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Home > Blogs > Ian Fraser > Pondering recovery amid the snow

Pondering recovery amid the snow

Finance Blogger: Ian Fraser Ian Fraser

The picturesque Swiss ski resort of Davos will later this month again play host to the World Economic Forum (WEF), the annual jamboree of the global great and the good. This year the event is likely to be dominated by soul-searching about the state of the global economic recovery.

Specifically, speakers will be assessing whether the neo-Keynesian medicine doled out by most governments is going to be sufficient to avert future economic catastrophe, or whether different prescriptions may be required.

The Forum, now in its 39th year, commences January 27th with a speech from Nicholas Sarkozy. The French president will focus on the summit’s over-arching theme: “Improve the State of the World: Rethink, Redesign, Rebuild.”

His Élysée minders were not giving much away, only saying the speech will touch on the “world after the crisis” and “the regulation of financial markets," but Sarkozy is known to be no fan of Anglo-Saxon-style capitalism. Perhaps feeling the French system has been vindicated by the crisis, he wants a fundamental rethink.

Ahead of the event, the WEF co-chairman Eric Schmidt has set the tone by calling for stricter regulation of banks. In an interview with Kamal Ahmed, business editor of the Daily Telegraph, Schmidt blamed the crisis on US macroeconomic policy under Bill Clinton and George W. Bush.

Schmidt, whose day job is chairman of Mountain View, California-based internet giant Google, said: “Eventually an easy-money policy catches up with you.

“Remember what happened … in the mid-1990s, Congress increased the supply of credit for home mortgages, through the institutions Fannie Mae and Freddie Mac. They were essentially given too much money for political reasons. And then that was followed by the repeal of Glass–Steagall which allowed banks to use investment equity vehicles to create liquidity which creates very large amounts of money. So the banks were busy creating money and making a lot of money on that creation of money and the regulators were either asleep at the wheel or did not have the tools to understand what was going on.”

Schmidt gave short shrift to those who complain there is now too much state intervention in the economy.

“The number of people who were hurt by the activities of the financial industry is so large, it is very hard to have a lot of sympathy with that industry given the high-flying nature of its behaviour. Remember, many of these institutions privatised the gains and socialised the losses … It is very easy to understand. You’re a banker, you make a loan, and if you screw up you lose your job and the firm is liquidated … You cannot have a situation where you only win and do not lose in capitalism. At Google, if I lost $10bn in one day I would lose my jacket.”

Schmidt warned that growth this year will be patchy, with whole swathes of the US still “severely injured.” He believes the patient that is the global economy is now out of intensive care, but said how it recuperates from here remains uncertain. “What happens when the stimulus money is withdrawn? No one knows. There’s no precedent for the amount of capital put into these markets.”

Schmidt also touched on the deficits being run by many Western countries, suggesting that America is in a stronger position because of its domestic use of the dollar, the world’s reserve currency. “The situation in Britain is worse … and the reason is that the US can inflate its currency and Britain can’t.” He warned this will necessitate economically damaging public spending cuts in the UK, but not in the US.

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Tags: Davos , economic recovery , financial crisis , fiscal stimulus , regulation , UK , US , World Economic Forum
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