For 15 years, I have attended the World Economic Forum in Davos. Typically, the leaders gathered there share their optimism about how globalization, technology and markets are transforming the world for the better. Even during the recession of 2001, those assembled in Davos believed that the downturn would be short-lived.
But this time, as business leaders shared their experiences, one could almost feel the clouds darkening. The spirit was captured by one speaker who suggested that we had gone from “boom and bust” to “boom and Armageddon.” The emerging consensus was that the IMF forecast for this year, issued as the meeting convened, of global stagnation — the lowest growth in the post-war period — was optimistic. The only upbeat note was struck by someone who remarked that Davos consensus forecasts are almost always wrong, so perhaps this time it would prove excessively pessimistic.
Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.
The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further skepticism.
While no one from either the administrations of US President Barack Obama or former US president George W. Bush attempted to defend US-style free-wheeling capitalism, European leaders argued for their “social market economy,” their gentler form of capitalism with its social protections, as the model for the future. And its automatic stabilizers, with spending automatically increasing as economic woes increased, held out the promise of moderating the downturn.
Most US financial leaders seemed too embarrassed to make an appearance. Perhaps their absence made it easier for those who did attend to vent their anger. The few labor leaders who work hard at Davos each year to advance a better understanding of the concerns of working men and women among the business community were particularly angry at the financial community’s lack of remorse. A call for the repayment of past bonuses was received with applause.
Indeed, some US financiers were especially harshly criticized for seeming to take the position that they, too, were victims. The reality is that they were the perpetrators, not the victims, and it seemed particularly galling that they were continuing to hold a gun to the heads of governments, demanding massive bailouts and threatening economic collapse otherwise. Money was flowing to those who had caused the problem, rather than to the victims.
Worse still, much of the money flowing into the banks to recapitalize them so that they could resume lending has been flowing out in the form of bonus payments and dividends. The fact that businesses around the world were not getting the credit they need compounded the grievances expressed at Davos.