Davos: Two Worlds, Ready Or Not

By Simon Johnson

On the fringes of the World Economic Forum meeting in Davos this week, there was plenty of substantive discussion – including about the dangers posed by our “too big to fail”/”too big to save” banks, the consequences of widening inequality (reinforced by persistent unemployment in some countries), and why the jobs picture in the U.S. looks so bad.

But in the core keynote events and more generally around any kind of CEO-related interaction, such themes completely failed to resonate.  There is, of course, variation in views across CEOs and the people work intellectual agendas on their behalf, but still the mood among this group was uniformly positive – it was hard to detect any note of serious concern.

Many of the people who control the world’s largest corporations are quite comfortable with the status quo post-financial crisis.  This makes sense for them – and poses a major problem for the rest of us.The thinking here is fairly obvious.  The CEOs who provide the bedrock of financial support for Davos have mostly done well in the past few years.  For the nonfinancial sector, there was a major scare in 2008-09; the disruption of credit was a big shock and dire consequences were feared.  And for leaders of the financial sector this was more than an awkward moment – they stood accused, including by fellow CEOs at Davos in previous years, of incompetence, greed, and excessively capturing the state.

But all of this, from a CEO perspective, is now behind them.  Profits are good – this is the best bounce back on average in the post-war period; given that so many small companies are struggling, it is reasonable to infer that the big companies have done disproportionately well (perhaps because their smaller would-be competitors are still having more trouble accessing credit).  Executive compensation at the largest firms will no doubt reflect this in the months and years ahead.

In terms of public policy, the big players in the financial sector have prevailed – no responsible European, for example, can imagine a major bank being allowed to fail (in the sense of defaulting on any debt).  And this government support for banks has translated into easier credit conditions for the major global corporations represented at Davos. 

The public policy issue of the day, from the point of view of such CEOs, is simple.  There needs to be sufficient fiscal austerity to strengthen public balance sheets – so that states can more effectively stand behind their banks in the future, and to keep currencies from moving too much.  Leading bankers, in particular, insisted on the paramount importance of providing unlimited government support to their sector during 2008-09; now they insist with equal or greater vigor that support to all other parts of society be curtailed.

This is where cognitive dissonance creeps in.  Most CEOs feel that the provision of general public goods is not their responsibility, although they are very happy to help guide (or capture) the provision of public goods specific to their firm. 

But it is reckless decisions by some in the financial sector that produced the crisis and recession – this is what accounts for the 40 percent of GDP increase in net government debt held by the private sector in the United States (to be clear: it’s the recession and mostly the consequent loss of tax revenue).  And CEOs are happy to lead the charge both against raising taxes and in favor of deficit reduction.

This adds up to public goods being weak and so much under pressure around the world.  No one can put significant resources to work helping to bring down unemployment.  No one is seriously addressing the loss of skills faced by the long-term unemployed.  No one is offering real resources to help improve education for lower-income children or adults who did not finish high school.

Self-anointed “fiscal conservatives” claim the budget issues we face are all about discretionary nonmilitary spending.  This is nonsense.  The U.S. faces an incipient fiscal crisis (a) in the shorter term, because of what the big banks did and what they are likely to do in the future, and (b) over the next few decades, if we fail to control rising health care costs (both in general and as funded by government budgets).

The gap between the CEOs’ world and the real world should be bridged by the official sector.  But where are the politicians and government officials who can explain what we need and why?  Who can confront the CEOs in the highest profile public forums, and push them on the social responsibility broadly defined?

The biggest disappointment at Davos was not the attitude of the corporate sector; these people are just doing their jobs (as they see it).   To the extent the U.S. or eurozone official sector showed up at all, it continued to demonstrate the deepest levels of intellectual capture.  The reasoning seems to be: As long as we do what the big banks and big firms want, everything will turn out all right.  There was zero high-profile public debate at Davos this week on anything related to this way of seeing the world.

Corporate Davos was borderline exuberant.  Even if a deeper crisis looms, does the global business elite really care?

65 responses to “Davos: Two Worlds, Ready Or Not

  1. Breaking up is hard to do – Cue music http://www.youtube.com/watch?v=tbad22CKlB4

    Sir David Cooksey (Chairman UKFI) quizzed about whether breaking up UK banks (RBS, Lloyds) would cost UK taxpayers, says “..there would likely be a diminution in value”

    http://bit.ly/flP8LN

  2. I hesitate to get into this explanation for the “CEO” attitude and cognitive dissonance but feel I should at least give it a try.

    Paradoxically, it’s about the role of altruism in abetting CEO arrogance.

    When we think of altruism we think of empathy, caring, a willingness to sacrifice for another’s well-being…

    That’s a very nice thing!

    But the root of altruism is in biology… and it has a very long history in social organisms from honey bees to whales to us.

    Biological Altruism is NOT about being nice. It’s about distinguishing In-group from OUT-group. And in humans its also connected to something called Dunbar’s Number (a hypothetical natural human community size).

    And the attitude towards the ‘out-group’ can range from indifference, to being seen as simply an opportunity for exploitation… or even deserving of absolutely ruthless enmity, brutality and elimination.

