The Shifts and the Shocks
THE FINANCIAL crisis has spawned a host of books comprising analysis, value judgment, self-flagellation, angst and optimism in equal part. So much has been written about it that the prospect of reading yet another book on a well-flogged subject is daunting. However, The Shifts and the Shocks still manages to attract and retain attention. Not a self-righteous, omniscient tome, it holds promise of being a work in progress.
Like a good bestseller, it has three parts. Part one details the shocks and shows how the world moved from crisis to austerity. It explores and tries to unravel the causes and consequences of the crisis in the eurozone and discusses the brave new world that has emerged post-crisis. Part two shows the shifts that have taken place through two chapters titled How Finance became Fungible and How the World Economy Shifted. Part three presents the solutions. This is detailed in four chapters, with headings that range from Orthodoxy Overthrown, Fixing Finance, Long Journey Ahead and Mending a Bad Marriage.
The book is a joy to read, as it graduates you from level one to level three easily and is written with clarity and lucidity, mirroring the writer’s experience and erudition. However, like the curate’s egg, it is only good in parts, as it sags towards the middle, meanders a lot and even threatens to grow unfocused, till it stages a smart return to the subject. The conclusions are optimistic and a bit self-assured, though they need to be taken with a pinch of salt.
Martin Wolf has the easy, comfortable style of the raconteur who simplifies even the most complex of details. His journalistic skills are apparent in the cosy unravelling of the complex skein of events. He has penned a compelling account of the lessons to be drawn from the crisis about modern economies and economics, and the purblind nature, partly of the discipline but more largely of its followers.
Interestingly, Wolf, who is the associate editor and chief economics commentator at Financial Times, has showered encomiums and fulsome praise on Raghuram Rajan, quoting from Rajan’s now oft-quoted and prescient paper presented at Jackson Hole, Has Financial Development Made the World Riskier.
He quotes extensively from the perspicacious Fault Lines: How Hidden Fractures Still Threaten the World Economy and, in presenting the solutions, turns again to Rajan’s Andrew Crockett memorial lecture of June 2013, A Step in the Dark, Unconventional Monetary Policy after the Crisis.
Predictably, the origin of the crisis is imputed to the interaction, liberalisation, global imbalances and the impossible fragility of financial systems. He terms the eurozone a bad marriage, the nature of the union inherent with seeds of dissolution. He also exposes the complacency and smugness that marked the pre-crisis years of asset bubble abundance. He asserts that the financial, political and intellectual elite that ran the system were all complicit in its collapse. Wolf posits an existential question: “Are we now on a sustainable course?”
Here, he falters, as, for him, the answer is no. Further crisis seem certain. However, the book does not necessarily end on a pessimistic note, as he provides a helpful blueprint for action to salvage the crisis of the eurozone, repair the damaged marriage and the impaired financial architecture, and points to a cogent way forward. He is on much safer and surer ground when he explains the crisis of 2008 as an economic disaster to which the policy response has been muted, as it has failed to address the fundamental structural drivers of instability, excessive debt creation, global imbalances and inequity.
On the asset side of the balance sheet, he contends that, driven by trade and foreign direct investment, economic globalisation has produced economic results that are impressive to say the least, leading to the successful integration of China and, to a lesser extent, India, in the world economy, together with substantial reduction in mass poverty in these and other developing emerging economies.
On the liabilities side, he points to the dangers of unbridled expansion and the savings glut that has led to global imbalances, fiscal loosening and credit expansion, which have endangered long-term fragilities.
All in all, a thrilling, racy read that is strongly recommended. All policy makers and thought leaders should engage with Wolf, explore the nuances of the crisis and argue the solutions posited. The book will provoke thought and lead to debate, and that is what good books are meant to do!
By Deepali Pant-Joshi
Deepali Pant-Joshi is executive director, Reserve Bank of India, Mumbai. Views expressed are personal