Davos is a well-rehearsed event and everyone knows the part they should play. Business and political leaders gather each year to tackle the major challenges of a global economy while the rest of the world, or those of its citizens who are interested, look on from afar. But this year, for obvious reasons, things are different. The notion of leadership has been coupled in the public mind with that of responsibility. The tone here is a little more humble and the attitude more open-minded. There’s a recognition that new thinking is required. A suitable time, perhaps, to turn the tables on convention and have Davos delegates ask the questions they can’t answer and for global citizens to offer solutions.
Gamefully opening the discourse is Professor Klaus Schwab, Founder and President of the World Economic Forum.
If you’ve got suggestions for Klaus then use the comments section below.
The crisis has to run its course. The best resolution to this problem is to let the market eliminate the problems through bankruptcy. Attempts to prop up failed institutions and businesses is fruitless, these entities need to fail, otherwise we'll never have a solid foundation to build upon. Also, there has to be transparency and revision to central bank policy, we can't have central banks manipulating the markets the way they have in the past. Controlling market behavior through artificially low interest rates and currency inflation does not work...the present situation is a clear testament to the failings of current economic thought.
The failings of central economic planning we're supposed be have been killed off, yet here we are again trying to run a supposed free market economy through central economic planning.
Unless we cease this incessant meddling we'll continue to get more of the same. Let the liquidation of debt occur and allow better business managers to acquire the assets and move forward. The idea that we reward failure through bailout policy is absurd. And the idea that we reward private sector failure with public sector money is even more disturbing.
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There must be a recognition that the extreme diversification of the financial instruments, CDS, OTC derivatives, etc, have advanced beyound all logical relation to the underlying investments. These losses must be acknowledged, not swept into the future by massive injections of fiat currency that further set the stage for inflation and devaluation of the same. Major financial institutions must be allowed to fold, not kept on life support by governments afraid of riots in the street. Past mistakes must be acknowledged and responsibility accepted by those responsible. There is a consensus among the average person that the banks and financiers responsible for this mess, in colusion with politicans, are doing thier best to cover up and postpone the inevitable. Businesses cannot begin creating or sustaining jobs when staggering losses are being hidden behind mazes of financial shenanigans until they become too much to hide.
Governments, employees and those on government assistance must all share a portion of the blame. Governments for spending beyound thier means on programs that they do not need to be involved in. Employees for demanding ever more money and spending easy credit, following the government lead into debt. Those on Government assistance for not expending the effort to fend for themselves. We have become used to a certain level of existance which we must temper if we wish to see a true light at the end of the tunnel
I believe the issue of massive regulatory failure needs to be addressed much more explicitly. I am a former bank regulator (a Director of Research of the New York State Banking Dept.) and I have spent many years in the investment banking world involved in risk management, risk reporting and risk technology. Lately there have been several proposals for revising the regulatory process, including establishing a clearing house for credit-default swaps. consolidating regulators, new reporting requirements, etc. But there seems to be a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. If I may let me offer the following comments:
1. The bank regulators have had the authority to examine any aspect of a bank’s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper will mean nothing if the regulators cannot or will not do their jobs.
2. Mr. Timothy Geithner recently said “First, the multitude of overlapping regulators must be rationalized into a coherent few, the communication between them improved and their turf battles ended”. Unfortunately consolidating the regulators will produce some streamlining but will not likely achieve the desired goals. Sending a regulator who makes $50,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did for over 4 1/2 years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There is a lot of deadwood at the top of the agencies and it needs to be cleaned out. A Herculean task if there ever was one.
Dear Sirs,
Debt forgiveness….across the board…..to individuals, institutions, governments, one and all, etc. Complete debt forgiveness….balance all accounts to zero (0), and start again, with reasonable, common sense laws in place.
It\’s the only way. Throwing billions of dollars of the taxpayers money/any currency at the problem only continues to line the pockets of the fat cats, once again, and does not help EVERYONE. It only lines the pockets once again of the greedy ones, as evidenced in the news every day. The few are STILL making millions in bonuses and despicable, unethical, obscene profits. Stop lining the pockets of the few THROUGH DEBT FORGIVENESS.
