Confidence grows at the rate a coconut tree grows and falls at the rate a coconut falls. That exquisite simile from Montek Ahluwalia, an Indian policymaker, summed up the 2009 gathering of the World Economic Forum.
Political leaders arrived depressed and left almost paralysed with fear after exchanging horror stories of just how savage and sudden the downturn had been in recent months. The herd mentality that created the unsustainable boom now threatens to turn recession into slump. Businesses have already written off 2009 and there are doubts about whether recovery will start meaningfully in 2010.
Economist Joseph Stiglitz believes
that, even now, there is a failure to recognise just how bad things are. Bill Gates, the
Microsoft founder, says this is a four-year recession; if he is right that would put
it up there with the Great Depression. There are those who still cling on to the hope that the colossal stimulus provided by lower interest rates, fiscal expansion, tumbling commodity prices and bank bail-outs will work sooner than the suicide squad in Davos believes.
Peter Sands, chief executive of Standard Chartered, noted that expectations of the future depend heavily on what is going on in the present. In the good times, the assumption is that life will be sweet for ever; when the rain is thundering down it is hard to believe that the skies will ever clear. At some point, the storm will blow over and the hope of policymakers such as Mark Carney, governor of the Bank of Canada, John Lipsky, the deputy managing director of the IMF, and British Prime Minister Gordon Brown is that the change in the weather can be hastened by co-ordinated and aggressive policy action. There are high expectations of what the April G20 summit in London will deliver â€” too high, if Davos this year is anything to go by.
The problem boils down to one little word: trust. Business leaders are cutting jobs and output because their order
books are shrinking and they donâ€™t trust policymakers to deliver recovery this year. Banks donâ€™t have enough trust to lend. And, most significantly of all, there has been a dramatic loss of public trust in business. There was much soul-searching in Davos as to why consumers now appeared to have a visceral loathing of those heading corporations, and whole sessions were devoted to the need to rebuild trust.
The recognition that widening inequality, corporate greed and a lack of suitable regulation helped to create the problem meant at least that the seed of a coconut tree was sown. It will, however, take a long time to grow â€” even assuming that it takes root.
Barack Obama, a significant absentee, put his finger on the problem last week when he gave Wall Street a dressing down for paying $18.5bn ($13bn) in bonuses last year and simultaneously set up a task force to find ways of bringing help to American working families.
What the new president identified was that the economic system of the past 30 years has been hugely â€” and unhealthily â€” skewed towards those at the top. In the United States, workers were able to improve their living standards only by sending spouses out to work, working longer hours and double (sometimes triple) jobbing. When even that was not enough, they borrowed more. This suited Wall
Street just fine. It developed a laxly regulated model that provided mortgages with
no questions asked. It packaged up sub-prime loans and through financial alchemy turned the dross into gold. The original investments were leveraged up as traders pursued short-term profit and assumed that there was no prospect of a crash in house prices.
It would be wrong to assume that the public ever had much affection for the masters of the universe as they indulged their orgies of conspicuous consumption. There was, however,
no violent reaction so long as the system delivered growth, jobs and rising asset prices. But just as voters turned savagely on the UK Conservative party in 1997 when it was shown to be incompetent as well as uncaring, so the evidence that the Wall Street/City model of financialisation is utterly broken has engendered an entirely predictable loss of faith in business and all its works. Kris Gopalakrishnan, who runs the Indian company Infosys, said: â€œTrust will get rebuilt only if we go back to fundamental values of integrity, leadership and fairness.â€ Stephen Green, the chairman of HSBC, confessed that some of the practices in the financial sector had not contributed to human welfare.
Politicians now have a choice. They say that they want a stable economic
system. They say that there has been too much greed at the top and insufficient rewards for working families. They say they want to avoid protectionism. In that case they have to act and act fast. The public may trust government more than it does business. But thereâ€™s not a lot in it, and unless there is rapid, verifiable change that trust will evaporate. â€” The Guardian