Can Davos avoid sloppy thinking?

The conclusions from last year’s Davos summit make interesting reading today. They put out a press release saying “we will have a resolution this year (2008)” to the Israel-Palestine conflict. They promised to make climate change the number one priority at the G8 summit and stressed its importance in all that business does. They identified four pressing problems for the world :“conflict, terrorism, climate change and water conservation”.

So how did they get on? Unfortunately their prediction on Palestine was wide of the mark. By the year end the conflict had flared up again in a violent and distressing way. Worse still, India suffered a dreadful terrorist attack. This year’s Davos needs to return to the drawing board on terrorism and conflict.

They have done much better on climate change and water conservation, but I trust not in the way they intended.The assembled body of Finance Ministers, Presidents, Prime Ministers, Central Bank Governors, Chief Financial Regulators and the main commercial bankers have between them brought the western economy into a deep recession. As a result people are buying far fewer cars, several leading car makers are on the edge of collapse, and many fewer people can afford air tickets to fly. Their stated wish to see less driving and flying has come true. They will doubtless be comforted to live once again in a world where the elite gets the limos, the chauffeurs and the first class air flights at public expense, whilst everyone else makes the sacrifice to keep down the CO2 emissions. Water demand in the west is down, as industry contracts and uses less.

I learn this morning on the BBC that the big topic for their amusement this year is “Should the world have a Global financial Regulator?” There’s plenty of life in that one. Ignore the hubris that they will be discussing the post Credit Crunch world, when the rest of us are still mired in the Crunch and hoping they might lead us out of it. Ignore the ignorance – they seem to have forgotten we have a world regulator of banking capital and liquidity in the form of the Basel agreements. It was those rules that let us down so badly in recent years, allowing banks to over borrow and overlend on a colossal scale. There is a simple answer. We do not need more regulation or more regulators. We need a good regulator, who sets sensible targets for capital and cash in both the upswing and the downswing. We need a regulator who knows how to dampen the cycle, instead of one who knows how to make it wilder as they have been doing in recent years. Each Central bank is best placed to do this, as they have to bank the banks.

If we are to have son of Basel it needs to be tougher and smarter. If we have a global agreement, we should then remove the EU level of regulation. We do not need so many regulators tripping over each other. They are all additional cost which ultimately the consumer has to pay. It should not take two or three layers of regulator to tell a global bank how much money to keep in its tills and how big a reserve it must have to carry on its business.

So what do I want from Davos? I want some recognition that Central Banks and Regulators made a huge mess as well as the bankers who could not say “No” to new business. I want some understanding that heaping more regulations and regulators on a tip of bad regulation will not solve the problem. Above all it would be good to know that they know we are not out of the Credit Crunch yet. Before we start building the “new architecture” we need to clear the site and see what we have left.

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19 Comments

  1. Stuart Fairney
    Posted January 28, 2009 at 9:41 am | Permalink

    Around 60% of the world is water, so why exactly do we need to conserve it? This is the ultimate nonsense. We now have the technology to de-salinate as much as we could possibly want.

    Also, given that they didn’t warn of the impending global downturn and credit problems, we may reasonably conclude that their various pontifications contribute something to global hot-air but little else.

  2. Acorn
    Posted January 28, 2009 at 10:47 am | Permalink

    “Before we start building the “new architecture” we need to clear the site and see what we have left” [JR]. Not sure what mechanism you would employ to “clear the site”. It sounds painful; then, perhaps it has to be.

    You still have faith in Central Banks and presumably their monopoly of printing money; and, buying their respective government IOUs, when nobody else wants them. Is this not one of the principle reasons we are now in this mess?

    The Basel agreements failed because too much non-money, was allowed to be classed as real money for capital adequacy purposes. They also allowed the global finance industry to spend fifty weeks out of fifty two speculating in ever more complicated second and third order derivatives. It spent only two weeks out of fifty two, arranging finance for trade.

    If you haven’t guessed already, I am now up to the “Austrian School” in my macroeconomic studies. So try this one for size:-

    http://mises.org/story/3138

  3. Neil Craig
    Posted January 28, 2009 at 11:01 am | Permalink

    Once again we see that the BBC’s default position is to ask for more government regulation & intervention as the solution to every problem.

    In one way it would be quite nice to see our masters at Davros don’t actually know any more than the rest of us but their calls, over the years, for us to accept lower living standards & less of everything makes it difficult to believe they didn’t realise they were calling for endless recession.

