Fixing the Global Economy

Myron Scholes Global Markets Forum

March 3, 2009 5:30–7 p.m., Gleacher Center

Focusing on “the emergence of extraordinary global imbalances” over the past decade or so, Martin Wolf gave his views on the current economic and financial crisis. He argued that although two explanations for the crisis widely heard in the United States—failures of regulation and excessively loose monetary policy—were important aspects of the problem, they could not explain “a catastrophe of this magnitude.” Wolf focused particularly on three trends that helped lead to the crisis: global imbalances, a credit boom that accelerated under the influence of those imbalances, and the way financial innovation worked.

Wolf argued that the Asian crisis a decade earlier was an important contributor to global imbalances because it led policymakers in emerging economies to conclude that “running very large current-account deficits to support large investment booms was sensationally dangerous,” especially when the deficits are financed by relatively short-term, foreign-currency borrowing. Over the decade leading up to the current crisis, therefore, many emerging economies, particularly in Asia, shifted to new policy regimes that included aggressively accumulating foreign reserves. The result was a “monstrous recycling of capital inflows and current account surpluses,” Wolf said, with foreign reserves held by emerging economies rising sharply. It also “amounted to a massive flow of capital from poor countries to the richest country in the world,” he added. Asset bubbles, especially in housing, started emerging across much of the developed world, Wolf said. Particularly in the United States, household debt rose sharply because of the capital inflows.

In addition, Wolf argued, these imbalances “came on top of what was already an astonishingly rapid credit expansion across the developed world, which had started in the early 1980s, when debt ratios to GDP were extremely low, and accelerated rapidly.” The third trend he highlighted was that, in an environment of low returns for safe assets, investors demanded higher returns for safe investments. Innovators in the financial system found ways to meet this demand, which eventually helped lead to the financial crisis.

Read Martin Wolf's Column »

Martin Wolf is associate editor and chief economics commentator at the Financial Times, London. He was awarded the CBE (Commander of the British Empire) in 2000 “for services to financial journalism.” Wolf is an associate member of the governing body of Nuffield College, Oxford; honorary fellow of Corpus Christi College, Oxford University; an honorary fellow of the Oxford Institute for Economic Policy (Oxonia); and a special professor at the University of Nottingham. He has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999 and a member of its International Media Council since 2006. He was made a Doctor of Letters, honoris causa, by Nottingham University in July 2006. He was made a Doctor of Science (economics) of London University, honoris causa, by the London School of Economics in December 2006.

Wolf was a joint winner of the Wincott Foundation senior prize for excellence in financial journalism for 1989 and 1997. He won the RTZ David Watt memorial prize for 1994, the “Accenture Decade of Excellence” at the Business Journalist of the Year Awards of 2003 and the Newspaper Feature of the Year Award at the Workworld Media Awards 2003. On December 1, 2005, he was given First Magazine’s “Special Advocacy Award” at its annual “Award for Responsible Capitalism.” In January 2008, he won the AMEC Lifetime achievement Award at the Workworld Media Awards for 2007. He came second equal in the Royal Statistical Society’s awards for statistical excellence in journalism for 2008, in the category for print and online journalism. He won the “Commentator of the Year” award at the Business Journalist of the Year Awards of 2008. He was also placed among the world’s 100 leading public policy intellectuals by the British magazine Prospect and the US magazine Foreign Policy in May 2008.

His most recent publications are Why Globalization Works (Yale University Press, 2004) and Fixing Global Finance (Johns Hopkins University Press, 2008, and Yale University Press, forthcoming).


This event is part of the Initiative on Global Markets and is generously sponsored by Myron Scholes. This program is cosponsored by The Chicago Council on Global Affairs.