    This disconnection between intellectual and biological altruism is why your dog being run over this morning would impact your emotions much more than the knowledge that 100,000 people in another part of the world just died in an earthquake. That’s not to say that wouldn’t arouse ‘intellectual altruism’ in you … and even a charitable response… but the difference between the two has subtle effects on cognition, rationalization and DECISION.

    In truth, its a necessary adaptation. Otherwise we’d all be continually immobilized by the tragedies in the world.

    However this disconnection requires actual structures and mechanisms in scaled societies to be adequately addressed.

    Things like sortition (juries) and suffrage (elected legislatures, etc) are mechanisms attempting to address this.

    A few words on this general issue here:

    Social Networks & The Social Organism: Healing the Breach
    http://culturalengineer.blogspot.com/2009/05/social-networks-social-organism-healing.html

    How Would Hunter-gatherers Run the World? (Psst… They DO!)
    http://culturalengineer.blogspot.com/2009/11/how-would-hunter-gatherers-run-world.html

    I’m convinced the Commons-dedicated Account Network is a necessary mechanism and am happy patent has been granted.

    What’s that?

    Well let me put it this way…

    Did you know that Facebook is getting ready to introduce Facebook Credits… a proposed network of user-accounts for in-system purchases of virtual goods and other similar microtransactions. I wish them all good luck! This is nothing against them.

    But forgive me bringing for up a minor point… DOES ANYBODY UNDERSTAND THAT GAME CRAP AND AVATAR OUTFITS AREN’T REALLY THE BIGGEST DEAL IN VIRTUAL GOODS? AND WHERE THE REAL POTENTIALS FOR THE INTERNET MICRO-TRANSACTION ARE?

    A very abbreviated logic chain:

    1. There’s potential in the political, charitable and speech-related microtransaction for networked citizen lobbying, candidate support, journalism, etc. if it can be harnessed.
    2. Problem is the cost and hassle of the microtransaction.
    3. This problem is solved by system similar to x-box points (which is how they handle the microtransaction issue for certain system content).
    4. Additional problem is catalyzing the network
    5. Addition of charitable and news/journalism monetization potentials solves this for a variety of reasons related to a more general user-utility

    6. And this then establishes the network’s utility for ALL the User’s similar expenditures of whatever size.

    7. Patent has just been granted for this mechanism: Patent #7,870,067
    8. Establishment of useful network opens up new fields for empowered association… especially when combined with localization capabilities.
    9. There are theoretical reasons for need for such a system but points 1-7 above are about a PRAGMATIC implementation.

    Finding Roots in a Shifting Landscape: Facebook and the Future of Social Networks
    http://culturalengineer.blogspot.com/2011/01/finding-roots-in-shifting-landscape.html

    P.S. Regarding the prospects for unemployment and the role of tech in addressing that see Nancy Scola’s piece and my comment at TechPresident:

    The Geekiest State of the Union Evah?
    http://techpresident.com/blog-entry/geekiest-state-union-evah

    (Thanks to founders of both TechPresident and Personal Democracy Forum for joining my LinkedIn Network! It’s a tough go without contacts!!! Patents DO help!)

    P.P.S. Eventually it’ll make a great story… but right now I need a way to get from L.A. to Mountain View if anybody can be of assistance.

  3. Herbert Wetherby

    I would TRY again, you obviously have way to much on your plate to contemplate. If I were you I would wage one battle at a time and try to win it. Repete process until you get the win. Then move on.

    What I really see in the making here are currencies that are about to collapse, even as there momentum seems to suggest otherwise. 2 years both goes by slowly and quickly depending on ones motivation. When left with nothing better to do, a growing population might take to the streets to show their objections to the ghosts of the machines, which put them out of work and under water, at best. At worst alittle chaos can provide cover for a new crook who wants to get back at a possible old crook.

  4. Wow. This says it all in a nutshell. thank you

  5. markets.aurelius

    Excellent post, Simon. Particularly insightful is the observation, “No one can put significant resources to work helping to bring down unemployment. No one is seriously addressing the loss of skills faced by the long-term unemployed. No one is offering real resources to help improve education for lower-income children or adults who did not finish high school.”

    Why is that? In good times, the banks and other financial intermediaries controlled ~ 40% of the profits reported among S&P 500 companies. In bad times, the banks secured all of the credit, credit support and contingent debt guarantees available from government to stabilize the economy (in the U.S. alone, this number is somewhere ~ $13 Trillion … a number so large as to be incomprehensible … kind of like the Avogadro’s number of finance).

    The banks have been extremely successful in inserting their operatives at the core of the system controlling the dispensation of this largess, and inside the academy, so that, after the requisite 2 – 6 years of post-graduate training, a cadre of like-minded apologists is ready to assume their role in this system. And control it. They will, as it happens, only listen to, and read stuff from, like-minded individuals.

    In either scenario — good times or bad — the non-banking world is effectively denied the credit and cashflow required to mobilize resources, invest in increased productivity and attract the best talent. Non-financial firms cannot produce the returns banks generate investing in themselves after they’ve levered their balance sheets to the point where their cashflows essentially become a long call on future income. Without investment the non-banking sectors atrophy. If productivity does not grow, GDP does not grow.

    At some point, which we may have reached, this cycle perpetuates itself to the detriment of society as a whole. And we arrive at the point the only thing President Obama can do is talk about “investing in green technology” as he visits the still-smoldering wreckage of what used to be productive communities. And members of Congress can only talk about the need for fiscal disclipine. This is beyond laughable.

