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For 15 years, I have attended the World Economic Forum in Davos.
Typically, the leaders gathered there share their optimism about how
globalisation, technology and markets are transforming the world for
the better. Even during the recession of 2001, those assembled in Davos
believed that the downturn would be short-lived.
For 15 years, I have attended the World Economic Forum in Davos.
Typically, the leaders gathered there share their optimism about how
globalisation, technology and markets are transforming the world for
the better. Even during the recession of 2001, those assembled in Davos
believed that the downturn would be short-lived.
But this time,
as business leaders shared their experiences, one could almost feel the
clouds darkening. The spirit was captured by one speaker who suggested
that we had gone from "boom and bust" to "boom and Armageddon". The
emerging consensus was that the International Monetary Fund
(IMF) forecast for 2009, issued as the meeting convened, of global
stagnation - the lowest growth in the post-war period - was optimistic.
The only upbeat note was struck by someone who remarked that Davos
consensus forecasts are almost always wrong, so perhaps this time it
would prove excessively pessimistic.
Equally striking was the
loss of faith in markets. In a widely attended brainstorming session at
which participants were asked what single failure accounted for the
crisis, there was a resounding answer: the belief that markets were
self-correcting.
The so-called "efficient markets" model, which
holds that prices fully and efficiently reflect all available
information, also came in for a trashing. So did inflation targeting:
the excessive focus on inflation had diverted attention from the more
fundamental question of financial stability. Central bankers' belief
that controlling inflation was necessary and almost sufficient for
growth and prosperity had never been based on sound economic theory;
now, the crisis provided further scepticism.
While no one from
either the Bush or Obama administrations attempted to defend
American-style free-wheeling capitalism, European leaders argued for
their "social market economy", their gentler form of capitalism with
its social protections, as the model for the future. And its automatic
stabilisers, with spending automatically increasing as economic woes
increased, held out the promise of moderating the downturn.
Most
American financial leaders seemed too embarrassed to make an
appearance. Perhaps their absence made it easier for those who did
attend to vent their anger. The few labour leaders who work hard at
Davos each year to advance a better understanding of the concerns of
working men and women among the business community were particularly
angry at the financial community's lack of remorse. A call for the
repayment of past bonuses was received with applause.
Indeed,
some American financiers were especially harshly criticised for seeming
to take the position that they, too, were victims. The reality is that
they were the perpetrators, not the victims, and it seemed particularly
galling that they were continuing to hold a gun to the heads of
governments, demanding massive bailouts and threatening economic
collapse otherwise. Money was flowing to those who had caused the
problem, rather than to the victims.
Worse still, much of the
money flowing into the banks to recapitalise them so that they could
resume lending has been flowing out in the form of bonus payments and
dividends. The fact that businesses around the world were not getting
the credit they need compounded the grievances expressed at Davos.
This
crisis raises fundamental questions about globalisation, which was
supposed to help diffuse risk. Instead, it has enabled America's
failures to spread around the world, like a contagious disease. Still,
the worry at Davos was that there would be a retreat from even our
flawed globalisation, and that poor countries would suffer the most.
But
the playing field has always been uneven. If developing countries can't
compete with America's subsidies and guarantees, how could any
developing country defend to its citizens the idea of opening itself
even more to America's highly subsidised banks? At least for the
moment, financial market liberalisation seems to be dead.
The
inequities are obvious. Even if poor countries were willing to
guarantee their deposits, the guarantee would mean less than that from
the United States. This partly explains the curious flow of funds from
developing countries to the US - from whence the world's problems
originated. Moreover, developing countries lack the resources to engage
in the massive stimulus policies of the advanced countries.
Making
matters worse, the IMF still forces most countries that turn to it for
help to raise interest rates and lower spending, worsening the
downturns. And, to add insult to injury, banks in advanced countries,
especially those receiving aid from their governments, seem to be
pulling back from lending in developing countries, including through
branches and subsidiaries. So the prospects for most developing
countries - including those that had done everything "right" - are
bleak.
As if all this were not enough, as the Davos meeting opened America's House of Representatives passed a bill requiring US steel to be used in stimulus spending, despite the G20's call to avoid protectionism in response to the crisis.
To
this litany of concerns we can add the fear that borrowers, wary of
massive American deficits, and holders of US dollar reserves, worried
that the US may be tempted to inflate away its debt, might respond by
draining the supply of global savings. At Davos, those who trusted the
US not to inflate away its debt intentionally worried that it might
happen unintentionally. There was little confidence in the
none-too-deft hand of the US Federal Reserve - its reputation marred by
massive monetary-policy failures in recent years - to manage the
massive build-up of debt and liquidity.
President Obama seems
to be offering a needed boost to American leadership after the dark
days of George W Bush; but the mood in Davos suggests that optimism and
confidence may be short-lived. America led the world in globalisation.
