Credit in Latin, the embattled British Prime Minister Gordon Brown said at Davos, means “belief” and “trust.” Faced with a barrage of questions from a hostile domestic media at Davos on his alleged inability to manage the worst economic crisis and loss of ‘trust’, Brown offered some new wisdom. What the world is witnessing at this juncture, he said, is nothing but a new form of “financial mercantilism.”
Till now, mercantilism was identified more with goods and, to some degree, with services as well. So, the term financial mercantilism and its usage in the current global banking crisis marks a new phase. It involves the process of banks safely retreating to their headquarters or national capitals, abandoning their operations in other markets and countries. And this is largely due to loss of “trust”, which, in turn, leads to “financial protectionism”.
Small wonder then, that international financial flows to developing countries are likely to drop dramatically, according to Brown. Last year, developing countries received financial flows of around $1 trillion. Those flows are likely to be around $150 billion this year. Therefore, the immediate goal for nations is how to prevent financial or capital protectionism which will result in a sharp contraction in capital flows. Jean-Claude Trichet, the head of European Central Bank, says financial markets are wrong if they are forcing banks to retain capital without spreading this to those who need it most in this hour of crisis.
Davos, this year, has been replete with statements and calls amounting to the pot calling the kettle black. If there is one sentiment that is common to all proceedings, whether political or economic, it is protectionism. Whether it is Shimon Peres’ loud statements on Israel’s attacks on those innocent civilians, or Gordon Brown’s preaching about financial mercantilism or Brazilian foreign minister Celso Amorim’s calls to thwart economic nationalism, the underlying theme is tension, depression, and protectionism.
That forward-looking Davos sentiment, the hallmark of all the meetings in previous years, is woefully missing and if anything, doubt and distrust hangs heavy, leaving all the gurus and confident politicos like Brown at sea. They seem unsure of how long the global economic and financial crisis will last and how severe the recession and unemployment in various countries will be. Nor do they have any roadmap. At one session on policy assumptions, the participants were asked what damaged the global economy the most? Several factors were cited. They included the availability of cheap money that financed what Chinese Premier Wen Jiabao called “inappropriate macro-economic policies of some economies and their unsustainable model of development characterised by prolonged low savings and high consumption”; other factors cited were the excessive leveraging by banks; the belief that the Americans could go on over-spending while the savings would all be done by China — basically, the belief that the good times would last forever.
But the highlight of the discussion was that a large majority of economists, who are known as the supply-side pundits and responsible for the continued financial liberalisation, admitted they were “horribly” wrong about market fundamentalism and the belief that markets would self-correct without any intervention. This led to “rampant mispricing of risk over the years” and “mispricing of assets”. They also said it was wrong to provide huge incentives to investors for risk-taking which ultimately led to underestimating risk and accumulation of toxic assets.
Beside all these factors, there were also suggestions that the complex financial betting instruments based on quantitative techniques and esoteric econometric models contributed to flooding the financial markets with insane and indigestible practices which were beyond regulation. The trickle-down theory which failed to work adequately all these years, they said, can claim success at least one area. It worked well when it came to spreading the sub-prime mortgage crisis far and wide both in terms of financial losses and social unrest! The moot issue is: Shouldn’t there be some criminal action against all those who created toxic assets in the financial markets, which made the world a highly-hazardous place to live in? In fact, there was such a suggestion, but it fell on deaf ears.The moral of the story is that the Davos man and his spirit have suffered an unprecedented loss of trust!
