http://www.nytimes.com/2008/10/07/opinion/07brooks.html – by David Brooks in the New York Times:
THE TESTING TIMEEvery few years, the world seems to face a new testing time. After Sept. 11, leaders had to figure out how to respond to Islamic extremism. Now we face another test. Today, leaders around the world have to figure out how to stabilize economies amid volatile global capital flows. This test is rooted in a global shift in economic power. The rise of China, the vast wealth of the petro-powers and easy monetary policies created an ocean of excess savings that had no obvious place to go. This money was entrusted to a few thousand traders who sloshed it around the world in search of the highest returns. These traders live in a high-tech version of Plato’s cave. They do not see reality directly. Instead they see the shadow of reality as it dances around in numbers on their computer screens. They form perceptions about other people’s perceptions of where the smart money is going next, so they’re three or four psychological levels removed from normal economic activity…
In his astonishingly prescient book, “The World Is Curved: Hidden Dangers to the Global Economy,” David M. Smick argues that we have inherited an impressive global economic system. It, with the U.S. as the hub, has produced unprecedented levels of global prosperity. But it has now spun wildly out of control. It can’t be fixed with the shock and awe of a $700 billion rescue package, Smick says. The fundamental architecture needs to be reformed.
It will take, he suggests, a global leadership class that can answer essential questions: How much leverage should be allowed? Can we preserve the development model in which certain nations pile up giant reserves and park them in the U.S.?
Until these and other issues are addressed, the global markets will lack confidence in asset values. Bankers will cower, afraid to lend. America’s role as the global hub will be threatened. Europeans will drift toward nationalization. Neomercantilists will fill the vacuum.
This is the test. This is the problem that will consume the next president…
The Economist’s selection of books to read post-GFC: http://www.economist.com/node/15810590