The World Is Curved


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Reviews and Press for The World Is Curved

From “The Decade the World Turned,” by Fintan O’Toole in the Irish Times, November 28, 2009:

“The movement of this vast flow of money was, however, increasingly mysterious. As the American financial strategist David Smick put it succinctly, ‘the industrialised world…surrendered control of its financial system to a tiny group of 5,000 or so technical market specialists spread throughout investment banks, hedge funds, and other financial institutions.’ The problem, of course, was not simply that governments and regulators hadn’t a clue what these 5,000 wizards were up to, but that the wizards themselves made the Sorcerer’s Apprentice look like Gandalf. Driven by greed and short-term incentives, and locked in a small world where money was increasingly distanced from its sources in the real economy, they were oblivious to the inevitability of the catastrophe they were creating.”

From “Will the G20 Summit Yield Any Results?,” Associated Press video, September 23, 2009:


From “The Risks of Inking an MOU with Beijing,” by Hong Ch-Chang in the Taipei Times, July 7, 2009:
“The government’s plan to sign a memorandum of understanding (MOU) with China will have an impact on the nation’s financial security mechanism and confidential business information on capital flows between the two sides of the Taiwan Strait. …

David Smick, a well-known international financial adviser who is well acquainted with the heads of central banks around the world, recently published a book entitled The World Is Curved: Hidden Dangers to the Global Economy.

Smick says in the book that in the world of financial markets, the world is not flat, but curved.

He says we cannot see the dangers beyond the horizon because of the lack of financial market transparency, therefore we cannot always identify risks.

Smick writes that China’s attempt to combine a market economy with a Marxist regime is asking too much, and that while China is capable of bringing the world into a new era of prosperity, it could also drag us all into chaos.”

From “Don’t Write Off America Yet,” by K.I. Woo in The Nation [Bangkok], April 10, 2009:
“In his bestselling book, The World Is Curved, David M. Smick explains succinctly that the US has suffered various forms of financial and economic deficits for more than two decades. ‘Many have predicted a falling dollar,’ he said.

These people, Smick said, have, however, underestimated the US economy’s ability to import capital. ‘They have ignored the US economy’s dynamism and its role as an international safe haven. These sceptics only focused on the size of the current account deficit,’ he said.

From “Fixing Economy Will Take Someone Fluent in Banks,” by Jonathan Last for the Philadelphia Inquirer, March 15, 2009:
“[E]very economic observer in America, from David Smick to Andrew Grove to Warren Buffett, has been shouting from the rooftops about the need to put the banks in order.”

From “A ‘Phony War’ on the Crisis,” by Washington Post columnist David Ignatius, March 12, 2009:
“Economist David Smick had it right in The Post this week when he said the administration had a three-pronged strategy: delay, delay and delay.” [Read David Smick’s March 10 op-ed in the Washington Post.]

From “Today’s Papers,” Slate, by Daniel Politi, March 10, 2009:
“‘In the WP’s op-ed page, David Smick writes that since there are no solutions to the banking crisis that don’t involve huge political and financial risks, Obama’s economic advisers ‘have adopted a three-pronged approach, delay, delay, delay.’ While many have been advocating for nationalization, there’s a simple reason that officials are terrified to go down the road. Yes, it’s the good old credit-default swaps again. ‘These paper derivatives have become our financial system’s new master,’ declares Smick. The truth is no one knows what will happen, and it seems the Obama administration is paralyzed by fear. It’s time for Obama to come clean to the American people, recognize the magnitude of the problem, and appoint a well-known figure who is not from Wall Street to deal with the mess. ‘The longer we delay fixing the banks, the faster the economy deleverages, the more credit dries up, the further the stock market falls, the higher the ultimate bank bailout price tag for the American taxpayer, and the more we risk falling into a financial black hole from which escape could take decades.’” [Read David Smick’s March 10 op-ed in the Washington Post.]

From “GOP at the Abyss” by columnist Michael Gerson in the Washington Post, March 6, 2009:
“‘It’s not smart to say this economy can’t recover,’ says economist and author David Smick. If the pipeline of credit is somehow unclogged, the Federal Reserve has provided plenty of money for there to be a quick recovery. Americans will eventually need to buy houses or cars again.”

