Morning Must-Read: Andrew Flowers: Martin Wolf’s Grand Theory Of Global Financial Disorder

Andrew Flowers: Martin Wolf’s Grand Theory Of Global Financial Disorder: “As the saying goes (sort of)…

…They had a favorite hammer, so every problem looked like a nail. For Martin Wolf… his hammer is ‘global imbalances’…. The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis… is a great read… will be unsettling to anyone who thinks the financial system is any more stable…. Global imbalances are the patient zero of financial crises, according to Wolf. And Wolf has swung this hammer before…. Wolf does argue smartly for other reforms, but you get the feeling that global imbalances explain everything. Might financial regulation at the domestic level, or China’s investment-heavy mercantilist model, or the skewed incentives of corporate managers, or the Federal Reserve’s monetary policy, or… any number of other factors also play a role? Perhaps.

Martin would say– correctly–the global imbalances have been an important part of every story in and by which things have gone badly wrong. Without global imbalances, either things would not have gone wrong or things would’ve gone wrong in a different, and probably less serious, Way.

That does not mean that there is any easy way to resolve global imbalances. Nevertheless, what Larry Summers said 15 years ago is still true: with global imbalances, they will be resolved, but they can be resolved in either of two ways–by balancing up, or bouncing down.