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Hubris melts at Davos

Evan Davis | 13:13 UK time, Wednesday, 28 January 2009

Each year the global business and political elite populate the small Swiss ski resort of Davos to talk, to listen, and to get to know each other over drinks.

The World Economic Forum in Davos, Switzerland We are told the numbers arriving here are up on last year. It doesn't feel that way. Many bankers are staying away - and members of the new US administration probably have better things to be seen to be doing than flying to the Swiss Alps for a meeting. It means the event is a little short of big hitters.

No big loss there, cynics would say. This is where the people who got us into the economic mess now have the temerity to gather and talk as though they are the ones to get us out of it.

A fair point, but don't over-play it.

Hubris is no longer the word that describes Davos - humility is evident here, as well as shock.

And in defence of the organisers, there are sceptics wandering around town too. I've just chatted to Nassim Taleb, author of The Black Swan and one of the most vehement and credible critics of modern finance in the world. It is his first visit to Davos and he seems ready to tell the establishment that failed to invite him until now, just what he thinks of their sophisticated banking practices.

But if I had to find one word to encapsulate the conversations here it would be floundering. Many people have had the intellectual confidence knocked out of them.

So you get repeated expressions of amazement at what has happened, you get the same old questions running round and round. But it's all very unfocussed. The test that it has been a worthwhile meeting will be that it gets beyond that in the next few days.

Evan Davis in DavosI'll be here with Today producer Ollie Stone-Lee and we'll be reporting on the Davos phenomenon. I should say there are two big pluses to the event: one is that there are scores of cultural, social and scientific discussions and lectures. These "fringe" events are invariably the most interesting things on the schedule. We won't overlook them.

Secondly, the greatest thing about Davos is that it is very cold and snowy - thus forcing everybody to dress in silly boots and bear-like coats that automatically strip even masters of the universe of a bit of their dignity.

As I say, hubris is not the theme this year.

Comments

  • Comment number 1.

    Did you know that Michael Baughen, retired Bishop of Chester, had written a tune Davos, to the hymn "I lift my eyes to the quiet hills"? Good advice, do you think, to the bankers flying in for the meeting?

    Mel Menzies, author of A Painful Post Mortem, a story of love and loss.

  • Comment number 2.

    Evan wtote

    "..strip even masters of the universe of a bit of their dignity.."

    These banking guys crack me up - they have just combined together to very nearly bankrupt the World and now they expect the poor to rescue them. But they can still afford the warm clothing and luxury when there are billions of poor staving and freezing in many parts of the World. Through the actions of the bankers the quantity of human suffering has been quite dramatically increased.

    Get some perspective Evan!

  • Comment number 3.

    Evan, just wanted to say EXCELLENT The City Uncovered series. 'Real Life' tv, at last! More of this kind of thing, please!

  • Comment number 4.

    Evan, Nassim Taleb would say, surely, that the fact that Davos is floundering and "nobody knows" what to do next, is actually a Good Thing? Since the thinking to date is currently known not to work, then instead of looking for "confirmation" from the same old same old crowd, we need to Explore What We Don't Know ?

  • Comment number 5.

    evan, in response to 'the city uncovered';
    absolutely wonderful, irresistable programme.
    but, i felt let down at the last thought. the implication that capitalism, whilst messy and flawed, does fare better than other systems.
    isn't the truth, and this is a question, not rhetorical, that capitalism is largely responsible for much of the misery and lack of success of other systems and regimes?
    the wealthy west strangle holds african countries through colonially acquired resource ownership.
    the west was intent on destrying the soviet union from its inception.
    and politically, though this this perhaps is not the best place to discuss this, the meddling west usually causes problems that future generations have to solve. (saddam, for example, israel, the shah of iran.
    no, capitalism and the politics of capitalism is simply not good enough, and not appropriate, and the messes it gets into are symptomatic of it's fundamentally inefficient disharmony with the human psyche and condition. (ie co-operative and mutually interdependent no wholly competitive and every person for themself).

  • Comment number 6.

    I watched your documentary ‘The City Uncovered: When Markets Go Mad’ with interest last night.

    I thought your documentary, while appealing to a broad audience, interesting and insightful. There was, however, in my view an important omission regarding the current financial crisis.

    The banking sector is, and has been for some considerable time, been a regulated sector. There are two important levers that regulators use to regulate and intervene in the free operation of market forces in this sector. One is the capital guidelines established by the Bank of International Settlements (BIS). The other is the setting of interest rates by Central Banks.