DEBT FORGIVENESS….total….for EVERYONE…put the counter back to zero(0). Viable AND doable. If you can throw money at the problem, you can put the ticker back to zero (0). Thank you.
Kitadawn
Reprioritize: Football players, baseball players, etc. being paid millions of dollars a year to do something as silly as a bunch of men/women running around chasing a ball. So called “movie stars” being paid millions for “acting”. CEOs of corporations being paid a gazillion dollars a year while farmers that produce their food do real work. I think that we should shut the food supply off to places like New York City and the other major metroploitan areas and show these urbanites and suburbanites that all of their glamour and glitter does not amount to a hill of beans when they can no longer put food in their bellies.
Guys, I understand you moderate this board, but the idea I posted was actually a solution. Most of this stuff is just opinion, and reprints. I would love to know what it was that got it deleted.
Much of my comments are based on interviews and commentary on Tech Ticker and Davos.
It is clear that the major banks are insolvent (but most smaller banks are quite healthy). The usual procedure would be to place the insolvent banks in receivership under the FDIC. The shareholders would be wiped out but that is the risk taken when investing. It appears that political considerations prevent this.
Other countries have nationalization insolvent banks but that is contrary to the culture in the US. Nationalizing banks is probably not the best answer as it unlikely that the US government could effectively run the banks, and it would be unfair competition against the many smaller well-run banks.
The provision of TARP money to the troubled banks was a major error as it did not address the underlying problems first. Providing more TARP money would be ineffectual and a waste. If the intention was to provide the troubled banks with money so that they could loan it out, then that has clearly failed. The banks have to hoard the money, as the money (apart from the money used to provide obscene bonuses) is needed to meet the losses announced each quarter and to meet capital adequacy ratios. The problems will probably escalate as the loan portfolios are marked to market at ever decreasing values.
A suggestion that marking to market should be suspended should not be countenanced. That would not solve the underlying problems. It would have the unfortunate consequence that bank balance sheets could not be trusted as they would clearly be fictitious. Improved standards are required if these problems are to be prevented in the future. The opposite policy is clearly inappropriate and dangerous as it would crystalize the lack of confidence in the banks.
The proposal to establish a “good” bank and a “bad” bank from each insolvent bank is probably the only solution that would work and have wide-spread acceptance.
This should be done before any more TARP money is injected into the troubled banks. The toxic assets of a troubled bank should be transferred to a newly establish “bad” bank.
George Soros has suggested that the capital of the troubled bank should also be transferred to the bad bank. I think this would be the best approach.
The shareholders in the troubled bank should have their shareholding transferred to shares in the bad bank. This would be equitable as their position would be roughly unchanged. They might be granted a nominal shareholding in the remnants of the troubled bank to reflect the tangible assets of that bank. Intangible assets would be deemed to be zero.
The shell of the troubled bank could then be re-capitalized. I understand that there would be great demand to invest in a bank that has no toxic assets - one that is essentially starting with a clean sheet.
These now “good” banks would be able to start lending money immediately. Higher capital adequacy ratios and stricter lending practices should be imposed on these banks for a period of say 5 years. That should be a necessary condition of the rescue. During that period, improved financial practices could be debated and regulated, and then these good banks could adopt those policies, which might well be less restrictive than the policies imposed on them during the 5 year period or part thereof.
The boards and the top-level managers of the troubled banks should be fired. No doubt some of the directors and top-level managers would have performed well and might not deserve to be fired, not everyone has necessarily failed in their duties, however like the toxic assets, the boards and the top-level managers should be regarded as being toxic and should be removed. The good bank should start with a completely new board and new CEO and second-tier managers. It might be suggested that an experienced board of directors and top-level management is required, however the existing boards and top-level managers have clearly failed.
Salaries and director fees and bonuses should be regulated by the federal government for say the first 5 years until the financial system has recovered. They should be reasonable, possibly tending towards the austere. There will be plenty of talented people who would jump at the opportunity. There would be a large pool at the smaller well-managed banks. After that 5 year period, regulation of renumeration would cease and would be opened to market forces.
