Everyone seems to have their own theory as to what caused the economic crisis and which reforms will alleviate the suffering. But does anyone really understand what went wrong? If anyone is qualified to take a stab at the problem, it is David Smick, chairman and CEO of Johnson Smick International, who discusses the volatile and unpredictable nature of economics in his book The World is Curved: Hidden Dangers to the Global Economy.
The book comes not long after the phenomenal success of Thomas Friedman’s The World is Flat. Smick’ book compliments Friedman’s, but his understanding of the global economy takes The World is Curved in a different direction. Smick explains, “I’ve spent 25 years in the financial market as a financial advisor to some of the biggest investors in the world. When starting to write a book about globalization, it dawned on me that in my world, the world is not flat. It’s curved, in the sense that you can’t see the dangers looming just over the horizon because financial markets lack complete transparency.”
Smick is justifiably worried about the financial crisis, and offers little hope that the proposed stimulus package will solve the problem. It may actually exacerbate it. “The global economy is in the midst of a brutal financial de-leveraging not seen since the 1930s. We’re seeing the reappraisal of the value of virtually every asset in the world.”
“The situation is not unlike an unstoppable force of nature. It’s like a swiftly downward tidal move. From August 2007 until this past September we experienced a mere financial crisis. Since then we are in a full-blown panic. Nobody trusts anybody or any institution.”
Smick points out that despite the never-ending proposals, bailouts and stimulus packages, “the tide has continued to move downward. To use a metaphor, Washington policy makers have attempted to spit into the headwinds of a force-5 hurricane. And worse, we don’t know the potential unintended consequences of all these government actions.”
He went on to explain that the only way to solve the problem is to fix the banks and, more importantly, to hold them responsible. The banks, rather than using the money they have already been given to grant loans to the private sector, are holding the capital. Legislators should have known, according to Smick, to make stricter stipulations and require a guarantee that this money would be loaned to the private sector.
The New York Times reported on Thursday that the controversially-appointed Treasury Secretary Timothy Geithner has a “comprehensive plan to ‘repair the financial system’” in the works. This plan will involve action intended to solve banking problems. Regarding bailout funds and how they are expected to be used the article read,
“Federal policy makers are discussing how to use the second $350 billion portion of bailout funds. About $50 billion to $100 billion is expected to be allocated to stave off home foreclosures. That would leave up to $250 billion available for the banks, with the bulk going to buying troubled assets.”
The success of plans to stabilize banking woes will be closely scrutinized, by David Smick in particular who called the banking crisis “Obama’s first real test of leadership.”
Smick also stressed the point that the economic crisis is not only the result of failed institutions. “What drives the economy is an intangible called psychology. We’re talking about the level of confidence and optimism toward the future.” It will be up to Obama, he asserts, to bring confidence back to American markets and “touch a psychological nerve.”
“As Barack Obama takes over, what’s important to watch is not just the size of various bailout packages,” he explains. “The thing to look out for is whether Obama’s leadership style can bring about…a shift toward optimism.”
Smick’s argument concluded with one over-arching observation: despite the size, shape and direction of bailout and stimulus packages, there is something fundamentally wrong with the way policy makers are approaching the financial crisis. He concludes, “All Washington seems concerned about stimulating existing demand through infrastructure spending and tax credits for existing businesses. But that kind of stimulus, at best, will keep the economy from drowning.”
“But what about policies that stimulate demand for new products and services, for innovation, through innovation? The secret to restoring a soaring, job-producing economy is a policy that encourages entrepreneurial risk.”
Whether Smick is correct or not in his economic diagnosis, Americans expect swift action. The World is Curved provides its audience with a lens through which it can view the balance of economic power, and determine how the steps being taken by policy makers defend America from the hidden dangers of the world economy or cause it to fall victim.