    So the “developed” economies in the West became de facto banking economies — the most significant share of total profitability, rents and access to resources flowed to this sector. And, of course, it was re-invested in better computer systems and in attracting the best grads from the best schools, but, at the end of the day, this still left gargantuan excess cashflow available to pay excessive bonuses. This type of “investment” only benefits the banks, and allows them to continue to dominate wage scales.

    It gets even more insidious within the banking and finance sector. Now we see the biggest of the TBTF beneficiaries of government support trying to kill off the actual risk-taking entities in this sector (i.e., the not-too-big-to-fail financial sector) — cf Gary Cohn’s laugh-track at Davos:

    http://www.ft.com/cms/s/0/f9753506-2990-11e0-bb9b-00144feab49a.html#axzz1CEzF2T36

    Mr. Cohn actually tried to convince anyone within earshot that potential regulations being discussed among regulators and lawmakers that might … oh, I don’t know … restore some sanity to financial markets and the allocation of credit … push risk and risky behavior toward hedge funds. O_M God! Thousands and thousands of firms — each with less than a third of the leverage GS and its ilk employed in the lead-up to 2007-09′s meltdown — will take risk! And they might fail (unlike GS, MS, C, BAC, …)! The hedge funds’ prudent risk-taking (at the risk of failure) might drive out the imprudent risk-taking of TBTF banks! Again: O_M GOD!

    “Risk is risk,” averred Mr. Cohn. “My concern is that … risk will move from the regulated, more transparent banking sector to a less regulated, more opaque sector.”
 After I stopped laughing … imagine the COO of the most opaque operation in the history of Wall Street saying such a thing … it occurred to me this is exactly what needs to happen: Risk needs to be re-atomized so that one small blow-up at a risk-taking entity doesn’t destroy the entire financial system.

    We already know what the excessive concentration of risk and the unfettered ability to lever the balance sheets of these non-hedge-fund actors produces. We are still recovering. GS is only “regulated” now because it did blow up: As the just-released FCIC report notes, they were among that non-JPM group of financial companies that surely would have failed had not the Fed and Treasury and God knows who else intervened to give them a commercial-bank charter. They required life support in the truest sense of the phrase, along with MS, C, BAC, …, etc.

    Risk-taking entities that are allowed to fail will outcompete firms like GS, MS, C, BAC, even JPM. That is so abundantly clear to anyone who can fog a mirror that even Mr. Cohn has to use his one chance to say something meaningful in front of a global audience to argue (laughably) for his TBTF/TBTS status.

    One hopes the folks that can actually affect how things evolve saw his remarks for what they are. After, of course, they, too, recovered from the side-splitting laughter occasioned by this speech.

  6. Thanks for suggestion. It is difficult to stay on one thing at a time sometimes. And its been said that an entrepreneur must wear ’500 hats’… and, of course, being relentless also helps. Especially when your endeavor threatens a few apple carts.

    I stand by the altruism argument. And am convinced its an issue not sufficiently attended to. While its relationship to the ‘invention’ discussed may be obscure (or more likely misinterpreted) the connection between them is real.

    But I agree with you that the current global financial system and its tokens (currencies) have growing credibility problems. And that such situations often create opportunities for despots as bad as those they replace.

    Don’t expect human nature to suddenly change. Its only by attending to systems, institutions and technologies that societies can overcome some inherent problems that arise with scale… and that have repeatedly brought on their dissolution.

    (Money, finance, government, laws… are social ‘technologies’… but the landscapes in which they operate have drastically changed… these technologies have been thoroughly ‘gamed’ and simply aren’t keeping up.)

  7. The hominid world must organize! Oh, wait…

  8. Simon, good post, as usual.

    Life is good when you’re at the top, no doubt, but what about the rest of us, still contending on the bunny-slopes of life? I guess we all are the slaves, they all are the masters, and we serve as funding mechanism(s) when their bets go bad.

    The public sector is being asked by these millionaire and billionaires to get its’ balance sheet in order, did I correctly hear that? School teachers, firefighters, police, IRS agents, now have to get used to pay cuts, pay freezes, reduced benefits, and support to “other sectors of society have to be curtailed”? Why is that? Why don’t their investors, bondholders, shareholders, and counter-parties take not a haircut, but go completely bald?

    They should talk about getting balance sheets in order: those TBTF remain insolvent, and by law, should be shuttered, liquidated, and sent packing. What oxygen are they breathing?

    This is an erudite forum you’ve got here, and I am not an economist. But can someone here relate any other historical parallel where the looting has been so massive, and the amount of criminals sent to jail so paltry, given the magnitude of these crimes against the citizenry?

    Tax WALL STREET with a sales tax!! Let those who have brought about these crimes BALANCE the public balance sheets…. not working people, who have paid so much, and lost so much.

    And clawback the $3 billion GS swiped, and also, kudos to Marcy Kaptur for having the guts to say it on national tv.

    This DAVOS summary was disgusting.