From “Why Mitt Romney Gets It” by James Pethokoukis, U.S. News and World Report, February 27, 2009:
“Analysts keep forgetting how the halving of the stock market has crushed people’s net worth and is contributing to a reverse wealth effect. And what if people fall permanently out of love with the idea of building wealth by building assets through stocks? It will be a huge drag on the economy moving forward since people will be saving too much in low-yielding assets and not taking full advantage of global economic growth when it returns. This is a point economic consultant David Smick makes in his great book, The World Is Curved. (A book, by the way, Romney just finished reading.)”

From “The Deeper Roots of Our Financial Crisis,” by Theodore Roosevelt Malloch in The American Spectator, February 11, 2009:
“Certainly macroeconomic weakness, heightened economic imbalances, over-leverage and extreme credit risks have contributed to the unbelievable levels of market volatility we have witnessed in this downturn, now become a near collapse. Almost all financial experts and many policymakers have started to cry out for financial reforms, greater financial transparency and measures to rebuild confidence. Trust is needed in the financial architecture and institutions, regulatory agencies among them, that underlie our now highly interconnected global economic system. Yet this is why the sage market advisor, David Smick spells out so explicitly in his book, The World Is Curved, ‘The distasteful reality is that there are no quick fixes for the global credit system’s dilemma, which is why the world has become a dangerous place with so much economic heartache.’”

From “Obama Is Right to Challenge Bankers’ Salaries,” by Albert R. Hunt for Bloomberg News, appearing in The International Herald Tribune, February 8, 2009:
“The restriction of some financial-executive compensation ‘is the necessary creation of political cover,’ says David Smick, a Republican economic expert and author of a book on the global economy. This ‘implicit deal,’ Smick argues, might engender sufficient public support to avoid a ‘financial Armageddon.’”

From “It’s Not the Bonus Money. It’s the Principle,” by Joe Nocera in the New York Times, January 31, 2009:
“But there is something else as well. Most people still don’t fully understand what, exactly, Wall Street did that caused so much trouble for the country and the financial system. I spoke this week to David M. Smick, author of a scathing book about Wall Street, The World Is Curved: Hidden Dangers to the Global Economy. In indignant tones, he talked to me about the sophisticated off-balance-sheet vehicles the banks used to hide risk and game the system, and the ‘mortgage-backed securities they were shoving out the door.’ He concluded, ‘I find their behavior just appalling.’

But words like ‘off-balance-sheet vehicles’ and ‘mortgage-backed securities’ don’t have much meaning for most of us. What we understand is greed—which, ultimately, is what Mr. Smick was talking about as well. For most Americans, big bonuses and corporate jets and office remodelings become a kind of stand-in for the real sins of the bankers. They signify what people hate about Wall Street.”

From “Global Crisis versus Leaders’ Priority,” by Yemi Kolapo in Punch (Nigeria), January 29, 2009:
“David Smick, in his book on the current global financial crisis titled, The World Is Curved, argued that under normal conditions, the global financial system could have absorbed the housing bubble burst where the initial subprime exposure was a mere $200bn in a global economy worth several hundred trillion dollars, but for a greater nuisance—a dubious dual system set up by banks to hide their exposure to market risk. Smick described the crisis as a ‘tale of greed, hypocrisy and sheer folly that the bankers don’t want you to know, brought about by the mother of all regulatory failures in realising what was happening.’ Watchers of the Nigerian banking sector affairs can draw a similarity here.”

From “Time for (Self) Shock Therapy,” by columnist Thomas Friedman in the New York Times , January 18, 2009:
“‘Right now,’ said David Smick, author of The World Is Curved, ‘the bankers are sitting on mountains of cash, including our bailout money, because they know their true balance sheets are a disaster—far worse than publicly stated.’ The situation will likely worsen as delinquent consumer and auto loans are piled atop bad mortgages. ‘Obama needs to inject some truth serum into the banking discussion. No one trusts the banks, and even the banker’s dont trust each other.’ Bringing clarity to bank balance sheets, said Smick, ‘is the first step to fixing America’s bank lending problem.’”

From “Obama’s First Job Is Buying Brain-Dead Banks,” by Michael Sesit for Bloomberg, January 20, 2009:
“[R]equire banks to invest some of their TARP funds in Fannie Mae and Freddie Mac bonds. That would help lower mortgage rates and boost refinancing. Banks would have no excuse for refusing to buy the mortgage-lenders’ debt, since it is explicitly government guaranteed, David Smick, head of consulting firm Johnson Smick International Inc. in Washington, said.”