With American-style capitalism and America's financial markets in
disrepute, will the US now lead the world into a new era of
protectionism, as it did once before, during the Great Depression?
In association with Project Syndicate, 2009
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For 15 years, I have attended the World Economic Forum in Davos.
Typically, the leaders gathered there share their optimism about how
globalisation, technology and markets are transforming the world for
the better. Even during the recession of 2001, those assembled in Davos
believed that the downturn would be short-lived.
But this time,
as business leaders shared their experiences, one could almost feel the
clouds darkening. The spirit was captured by one speaker who suggested
that we had gone from "boom and bust" to "boom and Armageddon". The
emerging consensus was that the International Monetary Fund
(IMF) forecast for 2009, issued as the meeting convened, of global
stagnation - the lowest growth in the post-war period - was optimistic.
The only upbeat note was struck by someone who remarked that Davos
consensus forecasts are almost always wrong, so perhaps this time it
would prove excessively pessimistic.
Equally striking was the
loss of faith in markets. In a widely attended brainstorming session at
which participants were asked what single failure accounted for the
crisis, there was a resounding answer: the belief that markets were
self-correcting.
The so-called "efficient markets" model, which
holds that prices fully and efficiently reflect all available
information, also came in for a trashing. So did inflation targeting:
the excessive focus on inflation had diverted attention from the more
fundamental question of financial stability. Central bankers' belief
that controlling inflation was necessary and almost sufficient for
growth and prosperity had never been based on sound economic theory;
now, the crisis provided further scepticism.
While no one from
either the Bush or Obama administrations attempted to defend
American-style free-wheeling capitalism, European leaders argued for
their "social market economy", their gentler form of capitalism with
its social protections, as the model for the future. And its automatic
stabilisers, with spending automatically increasing as economic woes
increased, held out the promise of moderating the downturn.
Most
American financial leaders seemed too embarrassed to make an
appearance. Perhaps their absence made it easier for those who did
attend to vent their anger. The few labour leaders who work hard at
Davos each year to advance a better understanding of the concerns of
working men and women among the business community were particularly
angry at the financial community's lack of remorse. A call for the
repayment of past bonuses was received with applause.
Indeed,
some American financiers were especially harshly criticised for seeming
to take the position that they, too, were victims. The reality is that
they were the perpetrators, not the victims, and it seemed particularly
galling that they were continuing to hold a gun to the heads of
governments, demanding massive bailouts and threatening economic
collapse otherwise. Money was flowing to those who had caused the
problem, rather than to the victims.
Worse still, much of the
money flowing into the banks to recapitalise them so that they could
resume lending has been flowing out in the form of bonus payments and
dividends. The fact that businesses around the world were not getting
the credit they need compounded the grievances expressed at Davos.
This
crisis raises fundamental questions about globalisation, which was
supposed to help diffuse risk. Instead, it has enabled America's
failures to spread around the world, like a contagious disease. Still,
the worry at Davos was that there would be a retreat from even our
flawed globalisation, and that poor countries would suffer the most.
But
the playing field has always been uneven. If developing countries can't
compete with America's subsidies and guarantees, how could any
developing country defend to its citizens the idea of opening itself
even more to America's highly subsidised banks? At least for the
moment, financial market liberalisation seems to be dead.
The
inequities are obvious. Even if poor countries were willing to
guarantee their deposits, the guarantee would mean less than that from
the United States. This partly explains the curious flow of funds from
developing countries to the US - from whence the world's problems
originated. Moreover, developing countries lack the resources to engage
in the massive stimulus policies of the advanced countries.
Making
matters worse, the IMF still forces most countries that turn to it for
help to raise interest rates and lower spending, worsening the
downturns. And, to add insult to injury, banks in advanced countries,
especially those receiving aid from their governments, seem to be
pulling back from lending in developing countries, including through
branches and subsidiaries. So the prospects for most developing
countries - including those that had done everything "right" - are
bleak.
As if all this were not enough, as the Davos meeting opened America's House of Representatives passed a bill requiring US steel to be used in stimulus spending, despite the G20's call to avoid protectionism in response to the crisis.
To
this litany of concerns we can add the fear that borrowers, wary of
massive American deficits, and holders of US dollar reserves, worried
that the US may be tempted to inflate away its debt, might respond by
draining the supply of global savings. At Davos, those who trusted the
US not to inflate away its debt intentionally worried that it might
happen unintentionally. There was little confidence in the
none-too-deft hand of the US Federal Reserve - its reputation marred by
massive monetary-policy failures in recent years - to manage the
massive build-up of debt and liquidity.
President Obama seems
to be offering a needed boost to American leadership after the dark
days of George W Bush; but the mood in Davos suggests that optimism and
confidence may be short-lived. America led the world in globalisation.
With American-style capitalism and America's financial markets in
disrepute, will the US now lead the world into a new era of
protectionism, as it did once before, during the Great Depression?