  9. @ Tom Crowl

    You failed to mention the “God Gene” in your sophism hypothesis?
    This “common denominator” has lost its way so to say, but actually you…and I know it takes but one unpredictable occurrence or event to resonate once again? Where diamonds, gold, and silver can’t be worn as flesh;
    where all are unmasked in a sovereign humanity
    these bloodlines of past once again shed for mankinds precarious existence,…

    “Two worlds ready or not, is but a warning? Societies are homogeneous entities…a symbiosis living collage – a woven collective tapestry…whereas if one were to frail the common thread – this could/would be our unraveling.”

    The greed by the “D66P 6″ is unpresidented in American history, and if left unabated spells our doom!

  10. Hey, at least have banks “launder” some of the war lord and drug lord money back to the “public sector”…seriously, try pulling the accounting crap (“it wasn’t illegal”) of TBTF banks at the drug lord’s operations…

  11. Herbert Wetherby

    But can someone here relate any other historical parallel where the looting has been so massive, and the amount of criminals sent to jail so paltry, given the magnitude of these crimes against the citizenry?

    No. Its basicly give the devil his due. Just make certain there is not much due him.

  12. Woop, I completely concur.

    Every day I shake my head and wonder, have these people never heard of Marie Antoinette?

  13. We interrupt the Davos Conference to bring you breaking news… it was reported last evening that Banking Analysts, Lawyers, and Engineers were among the thousands of protestors, demanding that Pres Mubarak resign immediately–if it could only be that easy, here in the states….

    Quoting over here from HP: AP reports: A massive crowd of tens of thousands calling for the ouster of President Hosni Mubarak was gathering in the streets and squares of downtown Cairo Saturday afternoon, with protesters making clear they reject promises of reform and a new government offered by the embattled leader trying to hang on to power.

    Dozens of tanks and armored personnel carriers fanned out across the city of 18 million, guarding key government building a day after large, violent confrontations emboldened the movement demanding a change of leadership. There was rampant looting across the sprawling city of 18 million and a growing feeling of fear and insecurity.

    In the city’s main Tahrir Square, at the center of Saturday’s massive demonstration, there was only a light military presence — a few tanks — and soldiers are not intervening. Few police were seen in the crowds and the protest began peacefully but then police opened fire on some people in the crowd near the Interior Ministry and a number of them were wounded by gunshots. It was not clear whether they used rubber bullets or live ammunition.

    One army captain joined the demonstrators, who hoisted him on their shoulders while chanting slogans against Mubarak. The officer ripped a picture of the president.

    “We don’t want him! We will go after him!” demonstrators shouted. They decried looting and sabotage, saying: “Those who love Egypt should not sabotage Egypt!”

  14. Carla, thanks, I’m on your side, too.

    Annie, perspicacious as always, makes a point, which I would buttress with this detailed report:

    http://www.bloomberg.com/news/2010-06-29/banks-financing-mexico-s-drug-cartels-admitted-in-wells-fargo-s-u-s-deal.html

    I want to say some relatively modest fines were levied, which probably makes its’ disguised way into business expense categories, and so forth.

    Anyway, the TBTF excuse was trotted out, with the implied or express threat that the “financial system” would implode, if indictments of living humans came into being.

    By contrast, that fella on Long Island accused of running an unlicensed money transfer business, faced 10 federal counts, and a potential jail term of 50 years. There was no allegation made in the indictment that he was part of or intentionally aiding the putative “Time Square bomber”, either.

  15. To answer your last question, Mr Johnson:

    No.

    Somethings are simple to understand. Excellent post.

    And for additional evidence of their insularity the list of top 10 counties by median income consists of 5 Beltway bubble and 4 NY/NJ counties and an outlier in Colorado. What problems? Just keep expanding the Fed balance sheet to keep them in chips. Thanks, suckers!

  16. Beautiful post Simon as always and thank you to some thoughtful reader responses as well. I blogged early in the conference trying to provide a minimal background to the WEF as well as a curious economic report out of the WEF just before the meeting. It may be of some interest.
    http://cal48koho.blogspot.com/2011/01/davos-2011-vs-sotu.html

  17. good point linking dear departed Marie to her “let them eat cake” remark which I have repeatedly read that she never actually uttered. But your point stands. There were many factors leading up to the events of 1789 and first among them was the shortage and high costs of foodstuffs, chiefly flour. As a side note the famine may have been a consequence of a significant volcanic eruption in Iceland some years earlier. So far there are minimal indictments drawn up against the banksters and little popular outrage. Maybe we will just have to wait until our tummies are empty to see any hope of change we can believe in.

  18. Herbert Wetherby

    Ahh, but in Maries basement there was enough gold to later created the gold standard of 1896. Stored away, now the banksters are fighting over just who owns and where is it all. And until then, just print the money backed by a myth, a mound, some hope, and the occasional prayer, with what’s left of my magic dust.

  19. “Maybe we will just have to wait until our tummies are empty to see any hope of change we can believe in.”

    I clicked on your name and took a gander at yer site, Doc.

    How many people do you talk to a day, face to face, in Wyoming? Zappa song comes to mind – “…moving to Montana soon, gonna be the local dental floss tycoon…” :-)

    REALLY.

    REALLY now…

    ….be totally devoid of prejudice to what I am going to ask

    ready?

    The breadbasket of the world is going to start STARVING it’s people to make a

    DELUSIONAL MATH POINT?

  20. i don’t post, but earle– you’re a poet.

  21. Marshall Dillon

    The breadbasket of the world is going to start STARVING it’s people to make a
    DELUSIONAL MATH POINT?

