Davos
Man’s Depression
by Joseph E.
Stiglitz
NEW YORK– 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 participant who suggested that we had
gone from “boom and bust” to “boom and Armageddon.” The emerging consensus was
that the IMF forecast for 2009, 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 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. But
business leaders from the “real” sector and 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. The fact that businesses around the world were not getting the credit
they need compounded the grievances expressed at Davos.
This crisis
raises fundamental questions about globalization, which was supposed to help
diffuse risk. Instead, it has enabled America’s failures to spread around the
world, like
a contagious disease. Still, the worry at Davos was that there would be a
retreat from even our flawed globalization, and that poor countries would
suffer the most.
But the playing
field has always been unlevel. How could developing countries compete with
America’s subsidies and guarantees? So how could
any developing country defend to its citizens the idea of opening itself even
more to America’s highly subsidized banks? At least for the
moment, financial market liberalization seems to be dead.
The inequities
are obvious. Even if poor countries were willing to guarantee their deposits,
the guarantee would mean less than that from the United States. This partly
explains the curious flow of
funds from developing countries to the US– from whence the world’s problems
originated.
Moreover,
developing countries lack the resources to engage in the massive stimulus
policies of the advanced countries. Making matters worse, the IMF still forces
most countries that turn to
it for help to raise interest rates and lower spending, worsening the
downturns. And, to add insult to injury, banks in advanced countries,
especially those receiving aid from their governments, seem to be pulling back
from lending in developing countries, including through branches and
subsidiaries. So the prospects for most developing countries – including those
that had done everything “right” – are bleak.
As if all this
were not enough, as the Davos meeting opened, America’s House of
Representatives passed a bill
requiring American steel to be used in stimulus spending, despite the G-20’s
call to avoid protectionism in response to the crisis.
To this litany of
concerns we can add the fear of borrowers that the massive American deficits
would drain the supply of global savings, and worries of holders of US dollar
reserves, that Americamay be tempted to inflate away its
debt. At Davos, those who trusted the USnot to inflate away its debt
intentionally
worried that it might happen unintentionally. 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. Americaled the world in globalization. With
American-style capitalism and America’s financial markets in disrepute, will
Americanow lead the world into a new era of protectionism,
as it did once before, during the Great Depression?
**
Joseph E. Stiglitz, professor of economics at Columbia University, and
recipient of the 2001 Nobel Prize in Economics, is co-author, with Linda
Bilmes, of The Three Trillion Dollar War: The True Costs of the IraqConflict.
Copyright:
Project Syndicate, 2009.
http://www.project-syndicate.org/commentary/stiglitz109
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