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After the fog...?

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Stephanie Flanders | 20:26 UK time, Wednesday, 28 January 2009

There used to be something symbolic about Davos - all those movers and shakers going to the mountains to talk about capitalism being on top. This year the more apt feature is the fog. No one knows where the world is going. But they're fairly sure it's in the opposite direction to the one before.

It's not just that economies have gone into reverse - spectacularly so in the case of the UK, if you share the pessimism of the IMF. There's also a more general sense - that the market capitalism they've promoted so long here at Davos is now seriously in retreat.

Even here, the call is for more regulation and more government to save the global market system from itself. But when the fog finally lifts, some here fear there won't be much of a global market system left. At least when it comes to international capital.

Speaker after speaker in the meeting halls talked today of preventing a costly retreat into protectionism. But where the financial system is concerned, we're already there. Nearly all governments are pressuring their banks to direct scarce lending to their home markets, with costly consequences for countries like the UK that depend on foreign loans. When things get tough, we've learned that even the most 'global' of commercial banks will skulk home to raid the coffers of national governments.

Persuading developing countries to open their economies to global capital flows has always been a hard sell - especially after the emerging market crises of the late 1990s. Now even some senior policy makers in the UK and US are wondering whether a global capital market can work.

In a few years time, Davos Man may make a comeback. But if it's globalisation he's talking about I suspect it will be globalisation minus finance.

Comments

  • Comment number 1.

    Stephanie,

    "a costly retreat into protectionism"

    Your observation is correct. We have been there every since the Bank of England signalled that it would not support Sterling through interest rate management - even though it knows it must do so - eventually!

    It is interesting however that the main movers and shakers - the biggest and fattest of the cat of last year, the multi-million pound/dollar bonus banking men are (mainly) not at Davos.

    I believe the reasons that they give are specious and without merit. It cannot be that they are so embarrassed by their actions can it? No - it is that Davos is an irrelevant luxury.

    You write also that

    "No one knows where the world is going"

    - nobody ever did - the system is chaotic (in the mathematical sense) and all that 'knowing' was was hope - now it is the hope that is in short supply. Like the second marriage the triumph of hope over experience is gone.

    To have a renewed vitality we need new actors, new economists and new journalists who have never known a bear market then Davos man will see a renaissance!

  • Comment number 2.

    To borrow from the title of an earlier Nick Robinson blog "the more things change, the more they remain the same".

    "All those movers and shakers" coming together once again, and "speaker after speaker" said basically the same thing (to paraphrase).

    So this year they're all saying the complete opposite of what they all said last year. But they all saying basically the same thing as each other. As they did last year. And the year before that.

    Despite the turmoil in the banks, the markets and Governments, it must be reassuring to turn up to the annual jamboree and find that, even if the tune has changed, everyone's still singing from the same (revised) hymn-sheet.

    And that is why these worthies never saw the runaway train hurtling down the track. And why, with uncharacteristic immodesty, I dare venture they're about to get it all wrong once again.

    Because there is no-one to challenge the mindset of the herd. There are no mavericks, no free thinkers, nobody outside the priesthood.

    ...but Samuel said, "What then is this bleating of sheep in my ears? What is this lowing of cattle that I hear?"

    (And so many sentences starting with conjunctions...)

  • Comment number 3.

    Hi Stephanie,

    Good to see you posting on the future of globalisation after a similar very interesting discussion on the same subject on Newsnight last night.

    The key here is that in any system, there is a lot more that needs to be considered other than just overall output.

    Take an example from a completely different field - say broadband. It's marketed on Megabits per second, but for most customers other considerations are more important - will it work robustly or crash all the time? Will the bandwidth be shared fairly, or will you only get 10% of the bandwidth and your neighbour 90%?

    It's really the same with globalisation. The big argument in favour is that it optimises overall global output. That may be true. But at what cost? Globalisation certainly doesn't lead to things being shared fairly - the overall effect of finding the cheapest possible labour market for each product is to make the rich richer and the rest poorer. And having a single globalised financial system has failed utterly against the key requirement of robustness.

    Any serious attempt at system design would take all requirements into account - the system must be robust and fair, and as efficient as possible given the other two requirements.

    To be honest, I don't think it is possible for a globalised financial system to be robust. As we have seen, all the eggs are in one basket. There's no backup system to take up the slack if one economy messes up. If you are correct and financial globalisation is finished for the forseeable future then I think that has to be seen as a good thing.