    Perhaps.

  22. Make Wall Street Banks Repay

    Make Wall Street banks and their “Fed” compensate our governments for the ENORMOUS damage they have done to them and most American tax payers.

    1. Loan Guarantees: Wall Street’s corporate shills in the Fed and our Treasury Department have literally GIVEN Wall Street banks TRILLIONS of dollars in taxpayer loan guarantees which will increase our national debt by those amounts when Wall Street (inevitably) crashes our economy again. These loan guarantees are in effect “free credit default swaps” which “privatize the profits while socializing the losses.” Now that our Wall Street banks are “profitable” again, our government should either CANCEL ALL OF THOSE LOAN GUARANTEES or make those banks REPAY our government for the FULL MARKET VALUE of those loan guarantees. Those repayments can be called “insurance premiums”, “credit default swap fees”, or whatever.

    2. State and municipal debts: The primary reason most of our nation’s state and municipal governments are in serious financial trouble is because our Wall Street banks AND the Fed acted irresponsibility (engaging in acts ranging from gross negligence to outright fraud). Our (actually Wall Street’s) “Fed” has been giving near-interest-free loans not only to those banks, but also to large corporations like GE, MacDonalds, Wall-Mart. But so far at least, they have REFUSED to give near-interest-free loans to state and municipal governments, thereby forcing our states, municipal governments, and their tax payers to “foot the bill” for the damage created by Wall Street and Fed misdeeds. Our government should force the Fed to give our state and municipal governments large enough near-interest-free loans to pay off ALL of their debts (even if this is just a one-time deal). This will enable our state and municipal governments to rehire teachers, police, firemen, etc. and to start seriously fixing our nation’s crumbling infrastructure.

    If the Fed continues to refuse to obey the law that requires them to act in ways that will keep US unemployment rates low, then our government should revert back to a fiat-based monetary system (as opposed to our present debt-based monetary system) whereby our government will simply bypass the Fed and electronically “print” as many US Dollars as are needed to keep our economy running successfully without incurring any further “national debt”. All US government bonds will continue to pay their normal dividends and/or be paid off, bought, or sold commercially as is presently the case.

    When President Nixon finally took the US Dollar off of the gold standard, our dollars became de facto “fiat money” anyway (their value relied only on trust in the United States Government and on it’s acceptance of those dollars for paying federal taxes). But our government nevertheless continued to “sell its sovereignty” to a group of greedy and irresponsible bankers who profited immensely by “loaning to us” and “printing for us” our nation’s currency rather than “printing the money for ourselves” without incurring debt as authorized by the US Constitution. This is why our nation has been suffering so much since the early 1970s from Wall-Street-induced financial instability!

    Christopher C. Currie
    161 Lake Shore Drive
    Pascoag, RI 02859
    401-568-8266

  23. Bayard Waterbury

    Excellent post, of course, Simon. I would note that those of us who aren’t a part of the elitists were not represented at all in Davos. I especially thought it was apropos that you mentioned that, from your perspective, the CEO’s were just doing their jobs. There would be little question of that. What is truer, perhaps, is that they are doing their jobs too well. They dot their i’s with profits and cross their t’s with their purchase of governments. Many have discussed the idea that China is doing well, what with a “command” economy (under heavy government control and supervision), but, most of the Western (read plutocratic) nations also have “command” economies, run largely by and for the plutocratic overlords. I actually believe that this is moving the world, especially the developed nations toward some kind of populist tipping point, where, once the oligarch supported plutocrats move far enough toward the top end (getting close now), and far enough away from the rest, revolution is virtually inevitable. What has begun in the Middle East, we in America and those in Europe may soon come to realize also applies to us. Let’s face it, we (the western nations) can’t afford to be fighting any other wars, but, sadly, what is happening in this hot bed of unrest seems to be spreading, and may end up creating far more international instability that we can ever know. The most interesting thing about it is that it seems to be largely non-factional, which, perhaps makes it even scarier.

    No, Simon, Davos didn’t, and wasn’t going to, resolve the seeds of catastrophe that are presently festering on the world stage. The world has become, more and more clearly, a place where the average citizen is being further and further pushed into pure helotism. Sadly, this will not, in the long run result in a stable and livable world environment.

  24. @Dr. Hugh: Actually, when I think of Marie Antoinette and her FATE, it’s about her being hauled through the streets of Paris in a cart and then guillotined.

    So when I ask, haven’t these people ever heard of Marie Antoinette? It ain’t about the cake.

    Am I the only one who remembers the part about the BLADE?

  25. My god, the bloomberg report is horrifying, had to print it out to read it, and I keep thinking I will become un-horrify-able, but it ain’t happenin.

    I have already sent it on to friends and colleagues. Probably nobody will read it, because they’re entirely accustomed to my sending bad news and really don’t want to hear.

    I am saving my print-out so that if I happen to run into someone who feels like defending the major banks all rich people know and love, I can whip it out.

    Woop…where do you stand on the issue of state-owned banks… a la the Bank of North Dakota, and the numerous writings of Ellen Brown…www.public-banking.com.