From “Memo to the Banks: Lend or Else,” by David Smick in the Washington Post, January 12, 2009:
“Obama needs a big play. The place to begin is by confronting our banking system—possibly even breaking up the financial behemoths considered ‘too big to fail.’ Our banks are sitting on mountains of capital. Taken together, their excess cash reserves normally amount to $3 billion to $7 billion. Astonishingly, those reserves today are estimated to exceed $800 billion, a portion of which is our bailout money. We have moved from reckless financial risk-taking to a situation even more dangerous: no financial risk-taking. Many suspect that this cash buildup indicates that the banks’ off-balance-sheet debt exposure is far larger than acknowledged.”

From “Mr. Cool’s Centrist Gamble,” by Washington Post columnist David Ignatius, January 11, 2009:
“Obama’s bet is that at a time of national economic crisis, the country truly wants unity. ‘I keep telling Republicans, ‘This guy has to succeed.’ Otherwise, we’re doomed,’ says David Smick, a financial analyst who wrote a prophetic book about the economic crisis called The World Is Curved. But it remains an open question whether the Republicans will do more than applaud politely when Obama asks for help.”

From “Why Regulators Always Lose,” by Rich Lowry in the Austin-American Stateman, January 10, 2009:
“As David Smick writes in The World Is Curved: ‘A well-intentioned government bureaucrat is no match for the kind of creative and clever market wizards, and their lawyers, who begin searching for legal means around any regulatory constraint the instant the regulations are put in place. Today a senior Securities and Exchange Commission (SEC) officer earns between $143,000 and $216,000 per year. Even junior executive decision-makers at Goldman Sachs garner annual compensation packages in the millions of dollars.’”

From “Good Luck, Barack,” by David Smick in Foreign Policy, January/February 2009:
“The one silver lining is that the world does not lack capital. It’s simply sitting on the sidelines, including $6 trillion in global money market funds alone. The faster Obama and his global counterparts can fashion credible financial reforms that enhance transparency while preserving capital and trade flows, the sooner that sidelined capital will reengage. In the end, markets crave certainty—in this case, certainty that our leaders have a credible game plan. That plan is not yet in place.”

From “Year’s Best: These Books Meant Business in 2008,” by Gary H. Rawlins in USAToday, December 21, 2008:
“In financial markets, ‘We can't see over the horizon,’ David Smick writes. ‘We are always being surprised. And that is why the world has become a dangerous place.”

Watch David Smick’s appearance on C-SPAN’s “BookTV,” hosted by the World Affairs Council on December 17, 2008, on YouTube.

From “Don’t Pull Back: ‘Progressive’ policies would cause economic regression,” by Pete du Pont in the Wall Street Journal, December 16, 2008:
“Economist David M. Smick’s recent book, The World Is Curved, shows that during the past quarter-century we have had a global ‘golden age of wealth creation and poverty reduction never before seen in the history of mankind.’ The global free market ‘experienced an unprecedented doubling of its labor force from 2.7 billion to 6 billion’; the U.S. had 40 million new jobs created; ‘the Dow Jones Industrial Average climbed from 800 to over 12,000’ (it is back under 9000 now); and, according to the Federal Reserve, U.S. households saw their net worth increase from $11 trillion in 1982 to more than $56 trillion today.”

From “Three Steps for America to Regain the World’s Trust,” in Seeking Alpha by John Mason, December 13, 2008:
“David Smick contends that ‘The World Is Curved’ because in financial markets people cannot see over the horizon. That is, the future is subject to incomplete information and, hence, risk and uncertainty.”

From “Smick: Markets Still Scared of Bubbles,” by Kirk Shinkle for U.S. News and World Report, December 3, 2008:
“David Smick, author of The World Is Curved: Hidden Dangers to the Global Economy and recent Bill Clinton fave, takes a look at the economic damage so far and sees more to come.

He says markets aren’t responding to billions in global stimulus simply because of the sheer magnitude of what could still go wrong.