    The remaining question is what should be done about the rest of the global market system? Even if it is less efficient, it may actually be better to produce more things locally (once environmental costs are taken into account), and a certain amount of encouragement to localised production is not a bad thing. We will of course still need international trade. But it has to be balanced, with no long term net importers and long term net exporters.

    Take the globalised financial system out of the equation (ie stop having flows of money that dwarf the flows of trade) and hopefully the system would be forced more towards equilibrium - net importers would see their currencies drop making them more competative and net exporters would see their currencies rise. The effect of this should be that each country should keep its balance of payments balanced.

  • Comment number 4.

    So the answer to a shrinking and struggling private sector is to enlarge the public sector? Where does the money to pay for the public sector come from? Oh yes, the private sector.

    Talk about kicking a man when he's down.

  • Comment number 5.

    Morning Stephanie,
    doesn't it seem like this to you?

    Once upon a time, HM Government and the Americans decided to have a competitive boat race on the River Thames. Both teams practiced long and hard to reach their peak performance. On the big day, they were as ready as they could be.

    The Americans won by a mile.

    Afterwards, HM Government team became very discouraged by the loss and morale sagged.
    Senior Ministers decided that the reason for the crushing defeat had to be found and a Quango was set up in the Grosvenor House Hotel to investigate the problem and recommend appropriate action.
    Their conclusion was that the American team had eight people rowing and one person steering, whereas HM Government team had one person rowing and eight people steering.

    Senior ministers immediately hired a consultancy company to produce a report on the rowing team’s structure. Millions of pounds, several months and many meetings later the consultants concluded that too many people were steering and not enough rowing.

    To prevent losing to the Americans next year, the team structure was changed to one steering director, five steering analysts and one steering Governor. A performance and appraisal system was set up to give the person rowing more incentive to work harder and become a key performer (this was partially fulfilled by awarding him a pay freeze). “We must give him empowerment and enrichment, this ought to do it”.

    The next year, the Americans won by two miles.

    HM Government made the rower redundant for poor performance, sold off all the paddles, cancelled all capital investment for new equipment and halted development of a new canoe and awarded high performance awards to the Quango.

  • Comment number 6.

    As I am writing from a developing nation I understand what it is to depend on foreign finance for our internal needs. With the global fog of a depressed financial condition, with foreign funds drying up, the light and the sound of many streets in India will be gone. But I thank our government for not taking a stand for fully integrating with the western market economy. Our nation was slow and conservative to such a unilateral move to integrate into the developed western system of currency convertibility. Such a move would have left billions of people with shattered dreams and caused wide spread calamity.

    Davos will go down in history as a failed club of economists, policy makers and industrialists. Driven by greed, they experimented with the dreams of the poor.

  • Comment number 7.

    For me Davos lost it's relevance when I realised that either everyone there was either too blind to see that the US et al were on a debt funded binge funded by a housing price bubble propped up by unnaturally low interest rates, or they didn't actually care as long as they kept making profits.

    Now that the bubble has burst then it appears that no-one is willing to accept responsibility or even accept that this outcome was only too obvious to anyone prepared to think it through.

    If they couldn't see the crash coming, let them stand aside and let those who did step forward. At least they might have some better ideas than the current public borrowing binge. The problem with any binge is that everything is wonderful while it happens but you still wake up with the same problems the next day, except now you have a hangover.

  • Comment number 8.

    Globalisation minus finance.? I think not. Globalisation through the consolidation of currency is the end game here and to get there the markets have fgot to be torn to shreds.

    Update 0730:

    Step this way Mr Putin, you know when the Dollar is about to tank so start the debate regarding over-reliance on it as the main reserve currency.

  • Comment number 9.

    #5 Very good - I remember seeing the cartoon nearly twenty years ago (in the days of Taurus, not the year of the Ox).

    So here's a brand new one...

    On the penultimate day of the conference, a guest speaker addressed the delegates.

    "Gentlemen, the people of Davos have decided to lay on a treat for you. Tomorrow, please assemble in suitable outdoor clothing next to Davos-Dorf railway station.

    "As you know, Davos stands at an elevation of 1560m. This year our town has benefitted from an excellent blanket of snow.

    "Gentlemen, tomorrow we shall enjoy these conditions by taking a leisurely ski up to 2500m."