  26. James,

    I have a simple solution for your predicament: move to a social democracy. The US will never be one, so do not waste your time asking for things that the US system will not provide. On the other hand, in the US you could get seriously wealthy, which is not so easy in Europe. The choice is between rent seeking workers or rent seeking billionaires. Politicians and bankers cater for both, but not at the same time…

  27. @Bayard: “what is happening in this hot bed of unrest seems to be spreading, and may end up creating far more international instability that we can ever know. The most interesting thing about it is that it seems to be largely non-factional, which, perhaps makes it even scarier.”

    This is so true, and yet, and yet, scary as it is, non-factional might possibly be…better.

  28. God, you are snide, Rien Huizer. It’s okay. We don’t care.

  29. @Simon Johnson: But it is reckless decisions by some in the financial sector that produced the crisis and recession

    It was the reckless decision by extremely arrogant bank regulators wanting to play risk managers for the world, to forget about risk neutrality, and impose that those who were perceived as riskier and therefore already had to pay higher interest rates would have to carry a bigger load of the capital of the banks… therefore effectively subsidizing the lending to those who are perceived ex-ante as “not risky” and who anyhow pay lower interests.

    That drove banks to triple-A rated waters were they entered with minuscule equity life vests… and whatever capital the banks had left over was courtesy of those perceived as “risky” and who now have to keep on struggling against this odious and regressive discrimination that not even so called “progressives” want to talk about, because that affects badly on their regulate-more agenda and on their PhD pals in the Basel Committee.

    Because of the lack of willingness to acknowledge what the regulators did so wrong, this financial regulatory reform is heading in the wrong direction, digging our banks and ourselves deeper in the hole, courtesy of Simon Johnson and others.

  30. markets.aurelius

    @ Herbert Wetherby: Your parallel is found in Rome in the time of Marcus Licinius Crassus, Gaius Julius Caesar and Marcus Tullius Cicero.

    To this point, these guys were at the center of an incredible story of theft on a grand scale (i.e., the looting of the treasury), civil unrest and lawlessness. Check out this link for a good intro:

    http://www.thefreemanonline.org/featured/marcus-tullius-cicero-who-gave-natural-law-to-the-modern-world/

    You’ll be surprised to learn it is the conservatives in the U.S. who find the present times so odious. Law and the rule of law has been so trampled in the past couple of decades, one truly worries we are re-tracing Rome’s steps.

  31. John Merryman

    Capital requires demand to equal supply, but supply holds the cards, so it is a matter of continually finding new demand to suck dry. Now it is in the final stage of sucking dry the world’s largest governments. This is an end game state though. Eventually money will have to be treated as the public contract which it is.

  32. digging our banks and ourselves deeper in the hole, courtesy of Simon Johnson and others.

    Insert the 1st law of holes. Which is “If you are in one, STOP digging. Then move on to the 2nd law of holes, Which is “When filling a hole, always start at the BOTTOM.” Following just these 2 laws will prevent you from bumping into reckless regulators, its actually as simple as that.

  33. Thanks, I know, but so few want to get their hands dirty just filling holes… most prefer keep on digging, thinking they’ll find gold.

  34. Why do we waste any of our precious revenues on tax write-offs for this Davos nonsense?

  35. Thats why we have a thing called “unwinding banks”. There are both more risks, and rewards, for the successful benificiarys, and there are plenty of them with dirty hands. But even that is not near enough for the truly stubborn regulator who in the end simply complains or does not believe the information before them, when things don’t go their way.

  36. This makes me think of architecture. Walk around New York City. Look at the old buildings. Why do they have such elaborate sculpture in their facades? Why do many of them have full on statuary?

    Why does no one… and I mean no one… do anything like that anymore?

    An architect friend said to me, “Well, at that time, everyone just thought you had to do that.”

    In other words, if your competitor was adding, say, 15% to the cost of building his building adding an elaborate facade, then there was no reason for you not to hire those highly paid craftsmen to decorate your building.

    But as soon as someone says, “Hey, I could knock my rent prices down significantly and come out on top of my part of town if I just build a plain building.” So that guy does it and he’s the winner in the fight for selling office space for a while and before long no one is decorating their buildings anymore.

    Similarly: it’s become assumed that everyone just advocates for their own narrow interests. Bankers think it’s perfectly okay for them to fight against anything that might yield higher taxes on them because “they are just doing their job.” In fact, if BofA were to say, “OK, this is all right, we owe this to the public” then that would put them at a competitive disadvantage with Citi, who’s not saying that.

    The time when CEOs used to at least put 15% of their energy into think of the commonwealth is long over (it ever existed). CEOs feel like they can’t worry about anything except what’s in their silo; that is, their company.

  37. The smaller countries in the euro area in bad shape. Risk in emerging markets. $90 per barrel of oil… uh … When do we’ll have good news? As it stands, the year looks bleak. I hope the India – US summit will bring some good news.

  38. Well, the facts are that “banks” (which don’t have a charter explaining the point of their existence, what their job IS in the beehive, btw, except to kill all the bees and take the honey)

    do “god’s work” and the “devil’s work”, so to speak…

    Lest we forget, I am quoting Goldsacks with the “god’s work” line. Personally I would never drag “god” into what is obviously monkey business – but it seems everyone likes simple explanations…

    So it turns out that the math boo-boo is that the “devil’s work” is triple A rated by Basel

    and “god’s work” is risky so more money and usury interest need to be loaded up in order to protect the banks…

    “I think I’ve got it” – LOL

    That “Safari Bar” scene in the movie “Protocol” is such a classic – pretty much documents the “show him a REALLY good time” party of the “global economy” ends up being…wonder what scenes ended up on the cutting floor :-)

  39. ooops, forgot to clarify – since people are stupid and the flesh is weak – addictions of all kinds are definitely triple-A rated businesses…

  40. “The world has become, more and more clearly, a place where the average citizen is being further and further pushed into pure helotism.”