    Having been an investment analyst who has worked on or with various teams analysing the banking sector I am persistently surprised that commentators on the current crisis neglect to refer to the changes in the capital adequacy regime instigated by the BIS at the turn of the decade. These changes promoted both the Value At Risk (VaR) methodology, pioneered by banks such as Bankers Trust, and altered the capital requirements for different types of lending on the basis of these models. In particular, the BIS concluded that mortgage investment was inherently less ‘risky’ than other types of lending and lowered the capital requirements for mortgage lending compared to other types of lending. This effectively forced banks to restructure their lending activities and increase mortgage lending. Banks such as those in German, where the domestic mortgage market is much smaller than in other countries, were pushed to buying securitised mortgages from markets such as the US, which have subsequently proved to have a large number of ‘toxic assets’. Former Central Bankers such as Alan Greenspan, have now been forced to admit that the VaR data input into the models, covering as it did just two decades or so, did not adequately value risk. This it seems to me to be a clear failure of regulators, who thought they had a better model for assessing risk, than the plurality of views on how to assess risk developed within the banking industry and shaped by ‘market experience’.

    Perhaps better covered by other commentators, but not dealt with in your documentary, was that the US Federal Reserve in particular, followed by other central banks such as the Bank of England, have repeatedly intervened to lower interest rates when faced with the prospect of slowing economic growth. The ‘market’ has been frequently signaled that is considers interest rates to have been held too low for too long, most notably in the early phase of the ‘credit crunch’ when interbank rates rose sharply. Far from listening to these market signals, Central Banks have ploughed on with their interventions and again repeatedly lowered interest rates. An earlier increase in interest rates would have curbed lending and re-stimulated saving. This would have resulted in lower economic growth for a period to be sure, but also restraining the worst excesses and brought the system back into balance. Instead, the determination of Central Bankers to heed the politicians’ calls to sustain economic growth at any cost, as merely resulted in policies which have brought about the complete failure of the banking system of the Western World.

    Perhaps if you had explored this theme a little more, your conclusion would not have been the cause of this crisis was simply the irrationality of free markets, which is a convenient interpretation favoured by politicians at the moment. Instead, the ‘bubble’ was as much driven by the interference in markets of regulators, central bankers and politicians, and the current crisis a reflection of the markets’ entirely rational lack of confidence of those players to do their job responsibly and competently.

  • Comment number 7.

    #6 Totally agree with what you are saying, and I'd also say that taking the mortgage rate out of the cost of living index practically guaranteed that house prices would escalate while wage rises stayed low. It was a recipe for disaster within itself - then they give tax incentives to buy to let buyers, and wonder why the house price forces first time buyers into multiple income level mortgages.

  • Comment number 8.

    Yesterday's BBC 1 programme about the causes of today's banking failures concentrated on the 'Fools rush in' theme. Nothing was said about the corrollary 'Where angels fear to tread.' But you should commend the decisions of HSBC, Lloyds, Nationwide, Co-operative and other banks to stay out of all that, particularly in the face of the lurid temptations you showed.

    The second omission in your programme concerned motive. Quite apart from the commonplace matters of greed and vanity, there is the intellectual question beloved of Hercule Poirot 'Just what did they think they were doing?' ...and a big part of the answer is US Government Support. Recall that US domestic mortgages were widely understood to be guaranteed by FNMA, which would mean that those who underwrite and trade them were dealing in quasi-government debt. Refer to the reports of the major ratings agencies on this topic: foreign investors certainly did. On that basis, much of what you describe is at a stroke perfectly understandable, and no sarcasm is needed to explain what happened.

    On that understanding, too, the present trading price of such debts is simply wrong, and Barclays and others are justified in holding their assets on their books at a higher price.

    Do please cover these aspects in future, to give your fatigued audience a three-dimensional appreciation of what the issues were, are, and why different people have responsibly believed and acted differently at each juncture.

  • Comment number 9.

    I like your programmes but no-one seems to be addressing the problem of the extreme negligence of these bankers. I read this blog today that summarises how they might be punished:

    "Punish the bankers? Disqualify them as directors!" http://ofaman.blogspot.com/2009/02/punish-bankers.html

    So, what about a programme or Today article on disqualifying the banksters from being directors or even prosecuting them for fraud?

 

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