    There was a murmuring and bleating in the audience. Eventually one of the sheep raised a hoof."

    "But, sir - we cannot ski uphill!"

    His comment was greeted by a hearty "Baaaa" from near the back.

    "Why is that?", responded the speaker.

    Again a murmuring from the sheep.

    "Gravity.", they ventured.

    "Precisely!", said the speaker.

    "And Gentlemen, if there's one thing you take away from this week, it is that natural laws apply to you as well as everyone else.

    "Class dismissed."

  • Comment number 10.

    Dear Stephanie

    The creation of the credit crunch and the sub prime issue was Globalisation by the Banks and stock exchamges,the real cause of the Global failure in the first instance.
    Politicians and finaciers created Capitalism and Globalisation, and it they who created this disaster, DAVROS, IS AN ATTEMPT BY THEM TO ARRANGE DAMAGE LIMITAIONS, for the monumental failure of the worlds economies inwhich they have invested.
    One thing Fiananciers and bankers do not want is Nationalisation by Governements as this deglobalises their monopoly.
    Politicians and Bankers go hand in hand, without politics Globalisation would not take off , BUT it is the people who in a democracy are the one the Establishment is so frightened of, they only wany you for your Vote, and to limit the damage by the economic down turn Politiciansare playing to the public sympathy scenario, VOTE FOR US WE ARE HELPING YOU/
    Pity though its Commercialism that sacks people not the banks or politicians and the only looser here is the tax payer.

  • Comment number 11.

    You say there used to be something symbolic about Davos, etc, etc.

    I've always found it rather sick and distasteful that a bunch of extremely rich individuals get together and agree on how they're going to squeeze money out of the world.

    Of course, there are always the obligatory sycophants from different national governments - they've got to sell these giant Ponzi schemes after all and line-up work for when they leave politics.

    Looking forward to hearing your interview with Mohammed ElBaradei.

  • Comment number 12.

    Dear Stephanie
    The Serious Fruad Office and the Finacial Services Agency should be making every effort to identify all the Fraudsters in this Economic down turn that they created, it is unacceptable to have such departments who sit and do NOTHING.

  • Comment number 13.

    #12, freecornwall, at the end of WW2 Winston Churchill was promoting the idea of summary execution for SS officers above a certain rank - he didn't see the point in trials (of course, he was overruled).

    Whilst I'm not promoting the shooting or hanging of these "movers and shakers", perhaps if we apply the Churchill approach and just build a very high wall around the venue, justice might be done.

    Hmmmmmm, quite extreme but isn't it about time that people (starting with Gordon Brown - our resident economic expert) took responsibility? The fault surely doesn't just lie with Bernie Madoff and Jerome Kerviel.

  • Comment number 14.

    Maybe we will get capitalism. At the moment we have a very poor version - all the people playing with money are those who don't have any, they use other people's.

    So, if they succeed they get paid big. If they fail, they get paid big. If they put it under the mattress, they'd probably get paid big.

    For a capitalist system to work, the rewards need to be better tied to the risks, then we'd see the fund managers and institutional investors working for their 'customers' who provide the capital for them to play with instead of treating it all as a no-lose game (for them).

  • Comment number 15.

    Perhaps now, that many thousands are to be made redundant and being without a job they will have to either sign-on or start working for themselves, as I have done, this might be the right time for the Government to look seriously at the option of Micro-Finance.
    Micro-Finance has worked well in emerging markets where mostly women have taken u covernment sponsored low-cost loans to start small mainly home based businesses. Just because we are in a 'so called' developed country does not mean that this is not the right option for here and now.
    Several years ago I tried, along with Prof Tom Cannon (Ex-Head of Manchester Business School) to get Micro-Finance to be looked at seriously, for the North West of England but the timing was wrong. Now however the timing is right.

  • Comment number 16.

    Surely one fundamental point of laissez-faire Capitalism is that you live and die by the market. However, that banks are, as Vince Cable say, wanting the privatise the profits and nationalise the losses.

    The way forward is to let the markets sort themselves out and those that invested in complicated instruments that they did not understand should go to the wall because they do not belong in the market. Warren Buffet will be OK because he only invests in what he understands - the rest should have done the same.

    The worst case scenario is surely that fiscal stimulus packages and bailouts leave the country so indebted that we practically become slaves to foreign banks for a generation. However, that is just what Brown and the Davos crowd want.

