Davos Notebook

The global values crisis

Reuters Staff

Jan 29, 2010 10:38 EST

Writer and activist the Reverend Jim Wallis discusses the importance of morals in today’s society.

Davos Man turns 40

Ben Hirschler

Jan 21, 2010 09:00 EST

Many happy returns or midlife crisis?

The annual talkfest in the Alps records its 40th birthday this year but the rich and powerful will hardly be in celebratory mood as problems pile up in the post-crisis world.

How to withdraw the trillions of dollars in stimulus that helped the world avoid a rerun of the Great Depression, without spooking markets all over again?

What to do in the face of the world’s lukewarm response to the hot topic of climate change?

How to deal with an ascendant China striding out with a new confidence on the world stage and ready to clash with the West over issues such as Google?

For ‘Davos Man’ — and 85% of participants at the World Economic Forum are still men — these are testing times.

The forum certainly embraces debate but at its heart is a belief in market economics, individualism and power of globalised business to be a force for good. In the wider world, though, the grumbles are growing louder and the WEF’s own research suggests public patience with big business is running out.

Hank Paulson is not Gavrilo Princip, Lehman is not the Archduke Franz Ferdinand

James Saft

Jan 29, 2009 10:33 EST

Was letting Lehman go down the biggest mistake of the crisis? Many, including George Soros in the Financial Times, have argued that letting Lehman go down sowed panic to markets, consumers and businesses.

Not so fast, says Harvard historian Niall Ferguson, in an interview in Davos:

“My position is this is a typical error of historical understanding in which a single event is blamed for much more than it can possibly have caused. You can say ‘Hank Paulson is to blame for my troubles’ and if you can change one thing in the story it would have a happy ending.

It’s like saying if only Princip had not shot the Archduke Franz Ferdinand in 1914 there wouldn’t have been a First World War.

If you go through the events of September of last year you will find it incredibly hard to produce a counterfactual scenario in which it could have been possible to save both Merrill Lynch and Lehman. There is one bank which could be bought by Bank of America but there couldn’t have been two.

This is a crisis of too much bank leverage which began in August of 2007 and indeed had it roots far before. A bank leveraged 25-1 only needs a 4 percent decline in their assets to have their equity wiped out. And the notion that saving one investment bank could somehow have prevented or mitigated the crisis is a fantasy. The problem would have happened at some point somewhere else. There is a fundamental problem of bank solvency.”

Ferguson argues that without another buyer for one of the two, one would have needed to have been taken into a kind of Treasury conservatorship, as Fannie Mae and Freddie Mac were. But those were already quasi-government and such a move would have required Congressional approval, which given that Congress turned down the first version of the TARP, was not likely.