This book is well worth a read, even though it paints an alarming picture of the poo the world economy is in. It is interesting for its thought-provoking suggestions for a way out of our current morass. ( )

In The shifts and Shocks: How the Financial Crisis Has Changed Our Future Martin Wolf, Chief Economics commentator at the Financial Times, expands on his FT commentaries in book form. He divided the book into three parts: Shocks, Shifts, and Solutions. The first part looks at how the financial crises that hit the world after 2007 made the world what it is today. The second part looks at the changes to the world economy and financial systems that led to the crises and their aftermath. The third part looks at how to achieve a better financial system and economy.

Each section addresses the "high income" countries, emerging countries and Eurozone countries. Wolf's view is that the underlying cause of the the interlinked global and Eurozone crises was what he calls a "global savings glut" driven by global trade and capital imbalances. China and the other emerging Asian countries, the oil exporting countries, Japan and Germany built up huge trade surpluses at the expense of the US and "peripheral Europe." In the US, this was partially a result of a dollar that was stronger than it ought to have been due to currency interventions against it by the exporters, and partially the result of Federal Reserve actions meant to equalize the imbalances and still maintain maximum employment. In "peripheral Europe" it was the result of being able to finance large current-account deficits at very low interest rates made possible by having the Euro as a common currency with the current-account surplus country of Germany. These imbalances were the result of long-term trends of increasing liberalization (freer markets), globalization,innovation, leverage and incentives toward greater risk taking within companies.

Wolf is skeptical that the voluminous reams of of newly adopted and proposed regulation will prevent another financial crisis. He points out the the most important legislation in response to the Great Depression was the Glass-Stegall Act of 1933 which ran 37 pages in it's entirety. The response to the 2007 crisis was the Dodd-Frank Act of 2010 which ran 848 pages BUT which requires nearly 400 pieces of detailed regulatory rules which have added an additional 8,843 pages to date and it's only 1/3 finished! He also points to thousands of pages of regulations currently being written in Europe and points out the inconceivability that something so complex can be understood and actually work. He instead calls for larger capital reserves and "macroprudential supervision" which means attempting to regulate the stability of the financial system as a whole. He acknowledges that this will not be easy and might not even be work, but thinks it needs to be tried.

He is also rather pessimistic about the survival of the Euro which he likens to a bad marriage. He proposes a banking union in which eurobonds would represent some percentage of the GDP of all the member countries with each individual country responsible for financing their debt above that level. Those eurobonds would then be very liquid and provide "safe" assets to back the system instead of relying on the bonds of Germany. He holds Germany culpable for the way they've handled the Eurozone and acknowledges that they are not willing today to accept the reforms that he proposes, but he thinks something must be done for the Euro to survive.

Wolf also doesn't believe that the current move toward government austerity was wise. He thinks there should have been more fiscal stimulus in order to keep the world's economy growing while the healing takes place.

The book is not an easy read since it deals with heavy subject matter and a lot of inter-related economic concepts. I have had to re-read some sections of it and feel I gained a better understanding of the material the second time around. The book is a take on the financial crises of the past few years that is different from anything else I've read. I think anyone with a strong interest in economics and markets will enjoy it.

Full disclosure: I received a free ARC of an uncorrected proof via a Goodreads First Reads giveaway. ( )