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.”
It was an outdated debate which started in spirited form when Sharan Burrow, general secretary of the International Trade Union Confederation, accused business leaders of “losing their moral compass” and urged them to “stop the greed”.
“The right debate is about how we get the innovation and creativity we need,” Verwaayen countered. “We need to talk about innovation, real sustainability and reforms – not about corporations and greed. It’s about decision-making. We have to go for transformation. We have to talk about job creation, not job security.”
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.
My feeling is that the US poses at least as much of a risk to the global economy as southern Europe does. There's a good chance that 2010 could be the year of walking away from underwater mortgages; there's no sign of the private sector releveraging; and the government has clearly reached its limit in terms of the degree it can step in and borrow on behalf of the rest of us. If the attempt to prop up the still-overvalued housing market fails and there's another downwards lurch, there will be a whole new wave of bank insolvencies and much less fiscal space to bail them out than there was pre-crisis. And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn't reassure me in the slightest.
“And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn’t reassure me in the slightest.” This may turn out to be quite prophetic and unfortunately I believe much sooner than not expected.
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.
Look for these special reports:
China has emerged from the financial crisis emboldened with huge economic clout, vast FX reserves and growing diplomatic influence. To build its global presence, however, it needs brands, managerial expertise and technology. China Economics Editor Alan Wheatley asks – How will it muscle up? Will it be through internal growth or foreign acquisitions? And what are the political and industrial risks, rewards and pitfalls of each approach – for China and the world http://www.reuters.com/subjects/davos/china
My invitation must have gotten lost in the mail again this year…
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.”
John Lipsky of the IMF said the answer was a better international liquidity facility to give surplus producing nations the confidence that cash would be there if they did float and were hit by volatility.
He’s right though it would have to be a very big fund indeed. But if the lesson of the last five years is that everyone should export like heck and build up reserves we are going to have a battle on our hands and a long, deep downturn.
James Saft is a Reuters columnist. The opinions expressed are his own.
good going so far.
only let good sense prevail and do not plllllllleeeeeeeeeaaaaaaasssssssssseeeee eeeee for the sake of the greedy builders, give them any sops. we buy stocks at high prices and when they fall we have to live with it. same should be with the builders. if they bought land banks at high prices, let them face loss and sell properly at reasonable prices, not at the inflated high proces that they want to. these high prices are what are hurting the common man the most.
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.”
The part of the brain which is rich in dopamine is active in giving people a buzz when they do something they value. Getting money can give this buzz, as can taking risks. But sadly shortly after we reach a level of wealth we need more to get the same kick, just as we become used to the risk taking which formerly would have been exciting and might have caused us to trim our sails.
Berns describes the process of becoming habituated as like adjusting to a new level of light, at first it seems bright but then you adjust.
“You get used to it. The brain is constantly gauging relative amounts. The brain does not have a mechanism ever to be satisfied.”
The implication he said, is that the trader, banker or even small investor needs some structure from outside to impose limits.
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.:
“The prices are very low, but there are no buyers!”
That’s it, in a nutshell.
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.
So who is going to pick up the ball on consumption? From the sound of the panel, it looks like some kid took the ball and went home. China was candidate one, but even if consumption increased there, as it will, its not likely to become the next America, nor should it be.
“We have to live with the frugal American. Think about how much wealth has been lost, half of world market cap” said Zhu Min, executive vice president of the Bank of China.
“You don’t have wealth, you don’t have liquidity, how do you come back? After a very deep adjustment … the whole world will be a frugal world.”
Well, a lot of the news lately has been about rebounding and reviving our economic growth. How about if we just focus on being consistent for once? Pay off some of this debt that we’ve accrued as a nation (and as individuals) and start acting like responsible people.
It is sad that we’ve reached this point, but I kind of enjoy the vision of the future I keep imagining. Imagine Americans riding motorcycles and bicycles instead of Suburbans. I always try to think about what I could do without, and most of the time, I realize that most of the things I own are tangential to my life. I’m as guilty as the rest, but I’m ready to make some changes. I even look forward to it.
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:
“Alan Greenspan personally prevented some needed regulations being put in place. The free market fundamentalism we had was a mistake, to go the other way would also be a mistake.
We had excessively loose monetary policy and regulations on these aggressive loans were not put in place. There were Fed board members who wanted to do it, and Greenspan himself said the had too much belief in the market. …it was a global problem of excess credit led by the central bank in the U.S. but ratified by the central banks around the world.”
Maybe history will be kinder to his reputation as a jazz musician.
Greenspan is at the center of the financial collapse by, as has been pointed out, actively preventing regulation but also by fostering obfuscation, let us not forget how the esoteric geniuses at LTCM almost blew up the global financial system in 1998 while playing with exotic derivatives, before being bailed out by dear Alan.
I am utterly fascinated by this arrogant little man, who even after his own mess had spectacularly hit the fan shows up in Congress to admit being “partially wrong”.
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."
He pointed out that Greece is now paying more for financing that Poland, and said further that Poland would not go down the stimulative route, seeing as how credit was still flowing, but instead "leaving space for interest rate reductions."
He did make clear that this was the province of the central bank.
Rostowski did raise another point I think has legs: financial protectionism. Smaller countries without a big banking sector could see themselves really hurt if governments make lending at home rather than abroad a quid pro quo for bailout money. It is a slippery slope.
James Saft is a Reuters columnist. The opinions expressed are his own.
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Resident Davos Expert
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