Davos Notebook

The problem with capitalism is democracy

The rich and powerful at Davos debated capitalism today with a defense that invoked Winston Churchill’s famous dictum on democracy. “Democracy,” Churchill told the House of Commons, “is the worst form of government, except for all those other forms that have been tried from time to time.”

Carlyle Group Managing Director David Rubenstein suggested in his historical comparison is that capitalism is not perfect but it’s the best we’ve got.

While the Time Davos panel, entitled “Is 20th century capitalism failing 21st century society?” acknowledged a desire to reduce inequality, there was a shrug of resignation about the way forward and an absence of solutions.

Indeed, one business member of the panel, pressed by a question from the audience, acknowledged there was only so much they could fix in a 90-minute panel. That may go to the heart of the World Economic Forum annual meeting itself: while it admirably raises the attention of complex issues by debating them with the media world watching, it can’t be expected to resolve them in this snow-capped Swiss town.

And it couldn’t in a forum like this which was, as Alcatel-Lucent CEO Ben Verwaayen grumbled, a “battle of nostalgia.”

from Felix Salmon:

Against the optimists

One of the more annoying aspects of the Davos echo-chamber is the way in which people are constantly asking each other what "the mood" is this year; the result is an inchoate consensus that since the crisis is over, markets are up, and countries are growing again, there must be grounds for optimism and the kind of yes-we-can thinking in which the World Economic Form has always specialized.

I'm moving the other way, however, siding with the pessimists like Nouriel Roubini and Martin Wolf. They're both convinced that the problems of southern Europe are both grave and intractable, although they differ in their prediction of what the consequences will be: Nouriel sees a good chance of the eurozone breaking up, while Martin sees the PIGS (Portugal, Italy, Greece, Spain) staying in the euro and ending up stuck in a long-term slump, able to neither cut interest rates nor devalue their currencies in an attempt to regain competitiveness. The only other option is an across-the-board cut in nominal wages, on the order of 30% or so. That's something which is pretty much inconceivable, although Ireland seems to be trying to move in that direction.

Of course the one entity which will benefit from this is the Squid: Goldman Sachs seems to be taking the lead in trying to orchestrate a desperate and expensive sale of Greek debt to China. Expect more such desperate moves as the southern European macroeconomy continues to deteriorate; anybody who watched the world's investment bankers swarming all over Domingo Cavallo in the final weeks of Argentina's currency board will remember just how vulturish they can be in such situations.

Five themes for Davos

Top (L-R): Steve Clarke, Natsuko Waki, Gerard Wynn, Martin Howell
Bottom (L-R): Peter Thal Larsen, Felix Salmon, Ben Hirschler, Krista Hughes

Reuters will have a multimedia team of 20 journalists plus editors and three columnists on site covering the Jan. 27-31 World Economic Forum annual meeting.

This year we are focusing our news coverage around five global themes that are shaping economics, politics and investment opportunities in 2010.  Our in-depth reports will draw on the expertise of our specialist correspondents from around the world to help inform the Davos conversation. These reports will be complemented by on-the-ground coverage, exclusive text and TV interviews, as well as a live blog aggregating the best Davos coverage on the web and on Twitter. We’ll be exploring the probing questions behind efforts to rebuild the world economy and financial system two years after the credit crisis.

Of confidence and coconut trees

“Confidence grows at the rate that a coconut tree grows, but confidence falls at the rate that the coconut falls,” Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, told a panel in Davos.

He also indicated that India’s decision not to float its currency and to build up massive reserves was correct, noting that this gave it a cushion during the downturn.

“Floating (currencies) would be fine, if that was what was meant, but what they mean by floating is crashing upwards and crashing downwards.”

Risk Takers Anonymous

An eminent scientist who studies the brain and economics thinks that the financial industry in essence became addicted and insensitive to both risk and reward.

“The finance industry was adapting to the level or risk,” said Gregory Berns a professor at Emory University in Atlanta and a leader in the relatively new field of neuroeconomics.

“It is an insidious process, and you are not aware of it. You are addicted to returns, you are addicted to risk, you are addicted to cocaine – its all the same as far the brain goes.”

Overheard in Davos

One of the best things about Davos is the conversations you overhear. It’s like no place else.

Sitting minding my own business, typing away I became aware of a central banker from a medium sized emerging market sitting nearby. He was joined by a gentleman from a bank in his home country. After a few muffled preliminaries the central banks said:

“So, how much trouble are you in?”

The banker responded in what sounded like soothing tones but I couldn’t make out exactly what he was saying. The only other line that came through clearly was that after a long speech the banker said to the central banker, with an air of exasperation.:

U.S. – They’re skint, they’re frugal, get used to it

Good session on the “Frugal American,” an as yet undiscovered species that is coming to a global economy near you.

You know the general idea, a decade or so of living beyond their means, borrowing money against their rising house values to finance consumption is coming to a grinding halt. That’s called a recession, but how long will this frugal thing last?

Ian Davis, the MD from consultants McKinsey & Co was blunt:

“Americans have no option but to be relatively more frugal over the next 10-20 years.” This is irrespective of the crisis and is a structural issue due to overspending in the past and the huge host of baby boomers who are now moving into what they fondly hope will be their retirement years. Old people buy fewer ipods and ski boots apparently, and are less likely to remodel their kitchens and bathrooms. That is a problem for the global economy.

It’s never too late to blame Greenspan

Alan Greenspan hasn’t been chairman of the Fed for three years, but his policy mistakes keep paying dividends in the form of blame at this year’s World Economic Forum in Davos.

Polish Finance Minister Jacek Rostowski yesterday:

“This was the failure of one of the key institutions in the world.” During the Greenspan era he said they continually met downturns and distress with easing and “eliminated fear.”

Ken Rosen of Berkeley, who was writing about the housing bubble in 2005 or so, is in the same camp:

from James Saft:

Whose job is it to stimulate Europe?

So do countries which can borrow money more cheaply, Germany for example, have a higher obligation to borrow, spend and make things better for everyone across Europe?

Polish finmin Jacek Rostowski, speaking in a session on the outlook for Europe, seemed to think so:

"Fiscal policy ... some countries which are far more able to afford increases in govt expediture and budget deficits than others. We should apply the principle that those with the lowest debt financing costs should consider the most expansive policies."