The Volatility Machine

This book presents a radically different argument for what has caused, and likely will continue to cause, the collapse of emerging market economies. Pettis combines the insights of economic history, economic theory, and finance theory into a comprehensive model for understanding sovereign liability management and the causes of financial crises. He examines recent financial crises in emerging market countries along with the history of international lending since the1820s to argue that the process of international lending is driven primarily by external events and not by local politics and/or economic policies. He draws out the corporate finance implications ofthis approach to argue that most of the current analyses of the recent financial crises suffered by Latin America, Asia, and Russia have largely missed the point. He then develops a sovereign finance model, analogous to corporate finance, to understand the capital structure needs of emerging market countries. Using this model, he finally puts into perspective the recent crises, a new sovereign liability management theory, the implications of the model for sovereign debt restructurings, and thenew financial architecture. Bridging the gap between finance specialists and traders, on the one hand, and economists and policy-makers on the other, The Volatility Machine iscritical reading for anyone interested in where the international economy is going over the next several years.

“The Volatility Machine provides a welcome departure from the sterile academic debate on the subject of financial crisis. Economists may quibble ... but would be wise not to ignore [Pettis's] insights into how they can exacerbate external risks.”

A source of new and enlightening perspectives for a wide range of the subjects of financial analysis and policy making for emerging financial markets. The Financial Regulator A cogent and compelling essay on the dynamics of emerging market crises ... Pettis's book offers invaluable insights into the dynamics of emerging market crises and provides important lessons for emerging market policy makers, investors, rating agencies, international institutions and anyone interested in emerging market finance. Moreover he has succeeded in delivering a punchy and highly readable volume The Business Economist The Volatility Machine provides a welcome departure from the sterile academic debate on the subject of financial crisis. Economists may quibble ... but would be wise not to ignore [Pettis's] insights into how they can exacerbate external risks. Institutional Investor

Michael Pettis is a Managing Director at Bear Stearns, a New York investment bank and an adjunct professor at Columbia University where he teaches courses in international finance. He has been involved in emerging markets, both as an investment banker and as a sovereign adviser, since 1987. In addition, he has written extensively on the subject, on specialized financial topics, and on policy.

This book presents a radically different argument for what has caused, and likely will continue to cause, the collapse of emerging market economies. Pettis combines the insights of economic history, economic theory, and finance theory into a comprehensive model for understanding sovereign liability management and the causes of financial crises. He examines recent financial crises in emerging market countries along with the history of international lending since the 1820s to argue that the process of international lending is driven primarily by external events and not by local politics and/or economic policies. He draws out the corporate finance implications of this approach to argue that most of the current analyses of the recent financial crises suffered by Latin America, Asia, and Russia have largely missed the point. He then develops a sovereign finance model, analogous to corporate finance, to understand the capital structure needs of emerging market countries. Using this model, he finally puts into perspective the recent crises, a new sovereign liability management theory, the implications of the model for sovereign debt restructurings, and the new financial architecture. Bridging the gap between finance specialists and traders, on the one hand, and economists and policy-makers on the other, The Volatility Machine is critical reading for anyone interested in where the international economy is going over the next several years.

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