Martin Wolf on the Financial crisis

image Notes from

Martin Wolf: Challenges of globalization
HBS 100th Anniversary
Soria Moria Hotel, Oslo

Timing of this conference is very prescient….

This financial crisis is more interesting than the Depression, since it is taking out the core of Wall Street.

"Let China sleep, for when she wakes, she will shake the world." — Napoleon Bonaparte

"The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war." Alan Greenspan, FT, March 16th, 2008

"Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – failed the test of the market place." Paul Volcker, April 8, 2008

Three of the five biggest investment banks have disappeared since he said that….and the others may not be around for another week or so.

What is driving the world economy?

It is the biggest globalization and convergence story of all time (last 20 years). There is a global move to the market, with liberalization of barriers to trade and capital flows, declining costs of transport and communications (half the world’s population has access to mobile phone in 2010), entry of countries containing billions of people into the world economy (China, India and former Soviet Union has doubled the world’s labor force) and the growth of those economies

What is upsetting the world economy?

Hyman Minsky: Success leads to excess. A world of low inflation and strong growth generates confidence.

Global imbalances also lead to monetary excess, asset price booms and credit explosions. The US was the target for global excess savings, but if a country spends more than its income, so must its citizens. US Households did most of that spending. Surplus of capital everywhere, 70% of it going to the US. UK, Spain and Australia also large importers of capital. The problem continues: China’s surplus is $400b annually already, and rising. This ultimately leads to revulsion, house prices collapse. What makes it worse is that inflationary pressures have risen, too, largely because of rising commodity prices due to more demand from China – the one-off impact of globalization has weakened.

(One reason for the housing boom is that the stock market has been depressed since 2000.)

The striking feature of this from the capital exporting side (aside from Germany and Japan, which accumulate capital and the waste it, mainly abroad), 5,5 trillion in foreign currency, mainly in the US, by China, Japan, Asia, oil exporters and Russia.

Hyman Minsky: when times are good, investors take on risk, the longer times are good, the more risk they take on. Ultimately, they take on too much risk, asset prices overshoot, and then fall, debt is called in, and the system collapses.

We are at the early end of this disaster….

What is the future of global capital markets?

This is a fundamental shift. The savings-surplus countries have with massive capital funds, much of it in sovereign wealth funds (larger than hedge funds and private equity already, 5% of global capital). The countries that need investments don’t have reliable capital markets.


Globalization itself is an immensely powerful political, economic and technologic process, though it is not by any means guaranteed to continue. Capital market integration has proved to be highly unstable. governments are going to be much bigger players in global capital markets form now on.