The World Is Curved


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From “Paulson’s Panic” by Robert J. Samuelson, Washington Post, September 24, 2008:
“What we are discovering is that all the complex securities, combined with ever-greater international investment flows, have created a global financial system ‘so arcane that few people can understand its workings,’ David Smick writes in The World Is Curved: Hidden Dangers to the Global Economy. The difference between now and two years ago is that financial managers then thought they understood the system; now they know they don’t. Ignorance breeds risk-aversion and fear.”

From “World Is Curved Offers Valuable Historical Perspective,” by Steve Weinberg, in a review that appeared in USA Today, September 22, 2008:
“Offering valuable historical perspective, [David] Smick explains that international financial markets have always been plagued by uncertainty. In recent years, the unknown factors have multiplied.

‘There are new players with new perspectives,’ Smick says. ‘All of a sudden, a huge pool of funds is competing around the world for investment opportunities. Bankers, business people and governments in industrialized economies are now competing with entrepreneurs, start-ups and old state-controlled companies in emerging economies to attract those funds.’

‘With new kinds of securitized debt, mezzanine investing and outrageously complicated financing instruments, it is almost impossible to figure out what is going on at any given time. Investors need new kinds of information to make good decisions. But exactly what information is that? And where do they get it?”

From “The Woe on Wall Street,” by Todd G. Buchholz, a review of The World Is Curved that appeared in the Wall Street Journal, September 19, 2008:
“Mr. Smick, a Washington consultant, neatly spells out both the upsides and downsides of economic liberalization: the hundreds of millions of people lifted from poverty as well as the middle-class workers struggling to keep their jobs amid ferocious competition. Overall he gives two cheers for global capitalism, offering a quote from Kofi Annan that must have staggered many of the former U.N. secretary-general’s fans: ‘The main losers in today’s very unequal world are not those who are too much exposed to globalization. They are those who have been left out.’

But Mr. Smick is hardly a flat-Earther of the Friedman stripe. He attacks the pernicious leverage practices of the past decade and describes how hypocritical banks slashed hedge-fund lending after Long-Term Capital Management nearly blew up the world in 1998 but then juiced up their own leverage. How did they do this? How did they escape the restraints of the Basel capital standards adopted to ensure global financial stability in the wake of the LTCM debacle? By shunting risky positions to new, separate entities. In other words, Wall Street has been torching itself of late because banks thought they could avoid scrutiny by writing down their risky bets on a completely separate piece of paper!

From “No More Lipstick—With Financial Crisis, Politics Gets Serious,” by Mort Kondracke in Roll Call, September 18, 2008 (featured on
“Neither [candidate], either, has taken up the idea of investment guru David Smick, editor of The International Economy Magazine, for an international summit after the election where heads of state—and the president-elect—would pledge to keep international credit flowing.

Smick, author of the new book, The World Is Curved, describes international credit as ‘the lifeblood of the world economy’ and warns it’s in danger of shutting down because of collapsing confidence and the short-sightedness of central bankers other than U.S. Fed Chairman Ben Bernanke.”

From “David Smick on Today’s Hidden Dangers: The adviser and author fears the credit crisis could sink the global economy,” by Kirk Shinkle, U.S. News & World Report, September 17, 2008:
“David Smick has hovered near the nexus of global economic power for decades, consulting with high-profile financiers and policymakers the world over. In The World Is Curved: Hidden Dangers to the Global Economy, he argues that radical shifts in the financial sector could threaten the benefits of globalization, especially if policymakers back away from a commitment to free trade.

•What does Thomas Friedman’s book The World Is Flat get wrong?
Tom Friedman wrote a great book on the revolution in the global supply chain, but as I began looking at the world I know, the financial market, the world is anything but flat. We can’t see the dangers lurking over the horizon.

•What’s the level of risk today?
Global markets could come to the conclusion that there’s a breakdown in the economic and financial order. That’s what happened in the 1930s; the fight for commodities, hugely nationalistic impulses, disagreements where trade and capital flows are suddenly affected—it’s very, very dangerous.

•What should policymakers understand?
We are seeing a tectonic shift in financial power away from the West. If you look at the big new powers in global finance—Asian central banks, commodity producers, global hedge funds, and private-equity funds—the amount of capital they control is a pile of money approaching the size of pension fund money, traditionally one of the big pools for global investment. They’ll ultimately have to judge the American economy based on its ability to attract capital.”