    5. splendidhashbrowns: This comment got it spot on. There are fundamentally worse problems with this country than just the banks and fiscal policy. The whole way the country is run just does not make sense. Add to that the BBC article saying that we will not achieve 95% literacy rates by 2020, and people better get used to the idea of working in sweatshops!

  • Comment number 17.

    Stephanie

    It is trust and confidence in the intermediation of global capital through institutions and the financial markets which needs to be re-established.

    We cannot resolve inter-govermentally the reality of global capital imbalances searching for yield in the dollar / dollar assets. The US is the biggest market for global goods/consumption.

    Without the US cooperating in a global sense, realising it plays the key role, this will be a long hard road to travel and economic nationalism will spawn.

    On regulation, the US must come to common accord with all other regulatory systems.

  • Comment number 18.

    Davos men are just gathering to enjoy mutual admiring and mentally "pleasing" each other. Can you please count among them who is not saved by the massive bailouts put out by the G10 governments? Me, I just got retrenched. Now, I just pray and hope that "trickle-down theory" works. You know the one where the rich are saved so that the poor can be enslaved.

  • Comment number 19.

    I see that Paul Mason's comment about the BBC cutting back on the number of people going to Davos doesn't really affect everyone now does it ;-) ??

  • Comment number 20.

    Funny - I had thought that the outstanding international capital flow in he past decade ws not to the 'developing' world but from China to Russia. That was an anomalous phenomenon whih reflected the peculiar weaknesses of both China & US. The world will be a more stable, balanced place when China actually consumes more of its funds at home.

  • Comment number 21.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 22.

    Stephanie,

    "But if it's globalisation he's talking about I suspect it will be globalisation minus finance."

    I am surprised you say this. From an industrial economics viewpoint, globalisation is gnerally accepted to be driven by a variety of factors, including economies of scale, global brand power, customer preferences, management ability to "think local, act global", etc. As the US car manufacturers have discovered (albeit not the US administrations), customers tend to determine the relative success or failure of global products and services.

    I agree with you that free flows of global finance are not always the choice of many emerging nations, but amongst the bigger players, BRIC, US, Europe and Japan such flows are the essential oil to grease the system. I think global companies (which are growing in number) will ensure that global finance remains an intergral part of the system. After all, memories are short and once the world has blown off this particular crisis, I suspect few lessons will have been learnt.

  • Comment number 23.

    At least it's clear that the BBC again have fallen for the new Brown gimmick, which is that Britain relies heavily on loans from foreign banks and that their retrenchment is hurting the UK economy. Funny though that Brown is ordering UK banks to focus their lending on, exactly, the UK (noticed the Royal Bank of Scotland might sell (some of) its operations and I don't think HBoS, now part of LLyds, will be adding to its Irish real estate loans anytime soon). Also funny in this context is that the givernment has been pointing out that the dropping pound is not so much of a problem because most gilts are bought by UK investors.

    The real issue is that the UK's household savings ratio was zero a few years ago, clearly unsustainable since most people face the risk of redundancy at some stage in their career, need to save for their kid's education and lack a defined benefit pension scheme as generous as that for civil servants including the BBC.

    A possible increase in the savings ratio to 10% implies a 10% drop in consumption and consequently a 6% drop in GDP, all else being equal (consumption accounts for 60% of GDP). Foreign banks have nothing to do with the fact that this adjustment process should take place. If you add the effect of higher unmployment to that of higher savings, it is fairly easy to come up with with a scenario in which GDP falls about 8% to 10% over the course of the next few years.

  • Comment number 24.

    Nothing wrong with capitalism.

    It's the people who control it who need regulating because of greed................ie bank & finance executives.



  • Comment number 25.

    Yesterday's IFS report is not that critical of the government but it uses the government's forecasts.

    All the more reason for a self-starting, independent-minded and honourable reporter to look into the difference between the government's forecast for a 57% debt-to-GDP ratio by 2011 compared to that of the European Commission of 72% for the UK by 2010.

    The European Commission also forecasts that the UK stimulus measures announced sofar will increase the budget deficit in 2010 by 1 percentage point, quite different from the IFS that uses government forecasts and estimate hardly any lasting impact on the deficit. By the way, the European Commission forecasts a 9.6% deficit for the UK in 2010.

    Anyway, it's all on page 45 of the report that you can find using the link below:

    http://bit.ly/gcpP

    [Broken link removed by Moderator]

 

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