The problem, he writes, is that we’re still at risk from (count ’em) eight financial bubbles of varying sizes. His rough breakdown looks like this:

A number of analysts talk about eight bubbles ranging from the subprime mortgage loans (again, $1.5 trillion) to emerging market debt ($5 trillion) to outstanding credit card debt ($2.5 trillion) to commodities derivatives ($9 trillion) to commercial real estate ($25 trillion) to foreign exchange derivatives ($56 trillion) to credit default swaps ($58 trillion) and so on.

In a worst-case scenario, he says those bubbles could mean roughly $200 trillion worth of financial exposure.”

From “A Bailout Stuck in Low Gear," by David Ignatius in the Washington Post, November 22, 2008:
“David Smick, whose book The World Is Curved provided an eerily accurate forecast of the economic disaster we’re now experiencing, was reviewing some numbers last week that help clarify the crisis. He noted that banks’ excess cash reserves, which normally total less than $7 billion, have recently approached $400 billion. A lot of that is taxpayer money that the banks aren’t putting to use.

Why? ‘You’d have to be crazy to lend in this environment,’ says Smick. ‘They aren’t lending because it’s going to be a terrible 2009’ and the banks don’t want to get caught.”

From “Books I’m Thankful for This Year,” by Gloria McDonough-Taub for, November 21, 2008:
“The World Is Curved: Hidden Dangers to the Global Economy by David Smick. Thank you thank you thank you, because I really, really didn’t believe the world was flat and this truly was an important book that came at the right time. My biggest hope is that we will indeed find the right combination of global leaders who are bold enough and smart enough to lead us out of this unimaginable financial mess.”

From “End of the Reagan-Clinton Era?” by Rich Lowry in the National Review, November 4, 2008:
“In terms of our globalized economy, we’ve been living in the Reagan-Clinton years. As David Smick writes in his compelling new book on the financial system, The World Is Curved: ‘Globalization was not a Republican or Democratic phenomenon. Indeed, there was not much difference in economic policymaking between Democrat Bill Clinton and Republican Ronald Reagan.’”

From “Two Books to Understand the Economy,” by Michael Barone for U.S. News and World Report, October 29, 2008:
“If you want to understand the economic events of the last half century, you should read two new books. One is Robert Samuelson’s The Great Inflation and Its Aftermath: The Past and Future of American Affluence, which explains how the abstract economic theories of Keynesian economists produced not the promised eternal economic growth but the longest sustained peacetime inflation in American history, rising to 14 percent in the times of Jimmy Carter. The other is David Smick’s The World Is Curved: Hidden Dangers to the Global Economy, which explains how the abstract mathematical models of financial wizards produced not the promised eternal self-sustaining economic growth but rather a nontransparent financial system, which led to the coagulation of credit and our current financial crisis. Both show how abstract theories proved faulty in practice; both recommend similar common-sense responses: intelligently regulated transparent markets.”

From “Global Financial Crisis May Hit Hardest Outside U.S.,” by David J. Lynch in USAToday, October 29, 2008:
“‘The export model that’s so dominant in the emerging markets is at risk. That’s the vulnerability in the international system. …We’re seeing an end to that model of globalization,’ says David Smick, a global financial strategist based in Washington, D.C.”

From “The World Is Curved,” by Jonathan Chevreau in the National Post, October 29, 2008:
“If you’re looking for an indepth read on how the mortgage crisis led to this brutal bear market, get hold of a copy of David Smick’s The World is Curved: Hidden Dangers to the Global Economy.

From “If Entire Countries Go Broke, We’ll Go With Them,” by David Smick in the Washington Post, October 26, 2008:
“The global financial market is like a rich, generous but occasionally paranoid great uncle. Normally, this benevolent great uncle sprinkles money calmly and wisely throughout the family, taking a careful reading of risk and potential investment reward. But every so often, a deep paranoia overtakes him. Panicked, he turns off the spigot. Why? Sometimes he thinks his relatives are not telling him everything he needs to know. Other times, paranoia sets in because the facts of a relative’s scenario don’t add up.

Today the great uncle has reached a level of paranoia not seen since the 1930s, and the massive ‘shock and awe’ campaign of bold rescue efforts from the world’s wealthiest countries has not calmed him down. The world financial market still thinks the numbers don’t add up.