From Harvard Business Review, by John T. Landry, September 2008:
“Economists love to talk about the flexibility of markets, and [David] Smick, a prominent adviser on international finance, is no exception. But he argues forcefully that the world economy is not as laissez-faire as we think. The very production-oriented government policies that have driven success in China and the rest of Asia have also brought corruption and a consequent investment bubble. If Western bankers are slow to overhaul the shortsighted financing strategies behind the present worldwide credit crunch, the bubble will burst—resulting in a protectionist reaction that will bring on a global depression. Smick concedes that any predictions are difficult given the complexity of capital flows, but he rightly points out that globalization is under attack everywhere because it tends to exacerbate income inequality.”

From “The Economy: How the American Financial System Came to Be Such a Mess,” by Peter Behr in the Washington Post, September 7, 2008:
“[David] Smick built his career through the classic Washington practice of networking and advice-giving, and his analysis is sprinkled with stories of encounters with big players in global finance. He describes his sweaty-palmed interview with Singapore’s legendary leader Lee Kuan Yew, who blasted Smick for his confidence in U.S. markets, then gave him a consulting contract. It’s classic name-dropping, but it enlivens his account.”

From “Global Risk Is Just Around the Curve,” by Vivianne Rodrigues for Reuters, September 4, 2008:
“In The World Is Curved: Hidden Dangers to the Global Economy, author David Smick argues that today’s vast pools of global liquidity mean financiers and political leaders are losing the ability to see financial risk ahead. ‘A small village in Arctic Norway can see its entire financial future destroyed because its financial managers invested heavily in a Citigroup product called a collaterized debt obligation,’ Smick said. ‘We are being forced to travel down an endless, dangerously twisting road of volatility.’”

From the Tampa Tribune, by Kevin Walker, September 7, 2008:
“David M. Smick lays down some scary information in The World Is Curved: Hidden Dangers to the Global Economy. His basic premise is the credit crisis is just the beginning of a worldwide problem because of complex interlocking global financial systems. Smick promises to help you understand how these systems work.”

From Kirkus Reviews, July 1, 2008:
It’s a fraught time, writes hedge-fund guru [David] Smick in this timely book. If the “Chinese juggernaut” doesn’t sink us, then class warfare and our spendthrift ways will.

Borrowing his title, obviously, from Thomas Friedman's optimistic The World Is Flat (2005), Smick dourly notes that in finance, the horizon is near while the dangers lurk out of sight—“nothing happens in a straight line. Instead, there is a continual series of unforeseen discontinuities—twists and turns of uncertainty that often require millions of market participants to stand conventional wisdom on its head.” Seeing over the horizon is the job of sound analysts and good political leaders, who seem to be in short supply. Weathering the fiscal storms is ever harder for numerous reasons, one of them the declining vigor of central banks, another, in the United States, an accumulation of personal debt that threatens to put the economy into a Japan-like state of decades-long stagnation. Globalism, some would object, is a vehicle for weakening national economies, but Smick counters that “liberated global financial markets and free trade” are largely responsible for the creation of vast wealth in the last quarter-century (during which the Dow Jones Industrial Average rose from 800 to more than 12,000) and should not be unduly regulated, since economies seem to be slipping beyond the control of national governments. Instability will thus be the norm in the future, especially inasmuch as private concerns dwarf whole economies: The exposure of the Swiss bank UBS to the subprime mortgage meltdown was four times as large as the entire Swiss economy, Smick observes. Couple profligate habits with an ever-growing Chinese economy beholden to no one, and suddenly the future looks like a roller-coaster ride for even the most aggressive investor.

A supremely useful book for portfolio planning, though not the thing to give someone who’s inclined to worry about the state of the world.”

From Publishers Weekly, August 25, 2008:
With this illuminating book, [David] Smick revisits Thomas Friedman’s description of the “flat” world produced by globalization, arguing instead that the uncertainty produced by globalized financial markets has created a world that is curved, where events and their consequences are unpredictable. Smick begins with a puzzle: why did the subprime mortgage crisis, an event that directly impacted a relatively small piece of the global market, have such a catastrophic impact on the world market as a whole? From there, the author turns to topics as complex and varied as the potential 21st century Chinese financial bubble and the policy dilemmas currently facing the Fed. Throughout the book, the author returns to the argument that political trends are increasingly at odds with the forces driving the globalized world economy. Smick brings expertise and lucidity to many difficult subjects, and while his book’s appeal will likely be limited to those with some background in the field, it will undoubtedly stir interest and debate amongst investors, policymakers and strategists alike.