On a completely separate topic, a journalist friend of mine called me earlier today to ask me what I thought about the popular discussions about whether the current crisis marked a “paradigm shift” that would see a sharp decline in the relative power of Wall Street and London and a rise in the power of one of the Asian financial centers.  Aside from the fact that I am a little allergic to paradigm shifts, I thought this was an interesting question.  I usually get asked where the New York or Shanghai stock markets will close Friday (for the record: I don’t know). 

This is also one of those “big” questions about which I think most of the current debate is a little muddled.  To begin with, I don’t think the current crisis is a paradigm shift at all.  It is simply yet another in the sequence of crises that have marked the six (as I count them) globalization cycles of the past 200 years.  Of course there will be big changes in the worlds of commerce, finance, and politics, but these changes won’t represent a brave new world so much as a reversion to a more standard world.

After all, during the great liquidity cycles that underlie the globalization cycles, we always see in the late stages a massive growth in financial transactions and the power of financial institutions.  During these periods banks get larger and larger, often though acquisitions and expansion abroad, and financial activity expands dramatically until it seems to become the hub of all industrial, commercial and political activity.  

But it is these late periods which are the anomaly, not the norm.  Every end of a globalization period (which usually ends in crisis) we experience a sharp deleveraging and a massive reduction in speculative activity.  Along with that inevitably banks and financial markets become less central and less active.  The expected decline of Wall Street and London, in other words, is not a shocking new reality but simply a reversion to more normal times – when it is not the dream of 8 out of 10 graduates of elite colleges to become investment bankers.  To tell the truth when I was graduating I didn’t even now what investment bankers did.  In a few years an awful lot of young graduates will be just as ignorant as I was.  That is probably not a bad thing. 

I suspect that a lot of experienced bankers, academic, and students of financial history will agree with me so far, but here is where I am going to get controversial.