This is primarily because of a new and fast-moving blip on the global radar screen: the growing concern that entire countries could default on their financial obligations. While Washington frets about bank failures and the potential collapse of the corporate sector, the financial market is far ahead of it. Global markets are now fixated on the economic, social, political and foreign policy shipwrecks that could be triggered if waves of country defaults sweep across the world.

In an alarming number of nations, the amount of dubious debt held by the domestic banking system dwarfs the country’s GDP. This is particularly true in such emerging capitalist economies as Hungary, Iceland, Belarus, Ukraine and Pakistan.

That’s scary. In the past, some emerging market economies have defaulted (Argentina comes to mind) and managed to survive without dragging the rest of the world off a cliff. But things are different today. The global financial system itself is on life support. If an emerging market collapses, the damage won’t be limited to just one country.

Here’s why all this matters to the average working American: Emerging markets are major purchasers of U.S. exports and a critical engine of global growth. If their economies fail, ours will fail, too.

The root of today’s credit crisis is not that the world lacks money; the world is awash in cash, with $6 trillion sitting idly in global money markets alone. But if countries start to fail, the remainder of the world’s investment capital could be spooked out of productive investments as well.

Nor do we have the tools to avert disaster. The International Monetary Fund’s resources are a pittance compared to the financial exposure of the countries in most danger. And as a result of the industrialized world’s government bailouts and bank guarantees, there won’t be any more capital for emerging markets that are still flailing.

Take, for example, a country as large and powerful as Germany: Deutsche Bank’s assets represent 80 percent of the nation’s GDP. In Switzerland, the assets of the bank UBS represent 450 percent of the country’s GDP. The financial exposure of the British banks is similarly alarming: Barclays PLC’s assets amount to more than 100 percent of the United Kingdom’s GDP, and the Royal Bank of Scotland’s holdings reach 140 percent of British GDP.

These countries aren’t even the biggest worry. That honor goes to the nations of Eastern Europe and some of the undercapitalized Asian countries. But globalization means we’re all connected. If Hungary were to default on its financial obligations, Austria’s banks would soon collapse. If that happened, Germany’s banks might well follow suit.

There’s plenty to fret about in Asia, too. Pakistan is facing default. Many investors worry about South Korea as well: Its exports are plummeting, and foreign investors are fleeing an already weak stock market. In an emergency, would the South Korean government, or even the IMF, have the resources to come to the rescue? We can’t be sure.

American investors wouldn’t be of much use, either. After all, what banker in today’s partially taxpayer-owned, soon-to-be-politicized financial system would want to testify before Congress about a risky loan to some small foreign country when safe domestic investments had been available?

Note, too, that the slowdown in securitization—the slicing and dicing of assets to be sold as securities—will add to this potential mess. In the past, the much-maligned process funneled huge amounts of capital to the developing world. That’s not going to be happening anymore, at least not for a while.

No wonder global markets are so jittery about the prospect of countries defaulting. The rich, developed countries enjoy huge resources that can save them from financial collapse. But those resources are not unlimited. In Europe, taxes as a percentage of GDP have grown to 43 percent (compared to roughly 20 percent for the United States). Translation: If Hungary, Pakistan or South Korea went broke and European governments were forced to raise taxes to finance a bailout, the economic pain would be excruciating.

That is why the ‘shock and awe’ of the current bank bailout efforts hasn’t yet stabilized world financial markets. Investors suspect that the problem is just too expensive to confront. The IMF estimates that global banks have already lost $1.4 trillion. By the time the world fully enters into recession next year, global bank losses will almost certainly have increased dramatically. Some experts expect them to reach a whopping $5 trillion.

So the question remains: Do the world’s governments have the resources to take on such a massive rescue operation? The global markets aren’t sure.

Our next president, beginning the day after the election, needs to call for global contingency plans in case countries collapse—because the financial market will bet against the global economy as long as this uncertainty exists. Eliminate that uncertainty, or at least show how the world economy will cope with such calamities, and our policymakers can return to the thorny job of cajoling our bankers into lending again. The great uncle is not assuming that the worst is over.”

From “If Larry and Sergei Asked for a Loan…” by Thomas Friedman in the New York Times, October 26, 2008:
“‘Government bailouts and guarantees, while at times needed, always come with unintended consequences,’ notes the financial strategist David Smick. ‘The winners: the strong, the big, the established, the domestic and the safe—the folks who, relatively speaking, don’t need the money. The losers: the new, the small, the foreign and the risky—emerging markets, entrepreneurs and small businesses not politically connected. After all, what banker in a Capitol Hill hearing now would want to defend a loan to an emerging market? Yet emerging economies are the big markets for American exports.’”

