Oof, that key phrase in Martin Wolf’s column in the Financial Times, “Why Davos Man is waiting for Obama to save him,” is only slightly more cheery than, “Abandon all hope, ye who enter here.”
Wolf gives a quick recap of Davos, recent international economic forecasts and market developments, which is worth reading, and then moves to recommendations:
The lead must come from the US: it remains the hyperpower; the economic system is one it promoted; and the crisis had much to do with mistakes its policymakers and private institutions made, even if aided and abetted by mistakes elsewhere.
So what are the principles to be followed? I suggest the following:
First, focus all attention on reversing the collapse in demand now, rather than on the global architecture.
Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.
Third, make future normalisation of fiscal and monetary policies credible.
Fourth, act in concert. Even the US cannot solve its problems alone.
Fifth, avoid protectionism.
Sixth, strengthen the ability of global institutions to help the weaker.
So how are we doing against these standards? “Better than in the 1930s” is the best one can say. The world desperately needs Mr Obama to take a firmer grip at home and lead abroad. The plans he is now announcing give him a chance of doing the former. The April summit of the Group of 20 countries, in London, is his chance for achieving the latter.
Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”. Instead of acting as a global leader, there is resort to protectionism and a “blame game”.
This way lies a catastrophe. I expect little enlightenment from the rest of the globe: the European Central Bank is allowing the eurozone to collapse into deep recession; Japan is in meltdown; China has at least announced a big stimulus package, but it lacks a credible plan for needed structural reforms; and most other emerging countries can only try to stay afloat in these storm-tossed seas. Their accumulated foreign currency reserves of the 2000s will help. But the resources available to the IMF, even with their hoped-for doubling, are too small to give most emerging economies the confidence they need to risk keeping their spending up.
Decisions taken in the next few months will shape the world for a generation. If we get through this crisis without collapse, we will have the time and the chance to construct a better and more stable global order. If we do not, that opportunity may not recur for decades.
We are living on the cusp of history. The priority is to reverse the downward spiral of despair through overwhelming and concerted action. That will only occur if the US now gives the leadership we need. Mr Obama may even find, as many presidents have found before him, that leading the world is easier and more rewarding than cajoling a recalcitrant Congress. This may not be the challenge he expected. But it is the challenge he confronts. History will judge his presidency on whether he dares to succeed.
It is troubling (bur probably correct) that Wolf sees no alternative to US leadership in this arena. In all honesty, even if we attempted to exercise it, I doubt we’d get consent. The big theme of Davos was anger against the wreckage Wall Street hath wrought, and how our economic models and prescriptions had failed. And Obama did not help build bridges via his surprising failure to send a reasonably senior emissary. No one would dare to try beat up on Paul Volcker, and not having played a role in creating the current mess, he could credibly condemn it while suggesting ways forward.
Even if we miraculously rebuilt our credibility by leashing and collaring the miscreants, would it be enough to restore trust? The other subtext of Davos was badly frayed nerves and a lack of cooperative spirit. That isn’t good even in more normal times.
It would be far better if I were proven wrong, but Wolf is pessimistic based on what he has seen thus far, and I am even more so.