  4. Rob N
    Posted January 28, 2009 at 11:35 am | Permalink

    Alternatively just give up on FIAT based money system and return to a system that is backed by gold or some other precious commodity.

    This document sums up why we eventually we will be heading for high inflation with or without regulation. Our monetary system is flawed and our culture of waste and greed (based on credit) is causing us to use up our planets resources faster than we need to.

    http://www.kondratieffwinter.com/kw_fiat_currency.html

  5. Lola
    Posted January 28, 2009 at 11:45 am | Permalink

    What I want from Davos is a repeat of the wonderful holiday I had there last summer. As far as what I want from the economic forum held there is for them to b****r off, ‘cos most of the time all the great and the good achieve by all their pontificating on one of these junkets is to make the whole thing worse for the rest of us.

  6. david
    Posted January 28, 2009 at 1:10 pm | Permalink

    Eric Pickles, Conservative Chairman
    BBC News

    Mr Pickles said the Prime Minister needs to admit that he has made a mistake in claiming he had ended boom and bust, and added that his party weren’t considering proposals to build an airport in the Thames Estuary.

    Asked why David Cameron continued to try to force Gordon Brown to say he had not abolished boom and bust, rather than concentrate on the problems in the economy he said, “a lot of people are suffering. The nation needs to hear from the Prime Minister to admit that he got it wrong.

    “We’re not looking to butter parsnips, nice thing to do though that would be, we’re looking for the government to come out of denial. We are in a peculiar position that we are in a worse position to deal with the recession because of Gordon Brown. People need to understand that he has made a mistake.”

    Asked about the Boris Johnson’s plans for an airport in the Thames Estuary he said, “we’ve said no to the expansion of Heathrow, we’re not considering the Estuary”.

    Looks like Zac is winning, ‘Vote Tory and travel by donkey’

    • Stuart Fairney
      Posted January 29, 2009 at 6:51 am | Permalink

      “Looks like Zac is winning, ‘Vote Tory and travel by donkey’ ”

      Soundbite of the week award. You perhaps should add, travel by donkey unless you are important and named Zac. However, I imagine it would be jolly convenient to have the roads cleared of the rest of us. My contribution to the sounbite contest

      “If you want sensible transport policy, DON’T talk to Frank”

      (Yes, that is Zac’s actual name http://en.wikipedia.org/wiki/Zac_Goldsmith)

  7. chris southern
    Posted January 28, 2009 at 1:38 pm | Permalink

    After Marco Polo discovered the fiat currency that the chinese used their system crashed due to too much non money put into their system.

    It’s time our system was changed, allowing money to be created from nothing is just legalised crime.
    We trade in debt and then complain that the system is crashing because of bad debt! It’s not just bad business practice from those who should have regulated sensibly, nor the financial managers in charge of the banks, but the responsibility of people to demand this system is reled in and a sensible none debt based system used.
    People with money will still be able to use it to make money, but the poor won’t be penalized with an ever decreasing wage as long as the amount of currency allowed into the system is controlled (i.e. goverments printing money and not the select few banks.)

    Climate change (global warming) is ust a nice money spinner for big business and goverments, it takes money from the people in the form of direct and indirect tax and then wastes it by not looking how to best use it, but instead to fund hair brained schemes that prove to be next to useless.
    Researching into more efficient fuel use (of all known fuels) would bring about more results that benefit everyone instead of building wind farms that only operate in certain speeds.

    As for water, having companies that charge ridiculous prices for water supply is a tax on life, that is something that should be nationalised (not subsidized, but run so that it only turns enough profit so that the infrastucture can be steadily improved)

    wow, i sound like a socialist with common sense!

    • Lola
      Posted January 28, 2009 at 11:04 pm | Permalink

      Water is not free. It takes a great deal of engineering, biology and capital investment to get it to you. Getting clean water in and foul water out of homes has probably saved more lives than doctors. So pay engineers more than doctors. Which brings me to the point of price. It’s a signal. It indicates to us what things are compratively worth to us. Providing free water would remove the price signal and no-one would value it. No investment would be made and the quality and security of supply would decline as bureaucrats argued over how to share it out and pay for it rationing would ensue. And you have a choice of supply. You can get it piped in or you can get it delivered by tanker or you can buy it by the bottle from supermarkets. So charging for it is not a tax. Income tax is a more of a charge on life. It taxes your life. You exchange time for wages QED income tax takes away your time; your life.

      • chris southern
        Posted January 29, 2009 at 1:35 pm | Permalink

        I totaly agree about income tax.