From “A curved-earther scans the horizon,” by Christopher Cook in the Financial Times, October 26, 2008:
“Smick also fears that this new world means policymakers at central banks and in finance ministries have lost some of their tools and their sources of information. With poorly informed policymakers beholden to unpredictable and unreliable regimes, he worries that popular pressure will mount to end financial globalisation, or just tax and regulate it until it flees offshore. In the book’s view, the US must look to remain an attractive location for investment, but also correct these imbalances.”

From “Ten Books to Read in the Financial Crisis,” by Jeffrey A. Trachtenberg in the Wall Street Journal, October 23, 2008:
“Number 5: The World Is Curved: Hidden Dangers to the Global Economy by David M. Smick. An inside look at what went wrong with the banking system here and abroad.”

From “Financial muscle moves to Washington,” by William Neikirk in the Chicago Tribune, October 14, 2008:
“‘The general European view is that the credit crisis will lead to the permanent neutering of the once-dominant financial-services industry,’ said David Smick, a global financial expert and author of a book on the global economy. ‘America’s ability to finance risk will be restricted,’ said Smick, who sounded out European opinion about America’s standing at the World Bank and International Monetary Fund meetings.”

From “New Book Covers ‘End of the World’ to Surviving Age of Volatility,” by Gloria McDonough-Taub on, October 13, 2008:
“‘There is nothing quite like the potential for the world economy’s coming to an end to focus the mind and shake up a quiet summer.’ This is how David M. Smick begins his book, The World Is Curved: Hidden Dangers To The Global Economy.

It is a must-read in Washington, London, on Wall Street and yes, on Main Street since it clearly and vividly tells us how we all got into this mess, outlines what needs to be done to get out of this mess and of equal importance how to thrive while in the midst of this mess.”

From “The Post-Binge World,” by Thomas Friedman in the New York Times, October 12, 2008:
“So what could ease this crisis? ‘There is going to have to be a workout,’ said the financial strategist David Smick, author of The World Is Curved, a book about the hidden dangers in today’s global economy. ‘There will have to be a restructuring of all these institutions to clean up their balance sheets and recapitalize them.’ Banks and insurance companies will have to be reconstituted, merged or left to die, until these toxic assets are properly priced and off the books.

The government’s job—which it is still trying to figure out exactly how to do—will be to provide a safety net of guarantees for the surviving banks, so they will be honest about pricing their assets, and then, once they have been, to help recapitalize them. ‘Government’s other job,’ added Smick, ‘is to quickly establish the new rules of the road for truth-in-lending on a global basis. We still need these kind of lending facilities if the economy is going to grow again.’”

From “Why There's a Crisis—And How to Stop It,” by David Smick for CNN International, October 10, 2008:
“At this point in the credit crisis, at least one thing is certain: most policymakers lack a clue of what is really at stake. Those with some knowledge are driving policy looking through the rearview mirror.

Begin with the U.S. Treasury’s $700 billion bailout package. This was presented as some magic pill which, if gulped down, would quickly restore financial stability.

The ‘shock and awe’ of the sheer size of the taxpayer-funded bailout would somehow restore confidence. Instead, stock markets collapsed and credit markets remained frozen.

This is because the credit crisis reflects something more fundamental than a serious problem of mortgage defaults. Global investors, now on the sidelines, have declared a buyers’ strike against the sophisticated paper assets of securitization that financial institutions use to measure and offload risk.

In recent years, our banks, borrowing to maximize the leverage of their assets at unheard-of levels, produced mountains of financial paper instruments (called asset-backed securities) with little means of measuring their value. Incredibly, these paper instruments were insured by more dubious paper instruments.

Therefore, the housing crisis was a mere trigger for a collapse of trust in paper, followed by a de-leveraging of the entire global financial system. As a result, we are experiencing the painful downward reappraisal of the value of virtually every asset in the world.

So what are these paper instruments, these asset-backed or mortgage-backed securities? I like to use a salad analogy. Before the last decade, bankers simply lent in the form of syndicated loans. But with the huge expansion of the global economy in the 1990s, which produced an ocean of new capital, the bankers came up with an idea called securitization.

