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Davos gloom, doom and dread of fresh trade protectionism
By Joseph E. Stiglitz |
February 6, 2009, Friday
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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.
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."
In a widely attended brainstorming session at which participants were asked what single failure accounted for the current global financial 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 Bush or Obama administrations attempted to defend American-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 American 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 American 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.
There was little confidence in the none-too-deft hand of the US Federal Reserve - its reputation marred by massive monetary-policy failures in recent years - to manage the massive buildup of debt and liquidity.
President Barack Obama seems to be offering a needed boost to American leadership after the dark days of George W. Bush; but the mood in Davos suggests that optimism and confidence may be short-lived.
(The author is professor of economics at Columbia University and recipient of the 2001 Nobel Prize in Economics. Copyright: Project Syndicate, 2009. www.project-syndicate.org.)
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."
In a widely attended brainstorming session at which participants were asked what single failure accounted for the current global financial 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 Bush or Obama administrations attempted to defend American-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 American 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 American 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.
There was little confidence in the none-too-deft hand of the US Federal Reserve - its reputation marred by massive monetary-policy failures in recent years - to manage the massive buildup of debt and liquidity.
President Barack Obama seems to be offering a needed boost to American leadership after the dark days of George W. Bush; but the mood in Davos suggests that optimism and confidence may be short-lived.
(The author is professor of economics at Columbia University and recipient of the 2001 Nobel Prize in Economics. Copyright: Project Syndicate, 2009. www.project-syndicate.org.)
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