The More Things Change…

Posted by on 10/12/09 in America, Ethics, Global Politics, History, Markets, Risk

In 1999—before the NASDAQ bubble popped, before Presidents George W. Bush or Barack Obama, before the attacks of 9/11, before Adjustable Rate Mortgages were famous—Thomas Friedman published The Lexus and the Olive Tree, a thoughtful treatise on Globalization. Ten years later, reading these three excerpts from Friedman’s book is eerie for they raise essential and existential questions. The bold highlights and follow-up questions are ours, but the original insights are credited to Friedman:

Excerpt 1
“If you talk to Wall Street investment banks today they will tell you that the thing that absolutely took them by surprise in the market meltdown of August –September 1998 was how much more interconnected the system was than they realized. None of their risk models—which were based on past correlations between investment and certain events—had anticipated the sort of chain reactions that in 1998 made a mockery of the whole concept of diversification. Companies that thought they were diversified by investing in different financial instruments, with different maturities, in different currencies, in different markets, in different countries found out quickly that all their investments were part of one big interlinked chain from which they could not escape when markets started to nose-dive. One link in the chain pulled down the other.” (Page 419)

Questions:

  1. What did the “surprise” of 1998 teach regulators, bankers, investors, advisors, politicians, etc.? How is business today conducted any more thoughtfully than it was then?
  2. With the S&P 500 trading now about 20% below where it was 10 years ago, what are our domestic public companies and in particular our financial services companies doing to promote sustainable economic growth?

Excerpt 2
“But what happens if you have a recession in the United States and Western Europe at the same time, and Japan continues in stagnation and is unable to pick up the slack?…Instead of America and Western Europe being able to suck in all the imports from the developing countries, so they can export their way back to life, the big developed countries could be tempted to put up new protectionist walls against more imports to preserve their own shrinking job markets. Will the system continue to hold then? We don’t know, because in the first decade of globalization we really have never faced this scenario. But this is the real stress test for the globalization system—how it survives a recession at the core—and until we go through it we really won’t know whether the process of globalization is irreversible or not. (Pages 430-31)

Questions:

  1. Now that we are going through the first major recession of the globalization period (we are at the end of the second decade as defined by Friedman), how willing are we as Americans to participate in its long term survival?
  2. What if the developing economies can get back to life by providing products and services for their own people (Chinese cars for Chinese citizens, for example) and no longer solely rely upon American and Western European consumers for sustenance? How does that change the geopolitical balance of power?

Excerpt 3
“Globalization is always in the balance, always tipping this way or that. Our job as citizens of the world is to make certain that a majority of people always feel that advancing issues are leading the declines. Only then will globalization be sustainable. And no nation has a greater responsibility and opportunity to ensure this than the United States of America. (Page 433)

Questions:

  1. What do Americans collectively believe that America is actually responsible for?
  2. If America grows wary of its leadership role in the world, who else might wish to step in? Are we okay with that?

And the final question: What will we think of Friedman’s observations in yet another ten years?