        In reagards to the water, i didn’t say charge nothing.
        The ever increasing prices above inflation at the moment though are ridiculous and will continue to be so whilst private companies are allowed to let the system fall into disrepair and continue to find ways to charge customers for the waste caused.
        Any fines imposed through lies over their standards (as the higher the standards the more they can charge, hence the lies) are simply passed on to the customers.
        Extra regulations won’t work, as has already been seen.
        The manopoly of the water companies needs to be broken (and the already govermental proposed changes will only add to the cost, hence my call for nationalisation of the water companies)

        and yes, nationalisation only works when the goverment keeps the management to a minimum, which is the problem we currently have with the current goverment as it creates more tiers of management with everything it can get it’s hands on.

        • Lola
          Posted January 29, 2009 at 10:17 pm | Permalink

          The water companies aren’t letting the system fall into disrepair. They have such a huge legacy of neglect (whilst the utility was in public ownership) to put right that it just takes time. They don’t have the people to do it quicker and they sure cannot spend the money well if they haven’t got those. Furthermore they are subject to constant interference from various quangos that divert resources from repair to politically advantageous projects. For example, in my area the water co has been forced to install meters in everyones house. They don’t want to do this. They want to spend the money on leak fixing but they can’t.

          I agree that the monopoly bit is difficult to resolve, but I have no faith at all in government bureaucracies.

          I should point out that I spend half my career in civil engineering and I’ve watched as politicians and gov’t bureaucrats have cocked things up time after time after time.

  8. jw
    Posted January 28, 2009 at 3:55 pm | Permalink

    Could someone please explain to me, why none of the people, bankers, hedge funds etc., who got us into this mess have been punished?

    • Lola
      Posted January 28, 2009 at 11:05 pm | Permalink

      Well, it depends what you mean by punished. Fred Goodwin’s reputation has been ruined forever. Sure he’s got money, but reputation is everything.

  9. Hilda Lanas
    Posted January 28, 2009 at 4:32 pm | Permalink

    How ironic, suddenly ethics are a subject of concern in the business world. If we wouldn’t be going through this economic crisis, the lavishing offices and the luxurious private planes would have never reached the news. Those were standard procedures, and without any remorse tacitly accepted by all high executives. Today we face an economic crisis of unimaginable proportion mainly caused by lack of any ethical principals; globalization has come to its epitome, we really need global business codes of conduct!!

    Pretoria, South Africa

  10. mikestallard
    Posted January 28, 2009 at 4:59 pm | Permalink

    I completely see the point of high-ups visiting each other for a quiet chat man to, as it were, man.
    I also see the point of allies in war making sensible plans for the future.
    Now we have the UN, the IMF, the EU, the G(10?)8, NATO, the UN Security Council, all with their round the room tables, lots of flowers and little flags and serious looking men and women all greeting each other warmly – perhaps too warmly – and staying in their lovely holiday venues at our expense.
    Nice work if you can get it.
    But – pur-lees – no more about suffering Africans, not emitting carbons with unnecessary flights or global warming!

    PS: the Second World War was 70 years ago now. The Cold War ended twenty years ago now. Many of the above institutions date back to then. So do I – and I am at least feeling my age!

  11. Mal Dodd
    Posted January 28, 2009 at 7:03 pm | Permalink

    The global financial crisis has had “a rather big impact” on China’s economy, the country’s Premier Wen Jiabao said in a major World Economic Forum speech.

    He added that China’s economy was in good shape “on the whole”.

    Mr Wen said that among the reasons behind the current global downturn were “inappropriate macro economic policies in some economies, characterised by [a] low savings rate and high consumption”.

    Now I wonder which country has headed the list of Low savings rates and high consumption in the last ten years?

    Step forward Mr Brown.

  12. Derek
    Posted January 28, 2009 at 10:56 pm | Permalink

    I wish Dr Who would finish off Davos once and for all.

  13. ManicBeancounter
    Posted January 29, 2009 at 9:17 pm | Permalink

    The need for financial regulation that is “smarter” begs the question as whether anyone, or any group are smart enough for the position. Most opinion did not see this crisis coming, and most commentators are divided as to what is to be done.
    Future regulation is likely to be tougher, more onerous but not smarter. It will stifle risk-taking and create costs, much like the new accountancy rules post Enron. In trying to prevent a future crash, recovery will be delayed and long-term global growth undermined.
    However, the box-ticking mentality will not prevent future crashes, as there will always be those who will cheer on a boom, and not want to put the brakes on.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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