Davos results inconclusive

The world is experiencing a statistical economic recovery, but a human recession. That is how United States President Barack Obama’s economic adviser Larry Summers, at the World Economic Forum in Davos, Switzerland, aptly described the global economic scene in the face of tentative signs of its emerging from the worst recession in more than 70 years. There were plenty commitments but few concrete plans on the table at the end of the four-day summit, with probably the only clear result that the world is heading for stronger regulation of the financial industry aimed at averting a next crisis and saving powerful politicians’ bacon.

As bankers, after initial strong resistance, indicated that they may agree to far-reaching reforms, the glaring lack of firm results were indicative of the uncertainty about and diverse opinions on how the recovery of the global economy would emerge, and whether there could still be a second dip ahead.

Many business leaders warned that the real issue of the present economic crisis was employment, while others warned that Western economies in particular could face years of jobless growth.

The greatest worry of most chief executives – from both developed and emerging economies – was that politicians could give in to populism and approve protectionist measures. They warned that open trade was absolutely critical to development, to lift people out of poverty.

It is against this background that Josef Ackermann, CEO of Deutsche Bank, echoing the tension between rulers and the captains of the financial industry through the ages, proposed the creation of a B20 group of business leaders to ensure the voice of business was heard when the G20 group of leading countries met again to co-ordinate economic policies and financial regulation.

Much of the discussion at the summit focused on the failings of the financial system and how to fix it, with a strong bias for increased and more rigid regulation of the industry.

Toward the end of the discussions, some of the world's top bankers – including those at Deutsche Bank and Barclays – indicated that they might be prepared to pay a global financial insurance levy, so that the next bank bailout would be financed by the industry, not by taxpayers.

It was, however, clear that regulators are not anywhere near to agreeing the actual details of regulation – except that another financial crisis could only be averted if there were some kind of global framework for financial regulation.

The mood, as far as the financial industry is concerned, was well summarised by Marcus Walker and Emma Moody, who wrote: “The scorn poured on the industry at this year's get-together in the Swiss ski resort is a sign of a mounting international backlash against the financial sector. Popular anger about banks' role in the financial crisis, and their behaviour in its aftermath, has spilled over to the world's elite business executives, politicians and regulators. Since gathering here Wednesday [27 January], they have been aiming sometimes bitter recriminations at the tainted masters of the banking universe.”

They reported Peter Sands, group chief executive of Standard Chartered PLC and co-chair of the Davos meeting, as saying: "I think that the relationship between government and banks has changed irreversibly. I think the banks have not helped themselves at all. We have been tone deaf, and shot ourselves in the foot. We all need a little humility."

This sentiment was echoed by Jean-Claude Trichet, president of the European Central Bank, who said the financial crisis fundamentally has changed the relationship between the banks and government because taxpayer money was used to rescue the financial system.

Only time will tell how this changed relationship will eventually play out. But he who does not study the past is doomed to be tripped up by the future. The present-day dilemma is not without precedent.

With the history of banking dating back to at least the 18th century BC, there are plenty of lessons to be found in the past. A relatively recent appropriate one, dating back to the 17th century AD, is recorded on the pages of www.historyworld.net.

It relates the history of the appearance of the first “national bank” in Sweden, established by Johan Palmstruch who had strong links to the state.

In consultation with the government, he introduced bank notes to Europe.

It was only a matter of time before he issued more notes than his bank could afford to redeem with silver, and the scheme imploded. By 1667 he was disgraced, facing a death penalty for fraud that was eventually commuted to imprisonment.

Gradually, public confidence in paper money returned when they were issued by national banks with the backing of government reserves. With governments issuing the bank notes, the inherent danger was no longer bankruptcy but inflation.

Originally, this was combated with the introduction of the gold standard.

The gold standard has long gone out the window, and with complicated hedged transactions and derivatives, banks again have begun effectively to 'create' their own money. With the latest crisis, they once again have lost the public’s trust.

Will we find the right balance this time around?