Wednesday, February 3, 2010

Banker Bashing Masks Rise Of China

Banker Bashing Masks Rise Of China

By | 3 February 2010

Some bankers still don't seem to grasp the depth of public anger. But does all the talk about 'banking reform' distract from another issue: the growing power of China? The two main themes at the World Economic Forum in Davos, Switzerland, this year were the future of the banking industry and the role of China in the global economy, according to a panel of editors from The Wall Street Journal and The Times at the Davos Download breakfast briefing held at Claridge's Hotel in London on Monday.

The hostility against bankers was hardly surprising, said Gerard Baker, deputy editor-in-chief of The Wall Street Journal. What was surprising was "the ferocity and provenance of that hostility". A number of bankers at Davos expressed resentment towards rivals who were badly managed, said Mr. Baker, while there was also concern that high-profile bankers appeared not to appreciate the extent of public anger against the industry.

He added that there was a great deal of support from Davos delegates for many of the regulatory measures that have recently been announced, especially President Barack Obama's proposal to limit the size and trading activity of banks. There was a very low turnout of U.S. officials at Davos and only one, Mr. Obama's chief economic adviser, Lawrence Summers, was authorized to comment on the record. The U.S. government's low profile added to the handwringing by Western EDC delegates [[France?: normxxx]] about the future of the Anglo-Saxon capitalist model.

In contrast, those delegates from developing countries were extremely excited about capitalism and the ways it could benefit their economies. "If Richard Nixon and Mao Zedong were alive and visiting Davos this year, they would have been very surprised by what they were seeing," said Mr. Baker. Many of the besieged bankers were holed up in a meeting behind closed doors on Saturday morning when other delegates were swapping their suits for salopettes, revealed Patience Wheatcroft, editor-in-chief, Europe, for The Wall Street Journal.

They were meeting with regulators to try and hammer out a deal. "The result of that meeting was zilch— nothing," said Ms. Wheatcroft. "There was no meeting of minds". The general mood at the forum was that urgent reform of the banking industry was required.

One leading banker claimed to realize that things needed to change but said reforms would take time. "However, Christine Lagarde, the French finance minister, made it very clear that time is something that bankers haven't got," said Ms. Wheatcroft. She added: "Bankers still don't seem to get just how angry people are". The backlash from companies that are resentful about the level of fees they have been asked to pay banks has also now come to the fore.

Not all agree with French President Nicolas Sarkozy, who gave an impressive speech that was clearly playing to the galleries back in France bemoaning the vagaries of capitalism. However, Ms. Wheatcroft left Davos feeling that, "if banks don't move soon, something will be done about it". Anatole Kaletsky, chief economic commentator at The Times, estimated that between 70% and 80% of the discussion at Davos was on banking reform. However, he argued that much of this was "displacement activity" designed to make headlines and to distract from the real issue: "The Chinese are taking over."

Mr. Kaletsky said that, contrary to popular belief, he didn't think that capitalism had been destroyed but he did think that it needed to be reinvented, much as it had been in the 1920s and 1970s. He added: "The alternative to Capitalism 4.0 is that Chinese government-led capitalism will be dominant". Mr. Kaletsky contended that most of the delegates at Davos were not willing to confront this possibility as it was "just too alarming."

Mr. Kaletsky left Davos convinced interest rates are going to be much lower for much longer than is generally expected. He thinks that U.S. interest rates won't rise until December this year "at the very soonest". At Davos, Mr. Summers said that statistically the recession was over, but that the human recession had only just begun. Mr. Kaletsky said that in such an environment it would be "inconceivable to start fiscal tightening" and he also thought it unlikely that the Bank of England or the European Central Bank would move any faster than the U.S. Federal Reserve.

James Harding, editor of The Times, said that among the most striking things he heard at Davos was the belief expressed by a senior Chinese official that the dollar carry-trade was the single biggest threat facing the global economy. The official was concerned that if the U.S. economy weakened, the unraveling of the trade— in which investors borrow at low interest rates in dollars and invest in higher yielding assets elsewhere in the world— would bring huge disruption to the capital markets. He estimated that as much as $1.5 trillion was already invested in such strategies. Mr. Harding said the concerns highlighted the shift of global economic power, with the East now worried about economic troubles in the West, rather than the other way.


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