The clueless

(Fortune Magazine) -- Of all the mind-bending problems for the next President to solve, the one that will most affect your livelihood is the same one that most vexes both candidates: global economic turmoil. We hear the rhetoric from Barack Obama and John McCain on how to defeat terrorism, expand health care, end our dependence on foreign oil, bolster the middle class (Obama), and support America's entrepreneurs (McCain). But on the question of how to prevent another panic attack that dries up credit and batters stock markets worldwide, the candidates' answers are oddly present-tense, small-bore, and contained within U.S. borders - even when danger lurks beyond.

So when David M. Smick, editor of The International Economy, a quarterly journal, sent me a copy of his new book with a note - "I don't think either of our candidates has a clue of what's about to hit him" - it caught my attention. Smick's book, The World Is Curved: Hidden Dangers to the Global Economy, takes readers on a lively tour of the dangers inherent in a global economy that he likens to a "rich, generous, but occasionally deeply paranoid great-uncle." It was that great-uncle's global panic - what appeared to be an overreaction to the rise in American homeowners' defaulting on their subprime mortgages - that induced what Smick calls the Great Credit Crisis of 2007-08.

The World Is Curved (take that, Tom Friedman) features a stack of blurbs from the same eminent economic names that dwell in the pages of his magazine: Alan Greenspan, Lawrence Summers, George Shultz, Jean-Claude Trichet - officials who probably share his view that "the world is curved" and "we can't see over the horizon." He writes: "Our sightlines are limited. We are always being surprised, and that is why the world has become such a dangerous place." No, Toto, we're not in Kansas anymore. But how does this get discussed in a presidential campaign?

Smick, a longtime investment advisor, has also played in politics, so I asked him what advice he would give a candidate. He begins with this diagnosis: The world capital markets are like a house of cards because of a lack of investor confidence, which in turn is caused by a lack of transparency. Sour mortgages weren't the problem so much as the fact that no one, here or abroad, knew how much toxic stuff was on their books because it had been securitized into obscure financial instruments. We've all heard the same diagnosis - and the same calls for new government rules - from both Democrats and Republicans.

But here's where Smick departs into bolder territory. Legislative action in Washington isn't the answer, he argues, and could well hurt U.S. markets. "You can't do it alone," says Smick. "It's too easy to play the central banks off one another. Financial institutions are too clever at arbitraging different international regulatory systems."

Instead, he says, the next President, acting with urgency, should convene a successor to the 1944 Bretton Woods conference, which gave birth to a post--World War II international monetary system. In addition to setting transparency standards, the industrial nations should look to provide a buffer when political turmoil disrupts capital flows - whether it's Russia invading Georgia or the possibility that slowing growth in China will lead to social chaos there.

Smick concedes it won't be easy: "Huge amounts of global capital are held by nondemocratic regimes that aren't in a cooperative mood," he says, and democracies have plenty of "weak political leadership." Tough trade talks can further complicate relations. Still, there's reason to think financial self-interest will prevail. "The one thing you have to get agreement on is capital flows," Smick says. "If you screw up capital flows, the game is over." None of this is as lively as debating offshore drilling, but you have to hope that the next President gets a clue - before the next great financial crisis hits.