Tough Questions For Next Week's Davos World Economic Forum
The big annual economic meeting at Davos opens next week (Jan 28-Feb 1 are the official dates), and the discussion there - in both formal and informal interactions - is worth scouring for indications of the current situation around the world and where we all may be heading.
Given the likely composition of the main players this year - world corporate leaders and the non-US policy elite (with the new US policymakers stuck in Washington, doing real work) - I would suggest viewers at home and on the ground keep watch for answers to the following.
Are we on the same planet? It is not unheard of for Davos participants to appear as if they are living in their own bubble (in more sense than one). Watch for opulent parties and excessive consumption, particularly if the people involved have nominated themselves for any kind of government handout. If you meet someone from Merrill, ask if their attendance fees came out of 4th quarter earnings - or if there is still more bad news to come.
Who doesn't have their hand out? It would be nice to see a corporate leader or, ideally, more than one, stand up and make a categorical statement along the lines of, "we don't need a bailout of any kind, nor will we seek any kind of additional government assistance however clandestine, and the idea of pseudo-protectionism to goose profits and jack up my bonus is quite repellent." Remember that the slippery slope to global trade wars is not the product of irresponsible politicians alone - they get a lot of assistance from business and lobbyists of many stripes.
Are they really in trouble or do they just want to fire us because it's in fashion? More than a sneaking suspicion is arising that many of the firings, layoffs, and pay reductions around the world are not actually necessary. Somehow corporate leaders have formed the idea that this is what they must do, rather the investing more in their people, looking for ways to innovate our way out of the crisis, or generally doing things that are hard work for executives and pay off only over time. No doubt someone will do very well by bucking this trend. But who?
Who didn't overspend in the good times? Some self-appointed intellectual and financial leaders - including universities, venture capital, and private equity - previously prided themselves on having deep pockets, a long-time horizon, and recession-proof strategies. Now we find that they overcommitted to things they couldn't really afford, just as if they were No Income No Documentation borrowers. And if you actually hear someone admit personal responsibility for anything at all - however small - in the boom or the crash, write me at once.
Is the G20 at all relevant? The G20 grouping of leading industrialized and emerging market countries has a great opportunity to establish itself as the preeminent forum for addressing the world's problems, pushing aside the G7, IMF, etc, and rising to the top of the global alphabet soup. The current chair is Gordon Brown and he will be in full voice. But what exactly is the agenda? Some of his re-regulation points make sense and will help preempt problems in the future, but we need more. Where is the recovery strategy, how are really poor people going to be helped, and what - if anything - does global cooperation offer that you can't do with a smart unilateral approach?
You may have thought that denial, arrogance of power, and profound irresponsibility left the world stage around noon on Tuesday. If so, Davos will likely prove you wrong.
Oh you cynical, cynical, person. I like it.
Victimology on a worldwide scale is going to be ugly, notwithstanding salons of the politically favored.
January 24, 2009 8:45 AM | Reply | Permalink
They'll blather about how they're going to save the world with a "new capitalism" that will promise to be gentler but will really be an old capitalism that helps them take stuff from people.
If the universe has a sense of humor it'll send a small but just big enough asteroid towards the Davos convention area.
January 24, 2009 9:23 AM | Reply | Permalink
WEF would appear to be on its own planet. The scenarios in their document "The Future of the Global Financial System" lack realism, except for the "Fragmented Protectionism", which is no doubt written to be sufficiently repellant to drive participants to support one of the other three scenarios.
But the language used tends to lump the EU as one entitiy, and some East Asian group as another. With another group centered on the US, these form a triangular basis for future financial relationships. This begs two important questions regarding the UK and Japan. Is the UK firmly included in the EU, or does Sterling - Euro competition keep it out, either to be independent or part of the US-centered block through the "special relationship"? Is Japan, perhaps with South Korea, included in the East Asian group, or are they independent or part of the US-centered block?
These tensions, along with the fact that Brazil, India, Russia, and the Persian Gulf countries do not easily fit into the three-way model, likely mean the "Fragmented" scenario is the most probable. However, it is not clear whether protectionism is a necessary result. That reflects the old mind-set, where order is only possible if imposed from the top. The alternative is that information technology creates the possibility that communication, cooperation and coordination can be done without centralized control. This has been true for the standards that created information technology itself, and it may be true for the standards guiding new financial systems.
January 24, 2009 3:43 PM | Reply | Permalink
January 24, 2009 8:08 PM | Reply | Permalink
Yes it is, but the need for regulation is recognized now. That regulation might be better formulated using processes that are similar to those used by the Internet Engineering Task Force or by the IEEE Standards organization for data networking standards setting, than by heavily political, top-down government driven processes. Note that the government sponsored ISO and ITU data networking standards are not much used.
We really need to characterize the regulation problem. The financial system has grown to be a very complex, non-linear, time varying system. There is no reason to believe that such a system is either stable or can be made stable by the adroit manipulation of a few well chosen variables. More likely, the natural tendency for such a system is to be unstable, with variables either running away to saturation limits or degenerating to zero. Or it may be chaotic, where the future state is unpredictable given any practically precise measurement of the current state.
This implies a need for regulation that limits complexity, limits the rate of change, and exerts more comprehensive controls over a carefully designed system.
January 24, 2009 9:42 PM | Reply | Permalink