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An Incisive Analysis Of Global Recession

Updated: November 6, 2010 12:23 pm

If you ever want to know how the world economy works: interest rates, currency devaluation, credit spreads, and every other term in economics, you must read this book. It will be recommended by most universities worldwide. The author, a professor of Economics at the University of Chicago, and former chief economist at the IMF, warns that it wasn’t just greedy bankers taking irrational risks that caused the recent global financial crisis—other factors included overdependence on the indebted American consumer, growing inequality, and a weak-safety net. These latter factors created political pressure to encourage easy credit and keep job creation robust. The book also contends that unequal access to quality education and healthcare acerbated the situation. In fact, the author was one of the few economists who warned of the global financial crisis before it hit. In 2005, he stood before a room of prominent economic policymakers celebrating Alan Greenspan’s legacy presented a paper about how the world was headed for financial disaster. He was roundly scoffed at, even though, as it turns out, he was right.

                The financial collapse of 2007 and the great recession that followed left many economists on the defensive. News programmes, magazines, pundits, and even the Queen of England asked, with some variation, the same question: Why didn’t you see it coming? While there are broad similarities in the things that go wrong in every financial crisis, this was a crisis centred on what many would agree is the most-sophisticated financial system in the world. What happened to the usual regulatory checks and balances? What happened to the discipline imposed by markets? What happened to the private instinct for self-preservation? Is the free-enterprise system fundamentally flawed? These are not questions that would arise, if this were ‘just another’ emerging market crisis. And given the cost of this crisis, we cannot afford facile or wrong answers. The book is a perceptive, detailed look at where the answers to the questions that were raised during the recession may lie.

                The writer shows how the individual choices that collectively brought about the economic meltdown—made by bankers, government officials, and ordinary homeowners—were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power global economic growth and stave off global downturns. He exposes a system where America’s growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust, no matter what the consequences to the economy’s long-term health; and where the US financial sector, with its skewed incentives, is the critical but unstable link between an over-stimulated America and an underconsuming world.

                The book demonstrates how unequal access to education and healthcare in the United States puts us all in deeper financial peril, even as the economic choices of countries like Germany, Japan, and China place an undue burden on America to get its policies right. He outlines the hard choices we need to make to ensure a more stable world economy and restore lasting prosperity. The author argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits us if they aren’t fixed.

HarperCollins, A-53, Sector-57, Noida-201301

By Ashok Kumar

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