Capital adequacy ratios would not be required at the bad bank as that would be under the control and management of the federal government.
Trading in shares of the bad banks would be suspended for 5 years. During the first 3 months of that period, the real value of the toxic assets would be determined. I am not clear how this would best be done, however it might be possible to take samples of the mortgages, determine the current values of the properties and the ability of the borrowers to repay the loans, possibly take into account market trends, estimate a value for the samples and extrapolate that to the entire loan portfolio. The real value of the shares could then be determined. It will probably be negative. Whether it is positive or negative, it would be used as a benchmark to measure improvement in the financial position of the bad bank at the end of the 5 year period. Any improvement in the value of the bad bank from this benchmark would then be shared between the shareholders and the federal government, that is the taxpayers, on a split determined when the bad bank is formed. The federal government could take its share as a “management” fee, or it could issue itself shares in the bad bank and take dividends and capital gains on the shares. The hope here is that the housing market will improve over the next 5 years sufficiently that the bad bank will have positive value at the end of the period. And if it doesn’t, the shareholders will simply be wiped out.
It is essential that people are encouraged to stay in their homes and not give them up, even if they are under water. Foreclosures increase the inventory of houses for sale and thus drive house prices down.
With interest rates having fallen so low, it is likely that interest payments on mortages might be comparable to rental payments. If the house is under water, the owner may as well stay as they would not be any better off renting. And if the housing market recovers, they might end up having equity in the house eventually.
If the value of a house is greater than the mortgage, the owner might wish to sell in the expectation that the value will continue to fall. It is imperative that such sales be limited. If the mortgage is held by the bad bank, the federal government could value the house and agree that it would make up any fall in value over the next 5 years as long as the owner retains ownership for at least one year. To clarify, suppose that the house could realistically be sold now for $300,000 and the mortgage is $270,000. If the owner sells now, they will pocket $30,000. If they believe the housing market will continue to fall, it would be sensible for them to sell now. But that increases inventory and continues to force valuations down. If the federal government agrees on the $300,000 valuation, there is no longer any incentive for the owner to sell. If they have to sell say 2 years time, then the federal government will make up any shortfall to the agreed $300,000. They pay off the mortgage and still have $30,000 in pocket. If they don’t sell, they might well find that the value of the house falls in the short term but rises in the long term, and the hope that that happens would be an incentive to retain ownership of the house.
Sir,
Everybody talks about fixing the problem but nobody talks honestly about the causes. Without fixing them it is impossible to resolve this crisis which I predicted and see continuing for a long time. Fact is all the bail outs, stimulus packages, elimination of ineterst (zero rate), all filed to reignite the world economy. And why?The reasons are simple. Let’s be honest. This is a socio-economic problem. Economy is second to social problems, and what are they and how to fix it? Unlike older generations people today are irresponsible regardless of their social status. Case in point is that people got mortgages, jobs, diplomas not because of their perspiration and intelect but tehir color of skin. Banks had to loan money even if people had no education and jobs to repay. Billions were loaned all across America. These people were unable to repay and did not intend to do it. On the other spectrum, CEO’s earn 500 times what their employees make and they took more away from their employees and cut their benefits and merit raises to a point that when the crisis happened, those who are responsible and productive are afraid to loose what they succeeded to save despite all this and so they stopped consuming and spending. The irresponsible loan policy triggered this latter effect and now we have a group which caused the problem, bankers and borrowers, and anotehr group whcih is afraid to spend because it looses jobs and has little to fall back. How can an average hard working person be blamed or expected to act differently if he has little savings, no job security, no guarantee of health care or pension?? These are the causes and all this throwing zillions of dollars at the problem won’t help, because it doesn’t reach the average person and calms him down. Wall Street CEO’s got more bail out money and what did they do? They renovated their offices, took luxary Las Vegas trips, gave themselves billions more in bonuses but nothing reached the average Joe, who needs to spend money to restart