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Thursday, February 05, 2009

Stiglitz: Depression in Davos

Joseph Stiglitz reflects on the recent World Economic Forum in Davos:

Davos Man’s Depression, by Joseph E Stiglitz, Commentary, Project Syndicate: For 15 years, I have attended the World Economic Forum in Davos. Typically, the leaders gathered there share their optimism about how globalisation, 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. ... 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...

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. ... Indeed, some American financiers were especially harshly criticised 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. ...

This crisis raises fundamental questions about globalisation, 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 globalisation, and that poor countries would suffer the most. ... At least for the moment, financial market liberalisation seems to be dead. ...

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 that borrowers, wary of massive American deficits, and holders of US dollar reserves, worried that America may be tempted to inflate away its debt, might respond by draining the supply of global savings. At Davos, those who trusted the US not 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...

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. America led the world in globalisation. With American-style capitalism and America’s financial markets in disrepute, will America now lead the world into a new era of protectionism, as it did once before, during the Great Depression?

    Posted by on Thursday, February 5, 2009 at 03:33 PM in Economics, Financial System, International Finance | Permalink  TrackBack (0)  Comments (42)


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