The World Economic Forum yesterday gathered several dozen, maybe even a hundred, of us to talk in small groups at tables about what went wrong with the economy. I was lucky enough to be at a table with a group of real luminaries, including senior members of the press, a Nobel laureate, the CEO of a major finanical services firm, a fellow academic, senior executives, and the head of a bank – it was a fascinating conversation which I’ll elaborate more on when I get a chance. In the meantime, here is the summary from the WEF’s web site:
2009 World Economic Brainstorming: What Happened to the Global Economy?
Maria Bartiromo, Anchor, CNBC’s Closing Bell, and Host and Managing Editor, Wall Street Journal Report, CNBC, USA; Young Global Leader, put three critical questions concerning the ongoing financial crisis to the participants:
1. What was the most damaging policy mistake leading to the crisis?
2. What regulatory failure produced the largest systemic shock?
3. Where did a genuine market failure occur?
After roughly 20 minutes of brainstorming by 18 groups, most of the participants seemed to agree on a range of factors contributing to the worldwide market collapse. Responses from the different groups tended to lump the three questions together and focused on the following factors responsible for the breakdown of the world financial system:
A mistaken belief that markets can be expected to efficiently correct themselves, and a failure to take into account the inevitable collateral damage
Too much easy money offered on a long-term basis and rampant underpricing of risk, especially when the risk premium dropped to nearly zero
An almost religious faith in mathematical modelling based on data samplings which eventually replaced common sense, and which were based on data samplings that were too small
A failure to give full disclosure of the risks involved, and the inability of the world financial system to provide global oversight once these risks were marketed internationally
Excessive complexity of new financial instruments, which were often fee-driven and accompanied by go-for-broke incentives
Following an open floor discussion, participants voted on the causes of the crisis. At least 50.8% voted for overconfidence in the ability of markets to self regulate as the major cause. Another 12.9% listed cheap money. Asked what issue the G20 should give highest priority to at its next meeting, 40.6% listed the lack of an international regulatory framework as the key problem; 21.3% listed the non-regulation of leverage, and 18% listed the inability to accurately assess risks as major concerns. For the last question concerning which risk seemed likely to produce the greatest public backlash, 41.9% listed the misalignment of incentives; 20% considered the crisis to be the result of a failure of governance; and 15.3% listed the misquoting of risk valuation and pricing.
The only remark during the discussion that triggered a round of applause was a comment by a participant that the failure to attribute personal blame for the collapse was “intriguing”. The participant observed: “If you sell toxic products in any other field, you go to jail.” There was widespread agreement that policy-makers need to make it clear that there are serious consequences for inappropriate behaviour. At the same time, it was pointed out that it is dangerous to go down that road because no one wants to punish people for ordinary fluctuations in the market.
The bottom line, as expressed by participants during the brainstorming and open floor discussion, is that the world is currently experiencing a paradigm shift, and a way must be found to open up and redesign the global financial system.