the engine. So my proposal is to immediately change laws, such as elimination of any discriminatory laws, such as affirmative actions, so people will be accepted to work based on their true talents and skills, so they will create and produce and not just be another burden on employer and society. Reduce and limit wellfare and other programs which encourage people not to work. Limit executive compensation, now, to not more than 5 times the average employee compensation, including benefits. Stop throwing money at pet projects which are not benefiting us in short term at all. Limit health insurance companies to 10% overhead so they will be more efficient like in Canada, and limit, yes, limit doctors compensations which is outrageous and is the primary reason for driving the cost of medical care up astronomically. Doctors in US can make a decent living like in many other counrties, even if they do not become millioners. After all, those who go to study medicine should do it out of love for medicine and helping the sick and not out of greed. These are real issues which will not go away and the problem will not be resolved, unless these issues either will get addressed on their own due to misery and exhaustion, which follows human catastrophy and major wars, as it happend in the past or if we are barve to be honest and do soemhtign about it now. We have a choice of doing basic fine-tuning or face major upheavals and prolonged pain to a point of exhaustion. Only then people will become mroe repsonsible and the system will readjust on its won. However, why should we suffer? It is not too late to fix it now if we show honesty and leadership. Are there any intelligent people left to comprehand this?
Debt forgiveness. Start Again.
The current problem is an inevitable result of globalization. It could have been slow and manageable, but that would have required long-term planned readjustment, worldwide. The ‘crash’ is due to short-term thinking and this year’s bottom-line priority. The current paradigm is view people as consumers, not producers. Until that changes, any ’solution’ will be extremely temporary, every ‘boom’ shorter and every ‘bust’ more extreme.
All ‘profit’ is the result of human productivity. The extension of credit, to compensate for decreased productivity, as manufacturing and ’soft services,’ such as programming, were moved from ‘developed countries’ to places labor is cheaper, regulation is laxer and profit is higher, created ‘the bubble,’ and concentrated the ‘wealth’ of the world.
The only solution is long-term investment in productivity, but that requires a truly long-term view, and reasonable expectation of profit, based on actual productivity growth, worldwide. Currently, it’s based on the ‘looting’ of resources, not creation of something. The very term “consumer” defines it as such. Use it up fast, so you have to buy more, on credit.
It is a philosophical problem. As long as ‘net worth’ is viewed as the primary factor in judgment of a person’s value to society, we will be trapped in the boom and bust cycle. It is at the root of short-sighted investment. Judging every investment by what it will do to the bottom-line, right now, will always cause disaster in the future. Nowhere is that more obvious than in our dependence on fossil fuels. Technologies for reducing it are not only not supported, they’re discouraged.
The price of oil should be much higher and its use much more limited. It shouldn’t be cheap and its use should be primarily synthetic materials and organic chemicals used in their manufacture, not to produce power and for personal transportation. Basically, not just being burned. Until and unless we move beyond the ‘fire age,’ the growth of human civilization will be limited and the ‘industrial revolution’ will not raise the standard of living of all people. If the goal is limited to ‘me making money now,’ not widening prosperity, by investing in the potential of human creativity and resulting productivity, we don’t have a future.
First of all, there needs to be a market for these complicated and so called “toxic” assets that financial institutions currently hold. The inability to assess the value of these assets is the primary cause of the credit crises. These organizations must be forced to reveal all of these investments and have them valued in some way. Without a private market, governments must create the market by creating a calculation of value and then purchasing them for later resale. In return, the institutions will receive either government guarantees or capital investment (with accountability.)
Next up is the unsustainable economic model of an artificially valued Chinese currency and “rest of the developed world” consumption. Globalization may well be here to stay but it cannot continue in this manner. When third world nations join the developed world on the back of cheap labor, they must join the developed world in not manipulating their currencies. The WTO must enforce fair trade practices that prohibit this kind of manipulation. This would “spread the wealth” to other developing nations as a source of labor and a target of investment. This cycle would continue until equilibrium is achieved. A level playing field is a must for the future.