    Helotism (Biology) – “A type of symbiosis, as among certain ants, in which one species is dominant and makes the members of another species perform the tasks required for their mutual survival.”

    Meritocracy and fraud, are just two opposing forces that come to mind in the march toward your vision of helotism – you might want to watch what you eat before you go to bed and start dreaming :-)

  41. Constitutional Convention and BURN the Patriot Act…

    Are Israeli Special Forces allowed to get into people’s homes and apartments, at will, since The Patriot Act?

    Told you there’s a LONG line of predators behind every USA born and bred woman these days….

  42. Herbert Wetherby

    Well that is great, it’s one mans interpretation of “natural laws”. Now the laws of nature are completely different from one mans interpretation of natural laws. Primarly because these laws of nature come from God and not a commener. And no, I am not surpised, espicially when a law marshall knocks at my door weather he is a con or a lib, makes no difference to me.

  43. Officially, I am happier

    As I wrote here in the past, downward adjustment is on the books for us. Obama’s recently calling for increase competitiveness means our individual incomes would go down and we can kiss goodbye whatever is left of the welfare state. Yes, I am all for supporting the consequences of our pyramidal dreams, meaning downward corrections, but so far I find the idea of justice lacking in the process. Reform ought to be real and aimed at the practices of the top layer, read banksters, just as much if not more than the base. Otherwise, officially I am told that 2011 will have been already better!

    http://imotion.blogspot.com/2011/01/officially-i-am-happier.html

  44. “The biggest disappointment at Davos was not the attitude of the corporate sector; these people are just doing their jobs (as they see it). To the extent the U.S. or eurozone official sector showed up at all, it continued to demonstrate the deepest levels of intellectual capture. The reasoning seems to be: As long as we do what the big banks and big firms want, everything will turn out all right.”

    Let’s try this as a thought experiment:

    The biggest disappointment at Cairo was not the attitude of the government sector; these people were just doing their jobs (as they saw it). To the extent the union sector showed up at all, it continued to demonstrate the deepest levels of intellectual capture. The reasoning seems to be: As long as we do what the government and big security agencies want, everything will turn out all right.

    We all know how this is about to end, don’t we?

    BTW, I’d keep an eye on Ireland if I was a bankster.

  45. Heroin is a lot like Bankers….these drugs are just doing their job of creating an initial dependency (Advertising is even the same: the first hit’s free::0% down no interest loans), and then milking the once healthy host until the shell of a host dies of an final lethal overdose.

    Tax payer money should always be deployed to save the drug dealer when they falter, eh Simon?

  46. The bankers provided a lethal, draino-laced, overdose to the US economy (and possibly the rest of the world’s economy as well). As monty python says, “don’t kill the customer”….too bad it’s too late for that.

  47. to frame the argument as a choice between “rent seeking workers or rent seeking billionaires” is a false dichotomy

  48. Herbert Wetherby

    Your bankers are in the wrong trade, we call it the sucicide train.

  49. Obama seems to be convinced that the thing to do is listen to corporate CEOs.

    Obama is, in this sense, EXACTLY-to-a-T like your typical Tea Bagger, 100% confident that the almighty US private sector has the solution to every single social, political, and economic problem. No one needs to actually do anything, just wait for the magic to happen.

    You know, maybe Davos will provide The Answer.

    Someone who knows better needs to detail a plan to restructure the financial sector and re-develop the US economy and HAND IT to him. The guy is a financial idiot, with a junk legal education (I am totally serious) in critical race theory, and if someone doesn’t lead him around by the hand, he can’t do a G-D thing in the real world.

    So, where is this co-ordinated effort by leading non-criminally corrupt economists to form an actual political block as a counterpoint to the organized crime cartel that is the extant financial sector?

    Such economists have been more or less vocal in dissent but, as bankster bagman Timmy the Tax Cheat will hasten to tell us, anyone can be a Monday morning quarterback.

    Fine. Monday morning quarterback an alternative strategy and get in there and get rid of him and his whole cohort. If you don’t get rid of him, then Primary Obama.

    It’s not like there isn’t a substantial part of the public that is LOOKING for this, Tea Party theatrics notwithstanding.

  50. Herbert Wetherby

    You seem to be talking to an inanimate person, Davos is a town, and anyone wanting to hand “him” anything would most likely fall on deaf ears. There is a way to get what you want though, It’s called baby steps.

  51. Carla,

    Maybe you should join James (I know, it was a Simon post, but that was my old age). Why “snide”? We Austrians do not use that word. Maybe you misunderstood what I meant as being a defense of the people or the situation you do not like, or maybe the notion that workers can be rent seekers (of course, collectively they can and their leaders need that desire in order to get them to join and pay fees). But, unfortunately, that is what happens in the real world: politicians deal in rents, like (investment) bankers deal in the promise of rents. Though, someone pays for it somewhere. You happen to be in a country where the politicians find it easier to organize/feed off the “rich” than the poor, so the rich get the rents. In some European countries the rich face a different political culture (though that is changing, the young look pretty much like their US counterparts) and there unions etc play an important role. From your comments, I gues you would feel more at home in a Scandinavian country.

