Monday, October 20, 2008

Globalization Giveth, and Taketh Away. And, Shall We Pray, Saveth?

New York Times op-ed columnist Thomas L. Friedman holds out the hope that the "globalization of finance," which helped so many large developing countries start an ascent from poverty but then bit us all in the foot, may yet be the engine that saves the day. Maybe. See the reservations I raise after some of Friedman's paragraph's, below.

So think about it: Some mortgage broker in Los Angeles gives subprime “liar loans” to people who have no credit ratings so they can buy homes in Southern California. Those flimsy mortgages get globalized through the global banking system and, when they go sour, they eventually prompt banks to stop lending, fearful that every other bank’s assets are toxic, too. The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.

And therein lies the central truth of globalization today: We’re all connected and nobody is in charge.

Globalization giveth — it was this democratization of finance that helped to power the global growth that lifted so many in India, China and Brazil out of poverty in recent decades. Globalization now taketh away — it was this democratization of finance that enabled the U.S. to infect the rest of the world with its toxic mortgages. And now, we have to hope, that globalization will saveth.

The real and sustained bailout from the crisis will happen when the strong companies buy the weak ones — on a global basis. It’s starting. Last week, Credit Suisse declined a Swiss government bailout and instead raised fresh capital from Qatar, the Olayan family of Saudi Arabia and Israel’s Koor Industries. Japan’s Mitsubishi bank bought a stake in Morgan Stanley, possibly rescuing it from bankruptcy and preventing an even steeper decline in the Dow. And Spain’s Banco Santander, which was spared from the worst of this credit crisis by Spain’s conservative banking regulations, is purchasing America’s Sovereign Bankcorp.

I suspect we will soon see the same happening in industry. And, once the smoke clears, I suspect we will find ourselves living in a world of globalization on steroids — a world in which key global economies are more intimately tied together than ever before.

It will be a world in which America will not be able to scratch its ear, let alone roll over in bed, without thinking about the impact on other countries and economies. And it will be a world in which multilateral diplomacy and regulation will no longer be a choice. It will be a reality and a necessity. We are all partners now.

So far, so good. What troubles me is the sentence, "We're all connected, and nobody is in charge." What's troubling is not its accuracy, but Friedman's failure to analyze it and challenge it (as he has in other columns).

It is the job of governments to be in charge of the global economy. And the fact that just about all significant governments have been asleep at the switch is the main reason globalization was allowed to run amok. Governments need to place financial globalization within globally agreed limits. And until governments do, globalization is more likely to give less and take more--from everyone.

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