Third is the problem of finite fossil fuels. The US and Europe are net importers of these resources and this model is, again, unsustainable. Therefore it is in America’s and Europe’s best interest to collaborate on investment in research and development of alternative energy and transportation solutions. If this collaboration can agree on fair sharing of the benefits, this kind of joint venture will do more to create a secure and wealthy future for all involved than any other measure under current consideration.
Finally there is the obvious and simple solution of greater regulation. Never again can we let so very few hold the economic well being of the world in their hands. Transparency MUST rule the day. No need for a long essay here. The solution is simple and obvious.
Dealing with global climate change needs to be the economic stimulator for the future. Climate change will stimulate the need for new products and services. However, this effort needs to be done in a systematic fashion, not hit and miss. Only government has the ability to stimulate this kind of systematics.
For example, fossil fuels are finite and at some point, through choice or inevitability, they will disappear. Electricity is the easiest energy source to produce sustainably, however, national electric grids are based on point-source power production, whereas, sustainable electricity production, such as wind and solar, are distributive by nature. This requires a very different power grid. Power grids should be nationalized and supported through user fees, so that coherent, systematic changes that prepare for future production capabilities can be put in place.
Economics is a master status for humans. Wars are always about control of resources. Economic development in chronically war-torn areas, such as Afghanistan, the Horn of Africa, the Congo, the Middle East, can do more to reduce or eliminate conflict than military activity. In these areas, war is the economy, for lack of a better alternative stimulus. Poverty, combined with a fungible commodity, such as diamonds in West Africa or poppies in Afghanistan, allow a war-lord culture to develop which provides employment to young men. Here is the priority sequence of required development: first, all-weather roads and rail, for without transportation, there is no economy; second, electromagnetic infrastructure - electricity production and distribution, communications infrastructure; third, school/clinics (the two functions co-located) and a network of teachers colleges. This will generate economic activity and at lower cost than military expenditures. The way to end war is through a full belly.
A third issue is executive compensation. On the economic Marginal Rate of Return curve, executive compensation reached the extreme right end of the scale, where more input results in a rapidly decreasing level of output. Executive bonuses did not improve management function but damaged it by rewarding greedy behavior and short term thinking, damaging to the entity as a whole. Under the U.S. farm program, disaster benefits are based on the concept of Proven Yield, where a farm’s per unit area production potential is calculated by taking the last five years’ production, dropping the high and low years and averaging the middle three. This process, adapted to executive compensation would reward behavior that favors good long term planning and the financial health of the company over that of the individual.
If there was more of a motivation to repay debt, rather than walk away when times got hard, we might see less foreclosures in the housing market of the U.S.
Consideration should be given to an overhaul of the personal Bankruptcy statutes so that this option is one of last resort rather than economic convenience.
An extension of this, into the corporate realm could see trailing penalties deducted from Corporate bonus funds that are held in trust for a period of time. Entering into risky deals for short term gain could then be tempered by evaluation of the longer term consequences of the deal. Jumping out of the door before the deal goes bad would then be a less favourable option.
Dear sir,
Although I am an economist with a lot of experience and knowledgeable of the financial system,i think that it will be very difficult to deal with this crisis with a conventional thinking because the world had changed
dramatically since the 80’s in term of media ,financial instruments and globalization.
Each country should deal with this own problems because the reasons of the crisis are different.for example what is happening in the USA in terms of credit thightening was needed and is needed and will be needed for a few years in order to cure the american economy and make it prosperous again on a sound basis.Americans will learn the hard way to spend less and save more.this way the economy recovery will be on a sound basis and not on a temporary”credit air pillow” that will desinflate with the firs blow.
i think this time the people in the street knows what is right for him and he cut spending and debt. it will be difficult to change this positive attitude overnight.
I think the administration should only focus on umproving the rate of employment ,help the undustrial,energy,construction and agricultural buisness directly and stop pouring money in the financial system.
trust the financial system that he will find ways to survive the crisis on his own once he knows that no more money will come from the government.