    However, economics tells us that both those political specialties are inefficient. Gvt should only do what no one else does and has to be done to preserve liberty and efficient markets. That is not what anyone in US politics (maybe some cranks, and they mix it with all kinds of noxious philosophies) other than rhetorically, advocates. Whatever the gvt does on top of that, comes from resources that could be utilized better. The US does not need that many prisons, drug enforcement efforts and lawyers, for instance. The US does not need this extraordinarily expensive system of defending itself or the equally inefficient system of subsidizing housing. And so on. Europe does not need to have these very lavish benefits ranging from retirement to university and integration of illegal aliens.

    Now, that is simple economics and I believe that no politician would seriously consider to run for office on a suicidal platform. So what you get are political entrepreneurs that hawk their wares in the great department store of democracy. Guys that cannot afford the rent do not hawk, and that results in the US in a specific brand of democratic politics, very sensitive to well funded and coherent interest groups (lawyers, doctors, churches, gun people, farmers businesses in healthcare, detention, nursing, finance, etc) that often promote forms of regulation that raise consumer cost without much of a benefit. And in other countries, there are unions, as well as the doctors, bankers etc. The main differences are: tort law (drives up the cost of everything), Unions (true ideological unions are absent in the US political scene) and national/regulated health care and nursing. Unions make Europe expensive and efficient, cheap torts keep lawyers poor and doctors cheap. Banks are pretty much the same… I guess your preferences fit better with the typical Scandinavian political department store than your own Walmart…

  52. “…where are the politicians and government officials who can explain what we need and why?

    On the payroll of the CEOs

    “Who can confront the CEOs in the highest profile public forums, and push them on the social responsibility broadly defined?”

    Can? Or will? These guys could if they wanted but…they’d be jeopardizing their own cash flow from said CEO.

  53. @ Rein

    Your anecdotal discourse is sad, but profoundly accurate?
    :-()

  54. oops…sorry for the keyboard dyslectic moment on the keys with your name – “Rien”.

  55. i wanted to jump for joy when i saw Sarkozy fire back at the bank CEO… but he seemed to be the only one to do so… and i guess he’s just too short and too french to get the attention his joust deserved, huh?

  56. CEOs slapping each other on the a$$ after a hard days thieving. Who gives a Sh!t what their next game is. I’m done with their illusion.

  57. Excellent article by Mr. Johnson, hitting the nail on the head.
    There needs to be more of a co-ordinated action on regulating the financial corporations from global governments. The corporations seem to be able to come together and protect their interests much more effectively.
    If one government alone is very strict the corporations may try to punish them.

  58. good suggestions Christopher

  59. If the regulators had kept their hands out of the markets and acted as regulators, instead of, with incredible hubris be acting as the self appointed risk-managers of the world, the influence of any special interest group, included corporations, would be much reduced.

    As is now, with capital requirements for banks based on perceived risk of default and as risk-weighted by the regulator, the regulators are free to play around with their risk-weights behind the doors, clearly without Simon Johnson even knowing about it.

  60. Ronald Mcdonald

    If the regulators had kept their hands out of the markets and acted as regulators

    That sounds more like something YOU WISH, rather than the actual truth. What if the regulators can not keep their hands out of the markets. Have you entertained that possibility? Or the consequences of that possibility? Or for that matter, the consequences of following the path you are currently on. I highly doubt it. Todays capital will come with more risk, the margins will be greater, the cuts more numerous, all leading to a sapping of the world economy.

  61. Yes I agree with your comment, but the fact that capital requirements for banks based on perceived risk of default and as risk-weighted by the regulator, has proven the most insidious and stealth way to intrude and distort the markets ever invented by regulators… and so we need, at least, to get rid of that.

    Had the regulators not had the possibility to risk-weight a triple-A rated investment as 20% while placing a risk-weight of 100% on “risky” loans to small businesses or entrepreneurs then the banks would not have gone and drowned themselves in triple-A rated waters wearing absolutely minuscule bank equity life-vests

  62. Ronald Mcdonald

    Once again, I fall back to the laws of nature, and commen sense. You have to know completely the former in order to have the latter. Once there, all your questions and answers and concerns go away.

  63. Yes but what to do when most de not want to even acknowledge the former problem. If you go back through all the records of this blog Baseline, and you go to http://www.teawithft.blogspot.com/ where I comment on the Financial Times, you will see that no matter how much I tell them so… they do not want to talk about the problem of having regulators sitting in their offices in Basel scheming and toying around with our financial system… behind our backs.

  64. Ronald Mcdonald

    I guess in their case it was percieved commen sense -vs- proven commen sense, and there is far too much of that. I really like the one they use,” you were not there so you have no proof” thing. It takes them where ever they want to go.

  65. That’s interesting. I can accept that post WWII US was an anomalous period with regard to our (US) growth and prosperity. Maybe the combination of social equity and capitalism (I thought we had) is just not realistic in the current competitive global economy, regardless of any re-regulation. Which would require a new social contract.