingled. A bright analysis of the risk, success, and failure in today’s global financial markets.”
—Otmar Issing, former member of the Executive Board, European Central Bank

“The World Is Curved is thoughtful, balanced, and provocative—a must-read.”
—Pedro-Pablo Kuczynski, former prime minister, Peru

“A lucid, informed, and insightful interpretation of the global financial system. Readers … are guaranteed to be entertained and provoked.”
—Edwin (Ted) M. Truman, former director, International Finance Division, Federal Reserve

“The consummate insider’s account of global capital markets. Truly informative and most entertaining. The World Is Curved reveals … why the next thirty years will be just as perilous as the past.”
—Gary Clyde Hufbauer, Peterson Institute for International Economics

“An insightful insider’s tour of the global economy and financial system. Readers will have a big head start in diagnosing the problem and devising sensible solutions.”
—Michael J. Boskin, Stanford University

“In The World Is Curved, David Smick treats us to a vision of the uncertainties in financial markets as the American Century drifts to its end.”
—Allan Meltzer, Carnegie Mellon University

“Both insightful and provocative in discussing a dominant contemporary question—where do we go from here?”
—Michael Steinhardt, Steinhardt Management

“Over the last thirty years, David Smick has had a unique, front-row seat at the revolution in global finance. If you want a clear explanation of what’s going on, read The World Is Curved.”
—Peter R. Fisher, former vice president, Federal Reserve Bank of New York

“The World Is Curved is by far the nearest thing to a consummate insider’s guide to today’s financial world as can be found outside of a central bank.”
—John Williamson, Peterson Institute for International Economics

“I always look forward to conversations with David Smick. He never repeats the conventional wisdom, and he always has a new and provocative take on what’s going on in our political economy. Now he’s distilled his thoughts into an important book. You’ll enjoy reading The World Is Curved, you’ll learn from it—and, most important, it really will make you think.”
—William Kristol, The Weekly Standard

“Financial innovations, including those that new electronic technology makes possible, enable both firms and individuals to carry out their ordinary business more effectively and to protect themselves better from the risks to which they are inevitably exposed. But these innovations also make it possible for both firms and individuals to take on new risks to which they never would have been exposed in the first place. What are meant to be improvements therefore sometimes make people worse off, and when the risks involved are sufficiently intertwined those supposed improvements can make people worse off who never even sought to take advantage of them. In The World Is Curved, David Smick deftly offers example after example of how just this process of unintended consequences has recently unsettled the world’s financial markets, and how the process may not be over yet.”
—Benjamin M. Friedman, Harvard University, author of The Moral Consequences of Economic Growth

“The world is indeed curved and I can think of no better guide to the global capital markets of the twenty-first century than David Smick. The book takes you through Smick’s personal journey over the past thirty years as an advisor to investors, hedge funds, central bankers, and policymakers. After reading this book, you will appreciate as perhaps never before the sweep of recent financial history and the risks that lie ahead.”
—Richard H. Clarida, Columbia University, PIMCO, and former assistant secretary, U.S. Treasury

“The World Is Curved describes today’s global financial issues in a dramatic, quasi-Beethoven style.”
—Norbert Walter, Deutsche Bank Group

“David Smick is a pioneer in the globalization of real-time information. Who better to present us with the most recent and relevant information on globalization?”
—Ron Insana, Insana Capital Partners, and CNBC senior analyst

“Stimulating reading, this book represents a shrewd analysis of the fragile global financial markets.”
—Horst Siebert, president emeritus, Kiel Institute for World Economics

“The book defines financial globalization as a system that produces huge and scary financial dislocations, but at the same time is the cherished goose that lays the golden eggs. In the end, The World Is Curved also offers a message of hope and confidence.”
—Renato Ruggiero, former director-general, World Trade Organization

“A fascinating and highly readable tour of the many complex dimensions of today’s fast-changing global landscape.”
—Charles Dallara, Institute of International Finance

“The World Is Curved raises important issues which need to be fully debated.”
—Nigel Lawson, former chancellor of the exchequer, United Kingdom

“This truly brilliant analysis of complicated financial dilemmas which the next president will face should be required reading by those going into the White House.”
—David Abshire, president, Center for the Study of the Presidency, co-founder of the Center for Strategic and International Studies, and former presidential counselor

“David Smick is sounding a clarion call to reform the global financial system before protectionist pressures can undermine it—an outcome that, he warns, would be far worse than today’s instability. The World Is Curved is a fascinating, sobering analysis of why financial globalization is beneficial, what ails it today, and what changes are essential—from America to China—for ensuring its smooth operation.”
—Knight Kiplinger, editor-in-chief, The Kiplinger Letter and Kiplinger’s Personal Finance

“The World Is Curved shows how sound economic policy making must be rooted in a deep understanding of markets, economics, and politics. David Smick has occupied a ring-side seat in all three areas for decades. He has written an insightful and highly entertaining account about today’s global financial system.”
—Philipp Hildebrand, vice chairman, Swiss National Bank

“David Smick’s new book, The World Is Curved, is immensely informed and instructive, and replete with penetrating insights. Among the latter, two examples illustrate the larger set: ‘…the job of central banking, because of the need to bolster confidence, has become an elaborate form of ‘theater,’ with the financial markets acting as the audience’; and, ‘Because of the uncertainty now surrounding the U.S. financial system, particularly in the wake of the subprime disaster, America is at risk of losing its perceived uniqueness as a trusted repository for global investment.’ As the examples suggest, Smick’s writing is not only cogent; it has the further advantage of being eminently readable.”
—Charles Wolf, Jr., Senior Economic Adviser, Corporate Chair in International Economics, and Professor of Policy Analysis, Pardee Rand Graduate School

“This book is both an intellectual breakthrough and a national service.”
—William H. Overholt, director and Asia Policy Chair, RAND Center for Asia Pacific Policy

“The World Is Curved is a fascinating read, offering novel insights into the working of the world economy as seen from the vantage point of a Washington insider familiar with the global economy.”
—Robert Heller, former governor, Federal Reserve

 

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