In association with Project Syndicate, 2009
For 15 years, I have attended the World Economic Forum in Davos.
Typically, the leaders gathered there share their optimism about how
globalisation, technology and markets are transforming the world for
the better. Even during the recession of 2001, those assembled in Davos
believed that the downturn would be short-lived.
But this time,
as business leaders shared their experiences, one could almost feel the
clouds darkening. The spirit was captured by one speaker who suggested
that we had gone from "boom and bust" to "boom and Armageddon". The
emerging consensus was that the International Monetary Fund
(IMF) forecast for 2009, issued as the meeting convened, of global
stagnation - the lowest growth in the post-war period - was optimistic.
The only upbeat note was struck by someone who remarked that Davos
consensus forecasts are almost always wrong, so perhaps this time it
would prove excessively pessimistic.
Equally striking was the
loss of faith in markets. In a widely attended brainstorming session at
which participants were asked what single failure accounted for the
crisis, there was a resounding answer: the belief that markets were
self-correcting.
The so-called "efficient markets" model, which
holds that prices fully and efficiently reflect all available
information, also came in for a trashing. So did inflation targeting:
the excessive focus on inflation had diverted attention from the more
fundamental question of financial stability. Central bankers' belief
that controlling inflation was necessary and almost sufficient for
growth and prosperity had never been based on sound economic theory;
now, the crisis provided further scepticism.
While no one from
either the Bush or Obama administrations attempted to defend
American-style free-wheeling capitalism, European leaders argued for
their "social market economy", their gentler form of capitalism with
its social protections, as the model for the future. And its automatic
stabilisers, with spending automatically increasing as economic woes
increased, held out the promise of moderating the downturn.
Most
American financial leaders seemed too embarrassed to make an
appearance. Perhaps their absence made it easier for those who did
attend to vent their anger. The few labour leaders who work hard at
Davos each year to advance a better understanding of the concerns of
working men and women among the business community were particularly
angry at the financial community's lack of remorse. A call for the
repayment of past bonuses was received with applause.
Indeed,
some American financiers were especially harshly criticised for seeming
to take the position that they, too, were victims. The reality is that
they were the perpetrators, not the victims, and it seemed particularly
galling that they were continuing to hold a gun to the heads of
governments, demanding massive bailouts and threatening economic
collapse otherwise. Money was flowing to those who had caused the
problem, rather than to the victims.
Worse still, much of the
money flowing into the banks to recapitalise them so that they could
resume lending has been flowing out in the form of bonus payments and
dividends. The fact that businesses around the world were not getting
the credit they need compounded the grievances expressed at Davos.
This
crisis raises fundamental questions about globalisation, which was
supposed to help diffuse risk. Instead, it has enabled America's
failures to spread around the world, like a contagious disease. Still,
the worry at Davos was that there would be a retreat from even our
flawed globalisation, and that poor countries would suffer the most.
But
the playing field has always been uneven. If developing countries can't
compete with America's subsidies and guarantees, how could any
developing country defend to its citizens the idea of opening itself
even more to America's highly subsidised banks? At least for the
moment, financial market liberalisation seems to be dead.
The
inequities are obvious. Even if poor countries were willing to
guarantee their deposits, the guarantee would mean less than that from
the United States. This partly explains the curious flow of funds from
developing countries to the US - from whence the world's problems
originated. Moreover, developing countries lack the resources to engage
in the massive stimulus policies of the advanced countries.
Making
matters worse, the IMF still forces most countries that turn to it for
help to raise interest rates and lower spending, worsening the
downturns. And, to add insult to injury, banks in advanced countries,
especially those receiving aid from their governments, seem to be
pulling back from lending in developing countries, including through
branches and subsidiaries. So the prospects for most developing
countries - including those that had done everything "right" - are
bleak.
As if all this were not enough, as the Davos meeting opened America's House of Representatives passed a bill requiring US steel to be used in stimulus spending, despite the G20's call to avoid protectionism in response to the crisis.
To
this litany of concerns we can add the fear that borrowers, wary of
massive American deficits, and holders of US dollar reserves, worried
that the US may be tempted to inflate away its debt, might respond by
draining the supply of global savings. At Davos, those who trusted the
US not to inflate away its debt intentionally worried that it might
happen unintentionally. There was little confidence in the
none-too-deft hand of the US Federal Reserve - its reputation marred by
massive monetary-policy failures in recent years - to manage the
massive build-up of debt and liquidity.
President Obama seems
to be offering a needed boost to American leadership after the dark
days of George W Bush; but the mood in Davos suggests that optimism and
confidence may be short-lived. America led the world in globalisation.
With American-style capitalism and America's financial markets in
disrepute, will the US now lead the world into a new era of
protectionism, as it did once before, during the Great Depression?
In association with Project Syndicate, 2009