Instead of making simple loans and holding them until maturity, a bank collected all its loans together, then diced and sliced them up into a big, beautiful tossed salad.

The idea was to sell (for huge fees) individual servings of diversified financial salad around the world.

The only problem: under an occasional piece of lettuce was a speck of toxic waste in the form of a defaulting subprime mortgage.

Eat that piece of salad, and you’re dead. The overall salad looked delicious, but suddenly global investors were no longer ordering salad. No one knew the location of the toxic waste. This distrust heightened when global interest rates began to rise.

So what does this salad boycott mean for the future and why have financial markets collapsed so brutally? The markets are telling us the world will face a serious credit crunch in 2009 regardless of how much money government spends to remove the toxic salad from bank balance sheets.

Policymakers have no means of forcing the banks to start lending short of nationalizing the entire financial system. After all, the U.S. banks alone so far during the crisis have lost upwards of $2 trillion from their collective asset base.
Most banks are leveraged by more than 10 to 1. Translation: The U.S. financial system will have a whopping $15 trillion to $20 trillion less credit available next year than was around a year and a half before. The cost of money is rising and the availability shrinking.

True, the banks will still lend—but the fear is they will do it only to people such as Warren Buffett, who don’t need loans. What is uncertain is the amount of lending to borrowers engaged in entrepreneurial risk, the center of business reinvention and job creation.

Apart from the economic pain resulting from shrinking credit markets, we are about to see an earthquake in the relationship between government and financial markets. The great uncertainty is whether government has the power to rescue the financial system in times of crisis. It seems doubtful.

In the United Kingdom, for example, the collected assets of the major banks are four times the nation’s gross domestic product (GDP). A similar situation exists in many Euro zone countries. This means government cannot bail out the system even if it wanted to. Given such massive exposure, government guarantees in a time of crisis become meaningless.

Yet because of the interconnected web of global financial relationships, we are all vulnerable to the threat. The collapse of, say, a major European bank would hardly leave American workers immune.

Our policy leaders in Washington are thinking domestically when the solution to the credit crisis will be global. It is not that the world lacks money; it is that the world’s money is sitting on the sidelines—more than $6 trillion in idle global money markets alone.

The challenge will be to reform our financial system quickly to draw that global capital back into more productive uses. The first step should be efforts to make the market for future asset-backed paper more transparent and credible.

We need a private/public global bank clearing facility. The bankers don’t trust each other. The central banks, working with the private institutions in providing enhanced data, need to begin to refashion the world’s financial architecture.
And while that is happening, the major governments of the world, including the Chinese, should begin major fiscal efforts to stimulate their weakening economies.

From “People Who Live in Glass Häuser,” by Daniel Gross, in Newsweek and Slate/The Big Money, October 10, 2008:
Der Spiegel noted with disapproval that ‘the total value of all outstanding mortgage loans in the United States—$11 trillion (€7.6 trillion)—is almost as large as the country’s gross domestic product.’ Surely, the good burghers of Brussels and shopkeepers of England wouldn’t be so foolish with debt, would they? But in Europe, ‘they embraced financial capitalism and leverage more than we did,’ says David Smick, founder of The International Economy magazine and author of The World Is Curved. The assets of tiny Iceland’s big banks were about 10 times the island nation’s gross domestic product.”

From “Financial chiefs seek global unity,” by David R. Sands, Washington Times, October 10, 2008:
“‘They’re going to have to do something collectively, because there is no way the U.S. government or any other country can do something meaningful on its own,’ said David Smick, head of the Washington-based market advisory firm Johnson Smick International and author of the influential new book on the changing world of finance, The World Is Curved.

Mr. Smick said the economic problems on Main Street could be directly affected by how the world’s economic powers coordinate policy and deal with structural problems with the globe’s financial ‘plumbing.’ The recent panic that started on Wall Street has produced plunging stock values, shrinking retirement funds and vanishing markets for small-business and consumer loans.

‘The idea that some of these guys seem to have had that you could see a major bank failure in another country and not have it hurt the American worker is out the window,’ said Mr. Smick. ‘We’re all connected now.’”

