View from Davos sends chill down economic spines

It was so cold up at the Schatzalp Hotel last weekend that the mineral water was freezing in the carafes before you could pour it in your glass. You could turn the whole thing upside down and not a drop would come out. We all sat there as long as we could stand it, though, because the art-nouveau Schatzalp is where by tradition every annual meeting of the World Economic Forum ends, with a big buffet on a sunny lawn overlooking Davos, the grills turning out meaty snacks and a Swiss country music band complete with alphorn playing its rendition of Bob Marley's Redemption Song.

Before we gave up and headed indoors, I found Nouriel Roubini, the New York University economist who predicted the financial crisis years before it finally hit, standing with Tony Tan, the chairman of the Government of Singapore Investment Corporation and its roughly US$100 billion (Dh367.3bn) in assets. Bundled up against the blistering cold, they were as congenial as anyone could be when their lips are freezing to their teeth. What I first mistook as hypothermia, though, I later realised was most probably gloom.

These two gentlemen had delivered some of the most sobering messages of the entire meeting, only to have their warnings drowned out by the din over how to mend the global financial system. The bulk of the conversations in Davos this year revolved around how to fix it so banks can't lose everyone's money and imperil the global economy again. More specifically, people hope somehow to cure bankers of caring so much about the one thing they're paid to care about - making money.

It dawned on me that this hullabaloo over banks was becoming something of a red herring during a session on financial risk management. Here was a high-level panel consisting of top insurance executives, central bankers, multilateral lenders, one head of state and one of the world's most famous leveraged buyout professionals. Yet their biggest contribution to the financial redesign debate was an analogy.

The wreck of the western financial industry, they postulated, was akin to a speeding car that had run off a winding road into a ditch. After hemming and hawing for a while over how to make the car safer to drive, someone on the panel cautioned that there was no point improving the car's bumpers if it only encouraged drivers to speed faster. The discussion then focused on how to reform the driver, to better police him - perhaps installing an annoying little bell that rings whenever he exceeds the speed limit? - or re-educate him so he no longer desires to speed.

Left out of this hand-wringing, though, was much concern over the fact that we passengers are still lying at the bottom of the ravine the car plunged into. Mr Roubini and a few others tried to hammer this point home. We aren't out of the hole yet. We've been floating back upwards thanks to a deluge of government borrowing and spending. But if we don't figure out how to get to dry land soon, we risk being washed over another cliff. Or we could end up like Japan, spending 10 years or more spinning our wheels in economic mud.

Only a few people seemed interested in discussing the passengers' role in the crash. After all, the banks and their customers - the pension funds, the sovereign wealth funds, the hedge funds, the mutual funds and individual savers, large and small - were all struggling to beat a deadline. Everyone wants their money to earn enough to push them to a certain level of prosperity while they're still young enough to enjoy it, or at least enough to retire on.

That all seemed possible before the crisis. Interest rates were kept low and markets kept opening, providing new opportunities for investors. The problem is that wealth is relative. A million dollars may make me rich until everyone has a million dollars. Then I need $10 million. This fed the race for yield. At the centre was the US, where the most meaningful pension scheme available to most Americans is the equity in their homes. The housing bubble was good for them. But opening markets also unleashed the consumers of the developing world onto the global economy. Their cheap labour had the effect of muting price increases but it also meant more people competing to afford more stuff: TVs, SUVs, steel, copper, coal and oil.

The competition for yield intensified, encouraging money managers to take on even greater risk and inventing more complex ways to do so, like credit derivatives backed with subprime US mortgages. "Countries need to do their homework to reduce the risks of these instruments and investing habits," the Chilean central bank president Vittorio Corbo said in Davos. But that was in 2007, over a year before the crisis struck, and Mr Corbo is no longer heading Chile's central bank.

Yes, we can fix the banking system and maybe even restrain the bankers. But the passengers will still be clamouring for more speed. A generation of American baby boomers have seen their nest eggs collapse with the housing market. China's population is ageing and needs to fund its own retirement. Meanwhile billions of young people from India, Saudi Arabia and Egypt are looking for jobs. Where will the money come from?

Mr Tan in a session on capitalism offered a bleak prognosis. The days of heady economic growth and opportunity that the world enjoyed in the 1980s and 1990s are over, he said, and with them the kind of fat returns that made it seem like we could get rich off our savings. "We must expect to have lower returns," said Mr Tan. In a world of people raised on TV commercials promising ever brighter, shinier lives, that doesn't bode well. "I think the world will be a more uncomfortable place," he said.

Bundle up. @Email:warnold@thenational.ae