Riding Out The Crisis With A Few Good Books

Nobody asks a doctor for a diagnosis in the middle of surgery. Likewise, it seems unreasonable to expect that the current global economic crisis can be understood or explained now, as we struggle to grasp its full magnitude. Back in March, U.S. Treasury Secretary Henry Paulson proposed his own early overhaul with a qualification: "This blueprint addresses complex, long-term issues that should not be decided in the midst of stressful situations." Now comes a spate of timely new books offering their own creative blueprints for understanding—and fixing—the mess.

The mechanics of book publishing involves a long lag time—authors often deliver manuscripts nearly a year before books hit store shelves—so one thing these titles share is the good fortune of good timing. They include an analyst's argument for a new economic theory, a columnist's call for revitalized local currencies and a novelist's investigation into the human dynamics of debt. Together, they offer remedies for a global economy has evolved into an inherently volatile system, where stability is an aberration and instability has become the norm.

Any discussion must begin with the fundamentals. George Cooper, a fixed-market analyst in London, finished his eerily entertaining "The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy" in April. He makes regular reference to the failure of Bear Stearns and Northern Rock, but also cites sky-high commodity prices, showing how radically things changed in six months. Cooper digs into the most basic of economic principles—efficient markets—and argues that the theory of natural equilibrium is wrong; markets are, at their core, unstable. He cites as evidence the justifications regularly invoked for NASDAQ's inflated prices before the tech bubble burst. "The intellectual contortions required to rationalize all of these prices beggars belief," he writes. Such rationalizations continue today.

Cooper's solution advocates a return to the theories of John Maynard Keynes: namely, that economic markets possess internal forces that are essentially destabilizing, resulting in waves of credit expansion and asset inflation. Policy inconsistently swings with, not against, bubbles. "As a rule we favor capitalism in an expansion and socialism in a contraction," he argues.

Thus, Cooper targets central banks. Creating credit with low interest rates makes people rich, he writes, but it also spawns constant uncertainty. Central banks have to do what has become unthinkable: slow down the economy. "We should move beyond considering all economic contractions as symptomatic of policy failure," he writes.

As Cooper goes micro, Martin Wolf goes macro. In the diligent "Fixing Global Finance" (Johns Hopkins. 248 pp.), the Financial Times editor and columnist takes on the imbalances that have made the world economy lopsided. The book began as a series of lectures Wolf gave at Johns Hopkins University in 2006, where he first put forth his thesis: that the failures of the global financial system have put the United States in the unenviable position of playing banker to the world. "The huge deficits that the U.S. willingly incurred gave the world breathing space," he writes. "But that could not last forever."

Like Cooper, Wolf says outright that crisis—not stability—has underpinned the last three decades of financial liberalization. Since the late 1970s, he writes, there have been 112 systemic banking crises, including the Latin American currency crises of the 1980s and East Asia's in 1997. "To have had one crisis may have been a misfortune," Wolf writes. "To have had 112 was surely the result of extreme carelessness." A main source of this instability, he argues, is the flow of global capital—a significant portion of which now heads from the developing to the industrialized world. In other words, the poor are loaning money to the rich, a formula he calls "perverse." The solution, then, is to reverse the direction, and currencies are the way to do it. It will happen mainly at the country level, he writes; states have to develop open markets based not on the dollar, but on their own currencies.

With her novelist's insight, Margaret Atwood reveals the human foibles that have fueled the economic crisis in "Payback: Debt and the Shadow Side of Wealth." She traces back debt to the Greeks and the Bible ("Forgive us our debts, as we forgive …") through Shakespeare, Machiavelli and Jung up through 9/11, demonstrating that the notion of debt—financial or otherwise—drives a great deal of human behavior. When debtors and creditors treat each other unfairly, things fall apart. "It's about pay-up time," she writes. Like Faust, we have signed on to an unstable and ultimately unsustainable bargain. Payback means realizing that global growth cannot go on forever.

None of these authors suggests that the global financial system is a lie, just that we now possess only a single understanding, and there are other, better ways to make sense of it. Proposals for reform are now on the table. The overhaul is coming. The question is, are we strong enough to survive it?

© 2008