From “Financial titles rise and fall with news,” by Patti Thorn, Rocky Mountain News, October 9, 2008:
“Smick, editor of The International Economy, posits that this crisis was a long time coming—and he wrote his book before the $700 billion bailout. Readers will give him credit for prescience and hope he can tell us what’s coming next. Er, strike that word credit. It tends to make people awfully twitchy these days.”

From “Investors, bankers have lost their faith,” by David J. Lynch in USA Today, October 9, 2008:
“‘You have a crisis of confidence because people don’t believe the bankers, and the bankers don’t believe each other,’ says David Smick, author of The World Is Curved: Hidden Dangers to the Global Economy.”

From “No safe haven, no exit for the global economy this week,” by David Ignatius, Washington Post, October 9, 2008:
“David Smick, whose fine book The World Is Curved offered clairvoyant early warnings of disaster, proposes that private financial institutions might finance 60 percent of the cost of this clearinghouse, and central banks the remaining 40 percent. To play and get protection, private institutions would have to share all data, which means coming clean about the toxic paper on their books.

What matters is the collective commitment to create a global backstop—so that there is a foundation for lending and commerce, all the way down the line. ‘What’s happening is the reappraisal of the value of every asset in the world,’ says Smick. ‘The solution has got to be global.’”

From “The Testing Time,” by David Brooks, syndicated column in the New York Times, October 7, 2008:
“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.?”

From “Money for Nothing: A bird’s-eye view of Wall Street’s nervous breakdown,” a review by Matthew Continetti in The Weekly Standard, October 6, 2008:
“The World Is Curved is a discursive book, ranging from Tokyo to Martha’s Vineyard, from European Central banker Jean-Claude Trichet to the decidedly non-European New York senator Charles Schumer. The attentive reader will quickly grasp two key themes. The first is that the so-called information economy is imbued with ignorance. A lack of transparency rules. ‘[I]n the new global economy,’ [David] Smick writes, ‘this crazy ocean of global liquidity has not only increased the number of unknowns but also re-arranged their relationships and relative importance.’ What you don’t know really can hurt you.”

From The Daily Beast (, October 5, 2008:
“Especially at this time every thoughtful American needs to learn as much as possible about the relationship of politics to economics,” says former President Bill Clinton. He recommends The World Is Curved to help understand the Wall Street bailout.

From “Not So Flat After All” by Bret Swanson, Forbes, September 29, 2008:
“[A] well-timed and lucid tour of the global economy. With continuing chaos on Wall Street—and in Washington—[David] Smick’s insights appear supremely prescient. Dozens of recent books, of course, predicted doom, gloom and even ‘financial Armageddon.’ But dozens of books always predict these things. Smick’s warnings warrant more attention because he mostly eschews the perennially wrongheaded tsk-tsk triad of the trade, budget and savings deficits. In its place he substitutes a more nuanced view of the promises and perils of globalization.”

From “The Clueless: Why neither presidential candidate knows what’s about to hit him,” by Nina Easton, Fortune, September 24:
“[David] Smick, a longtime investment advisor, has also played in politics, so I asked him what advice he would give a candidate. He begins with this diagnosis: The world capital markets are like a house of cards because of a lack of investor confidence, which in turn is caused by a lack of transparency. Sour mortgages weren't the problem so much as the fact that no one, here or abroad, knew how much toxic stuff was on their books because it had been securitized into obscure financial instruments. We’ve all heard the same diagnosis—and the same calls for new government rules—from both Democrats and Republicans.

But here’s where Smick departs into bolder territory. Legislative action in Washington isn't the answer, he argues, and could well hurt U.S. markets. ‘You can’t do it alone,’ says Smick. ‘It’s too easy to play the central banks off one another. Financial institutions are too clever at arbitraging different international regulatory systems.’

Instead, he says, the next President, acting with urgency, should convene a successor to the 1944 Bretton Woods conference, which gave birth to a post-World War II international monetary system. In addition to setting transparency standards, the industrial nations should look to provide a buffer when political turmoil disrupts capital flows—whether it’s Russia invading Georgia or the possibility that slowing growth in China will lead to social chaos there.

Smick concedes it won't be easy: ‘Huge amounts of global capital are held by nondemocratic regimes that aren’t in a cooperative mood,’ he says, and democracies have plenty of ‘weak political leadership.”

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