Sunday, February 01, 2009
Davos fails to pump up a deflated world economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


So did the World Economic Forum in Davos save the world? I have attended these annual gatherings in the Swiss mountains for quite a few years now, but never in conditions of such economic adversity.

Many bankers stayed away this year, but there were plenty of regulators, politicians and, yes, pundits. Those who did get some of it right, like Nouriel Roubini, aka Dr Doom, and Robert Shiller, were sought out to provide even more gloom. Were there any solutions? I don't always agree with George Soros, but he had it about right when he said Davos never solves things, it just discusses them.

The Davos meeting consists of four days of panel discussions, some of them over lunch and dinner at the ski resort's many hotels. There are also private talks among the real elite. All this is interspersed with a few formal speeches by, or interviews with, political leaders.

Bill Clinton got one of the latter, as the nearest recognisable thing in town to the Obama administration. So did Gordon Brown yesterday. And, despite a call from Klaus Schwab, its founder, for the forum to look forward, not back, much of it was looking back and everybody, pretty much, had the same analysis.

What we learnt was what we probably already knew. The banks relied on models that made them dispense with common sense. Regulators were incapable of judging whether their behaviour posed a risk to individual institutions, let alone the western banking system. Policymakers believed in a new paradigm, the "great stability".

Stable doors will be closed. In time, long before we have forgotten about this one, there will be another financial crisis; there always is. All that will be different will be the causes and, one hopes, the magnitude.

What you do genuinely get in Davos is a different perspective. When we hear Brown blaming America and the sub-prime crisis for all Britain's woes, he has a strong point but we know what he is up to. His aim, it is clear, is political. The more these outside forces can be blamed, the less will stick to him.

In the case of other leaders, however, the anger with America was palpable. Russia's Vladimir Putin said it was no time for gloating, then proceeded to gloat at Wall Street's investment banks, with the nice line that they had lost more in 12 months than their combined profits for the previous 25 years. He was concerned, only slightly tongue in cheek, about the growing influence of the state in America.

Wen Jiabao, the Chinese premier, did not name names but attacked "some economies" for "their unsustainable model of development characterised by prolonged low savings and high consumption". He clearly had America in his sights, particularly now the Obama administration has kicked off Chinese-US economic relations in the new era by accusing Beijing of currency manipulation.

His, in fact, was probably the most optimistic voice in Switzerland, saying that China would still be aiming for 8% growth this year, tough though it would be, something that most economists now think will be unattainable.

I had thought that other countries would welcome America's efforts to boost its economy and bail out the banking system. But worries over the cost of the rescues are not confined to Conservative politicians on both sides of the Atlantic or ordinary taxpayers. The fear, indeed, is that huge budget deficits in America, which will have to be funded by unprecedented issues of Treasury bonds, will replace one set of imbalances with another. Some of those bonds will be sold domestically, but they will also represent a huge drain on the world's available capital for years to come.

The fear among some emerging-market economies is that America's appetite for borrowing will "crowd out" investment in their countries for lack of capital. China is savings rich. Others are not. In the 1930s America prolonged the depression with trade protectionism. Some call what may happen as a result of this crisis unintended financial protectionism. Lending to emerging economies is set to plunge from $1,000 billion in 2007 to $150 billion this year.

Similar arguments apply in Britain, where the Institute for Fiscal Studies (IFS), in its annual "green" budget, says it will take 20 years to get back to where we were before the crisis. Public-sector debt issuance will be crowding out the private sector for a very long time. All but a small proportion of this reflects the crisis but I hope the Whitehall rumours of another giveaway in the April budget are not true. The IFS projections were based on an optimistic assessment of the scale and duration of the recession, from its partner Morgan Stanley, of the kind that is quite hard to find these days.

The International Monetary Fund, which says this will be the worst year for Britain since the second world war, predicts global growth of just 0.5% this year, well below the 2% or less that it regards as meeting the definition of world recession. That includes, by the way, a prediction of 6.7% for Chinese growth.

Goldman Sachs has 0.2% global growth and 6% for China. It has become important for China to come through all this relatively unscathed. Gerard Lyons, head of research at Standard Chartered, argues that its continued commitment to open markets, as much as America's, is one of the keys to global recovery and it is likely to come out of the downturn sooner.

But, in general, there was not too much optimism about "the post-crisis world". A disparaging view of Davos would be that if hot air alone could reflate the global economy things would be looking up quite soon. Another would be that the global business community has lurched too far from unbridled optimism to excessive gloom, in which case things might look a lot better this time next year.

PS: The Bank of England's monetary policy committee (MPC) meets this week and is widely expected to cut Bank rate from a historic low of 1.5% to an even lower 1%. Should they do so? Two things have determined the Bank's approach. One is that, given the grim outlook, there should be no limit to its efforts to provide the maximum monetary stimulus. The other is that alternative measures, whether you call them quantitative easing or credit easing, cannot really get going until interest rates are at zero, or within a gnat's whisker of it.

The shadow MPC, which meets under the auspices of the Institute of Economic Affairs, seriously disputes the latter argument. It votes 6-3 to leave Bank rate unchanged at 1.5% while urging the Bank to get on with quantitative easing.

It has a point. If the aim is to boost the money supply, and lower rates are only likely to do that slowly, why not get on with it now? Adrian Coles, the director-general of the Building Societies Association, also has a point. He says that further cuts will be of no benefit to borrowers, and could even do them harm, by reducing the flow of savings that lenders rely on.

Do I think the Bank will cut this week? It looks as if it will. Should it pause while doing other "unconventional" things, on top of already announced corporate debt purchases? I think it probably should.

From The Sunday Times, February 1 2009