Wednesday, January 28, 2009

The Latest From Davos Switzerland

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The invitation only annual World Economic Forum - a meeting of world leaders, central bank heads, economists from big financial firms, and billionaire investors - is currently taking place at Davos, Switzerland. In an opening forum, the people who pull the strings of the global economy and stock markets came to the following conclusions (long after they have been obvious to everyone else):

1. The world is facing unprecedented economic challenges.
2. Fiscal packages may not be enough to restore economic growth.
3. The multilateral financial system needs strengthening.

Fortunately, George Soros gave an early talk that had somewhat more substance than the above long-on-platitudes and short-on-specifics comments. At the same time, Nouriel Roubini who is in Switzerland, but possibly not at the conference, released a purposely well-timed statement about just how costly it would be to fix the banking system.

Soros stated that the current crisis has the potential to be worse than the one during the Great Depression in the 1930s. According to his calculations, the global banking system in developed countries still needs an additional $1.5 trillion to be rescued. Furthermore, the only way to pay for this is with money creation, or in other words - inflation. Nouriel Roubini now says that he estimates the total global bank losses from the Credit Crisis will be $3.6 trillion, far higher than his original estimates (and mine as well, last July at a talk at St. Johns University, I estimated $2 trillion, which was double the consensus at the time). Roubini further stated the biggest U.S. banks are insolvent (New York Investing first said Citibank was insolvent at the end of 2007).

Expect some talk about the two approaches to fixing failed banking systems. These are the Japanese model and the Swedish model. The Japanese reacted to their failed banking system in the 1990s by propping up as many failed institutions for as long as possible and the consequence was economic and stock market stagnation that has now lasted almost two decades. The Swedes had a banking collapse in the mid-90s and took that opposite approach. They took swift and drastic action, which was painful in the short term, but proved highly successful and their economy revived quickly. So far, the United States has come closest to the failed Japanese model in dealing with the banking crisis. The political will to step on some very rich and powerful vested interests has been lacking as has the willingness to admit that top U.S. banks such as Citibank and Bank of America are insolvent.

One person that is not yet at Davos is Federal Reserve chair Ben Bernanke. He is busy keeping fed funds rates at zero at the Fed meeting in Washington. The meeting ends today and presumably he will be jetting off to Switzerland shortly thereafter. Expect the quality of debate at Davos to suffer accordingly.

NEXT: Government Wants to Play Good Bank, Bad Bank

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

Vassilis Bakopoulos said...

great post, I really enjoy your humor (expect the quality of the debate to suffer accordingly... nice)