The only solution to solved this worldwide financial mess were in, is to implement the policies used in the late 1930’s and early 40’s. Let’s start World War 3. It worked for the US.and helped solve our unemployment problem.The US only lost approx. 500,000 lives, only this time my butt won’t be in some muddy dirt hole somwhere in Europe..
Let the banks rot. Why should the public pay for these greedy incompetant’s mistakes. Too many odious people in positions of powerful wealth. Let’s have some integrity restored to the world.
Observed in a newspaper the other day a list of the twelve topmost bankers/money manipulators that had been involved in and caused all this tragic problem with world economies and ten of them were jewish. Many people believe that this is a jewish heist of the American economy and the financial rewards concommitant. A British bank was given £39 billion, where has it gone? It has vanished!
The elephant in the room syndrome exists here, about time it was exposed.
Look closely at how big banks and big corporations have handled small businesses and individual people. There is an egregious pattern emerging. It’s on a massive level. Trust is lost. And those that don’t count are speaking and pulling out: Customer service doesn’t exist anymore, the airlines charge a 15 dollar baggage handling fee that assures they will lose your luggage. Credit card companies will be sure to let you go over your credit limit so that they can charge you 60 dollar over the limit fees and rack up absurd interest against you. In keeping with the overvaluing of property so banks could rake in profit while families are about to go homeless. Don’t get me on moving companies, they loved the demise of the interstate commerce commission. Better to throw your possessions in the garbage than to try to ship interstate. Then we have the major companies claiming to do and finance home improvements. The interest starts accruing before the job is done, if you are lucking enough to get a corporation like sears to finish a job. And the big guys raked in mega bonuses for adhering to a bottom line philosophy of screw you.
All the banks are crooks and cowards. They are holding the world hostage, demanding governments succumb to macroeconomic pressures that will force governments and ultimately taxpayers to take the trillions of dollars worth of bad assets off their own balance sheets so they themselves can go unscathed. Do not let them win!!! Create a national bank (just one is enough) to lend to those most in need. The cowards will fall inline when they see that they cannot hold the world ransome.
It’s appropriate that the “anti-spam word” that I had to type in order to post this was “TOAST”, because that’s what the world economy is.
There is no “solution”, any more than there was a “solution” for Titanic once it struck the iceberg.
The idea that somehow the consumer debt-driven economy is going to be magically revived is pure fantasy.
Governments had better quickly prepare for feeding and caring for their populations. We are going to devolve into localized, small-scale, village-type economies. The present system’s complexity and interconnectedness is what has doomed it.
Government or tax payers shouldn’t bear the huge mess created by irresponsible banks/investors. Let the recession do it’s clean up.
It’d be useless to pump more money into them, which will result in bigger fishes eating up smaller ones. More retrenchments will occur. More job losses will result in more sour mortgages.
Whatever the stimulus package has done for now is enough. Need more to help small-medium enterprises and medium-lower income groups.
And should imply temporary restrictions to companies having retrenchments when they are still profitable.
Government subsidies for companies who doesn’t retrench, and more incentives to companies who hires.
Sir, Each country should buy up all home mortages. I mean all. Place them in a Existing unit like in the USA Fannie Mae and Freddie Mac. The good home loans will provide postive income for the business dealing with the bad loans.
Plus with all the bad loans in one place Law Enforcement can have all the paper work in one spot and save money while looking over the bad loans for Illegal Activity.
The Government from then own should be the sole holder and maker of homeloans. This great wealth in realestate will eventually repay all losses and build equity that will support you countries curreny value.
I would suggest the banks and the fiancial markets deal with the Credit Swap losses on their own. The Fiancial Industry created that problem let them solve it. I would however put law in place that would require paper work for swaps. In the USA they have Swaps written on cocktail napkins and scrapes of paper without any real way of telling what or how much it actually is worth.
The Commerical Loans ignor and let the banks and the courts deal with it.
At the end of the day Banks would be left with a truck load of cash and no income stream from home loans. So they will have to loan money for people to buy homes, cars,and other things. Since you the only game in town for housing you can also control the building of new homes and how land is used then too. Possible nipping the loss of farm land to subdivisions in the bud.