Why the Elites Are Losing Sleep

Direct from Davos, the bubbles and risks that worry top bankers and CEOs

Rana ForooharJan

Who says nothing gets done at the World Economic Forum in Davos, Switzerland? As the weeklong winter fest, which costs tens of thousands of dollars to attend, has grown over the past decade, it has become as much about dealmaking as about brainstorming solutions to the world’s problems. In fact, gray-suited consultants slipping around the Magic Mountain in their city loafers now seem to outnumber genuine thought leaders (to use a very WEF term) by about 2 to 1. Still, the elite haven’t abandoned Davos. This year’s shindig drew several heads of state, the world’s top bankers and a good helping of Fortune 500 CEOs, Nobel laureates and rock-star entrepreneurs (though, for once, no rock stars). Davos remains, as Foreign Policy Group CEO David Rothkopf put it, “the factory in which conventional wisdom is manufactured.” And so it is in that spirit that we offer this year’s best takeaways, factory-direct.

A New Bubble?

We are now in historically uncharted territory in terms of how much central bankers are doing, in lieu of real political action, to try to boost the global economy. They are buying up trillions of dollars’ worth of bonds and buoying world markets in the process. Apart from a few worried Germans, nobody was talking about this last year. Now everyone is fretting about how the Fed, the European Central Bank (until recently), the Bank of Japan and even Chinese authorities have distorted the prices of assets from stocks to bonds to real estate, quite possibly laying the foundation for a market crash or, in the longer term, hyperinflation. “Central bankers can buy time, but they can’t fix the world’s underlying economic problems,” said UBS chairman and former Bundesbank head Axel Weber, who worries that easy money and low interest rates are covering up the fact that most rich countries still need to pay down debt and create a lot more jobs. “We’re buying short-term fixes at the expense of future generations.”

Hedge-fund titan George Soros believes that the problems could come sooner rather than later. When every country wants to keep its interest rates down and its currency weak in order to boost exports, there’s an inevitable race to the bottom. Soros predicted that Germany, the growth engine of Europe, will start to slow down in 2013 as a weaker yen makes Japanese cars and consumer goods more popular than German ones. That could throw the euro zone, which has begun to stabilize a bit, back into crisis.

Bank Anxiety.

A crisis is exactly what we don’t need, given that there’s still so much risk in the global banking system. One of the world’s richest hedge funders, Elliott Management’s Paul Singer, used the Davos stage to continue his public fight with JPMorgan Chase head Jamie Dimon over the lack of transparency in big financial institutions, saying that even his team of skilled analysts couldn’t make heads or tails of the trading positions of major global banks via public documents. For their part, Dimon and other bankers fretted over the fact that they are being asked to do more lending—while being asked at the same time to keep risk low and retain more capital. Meanwhile, fresh players are moving into lending: emerging-market sovereign wealth funds are doling out money for infrastructure projects worldwide, and peer-to-peer lenders are providing hundreds of millions for small businesses in the U.K. (New rules coming soon in the U.S. may allow them to take off here too.) The message to banks is clear: if you don’t lend, others will.

Global Free Riders.

Multinational companies are under fire. Five years on from the financial crisis, countries with shrinking public budgets are finally pressuring rich firms to pick up some of the costs of globalization rather than just the benefits. British Prime Minister David Cameron gave a powerful Davos speech on this front, promising that now that the U.K. has taken over the presidency of the G-8, he will name and shame multinationals that use creative accounting to avoid taxes. Cameron made a pointed “wake up and smell the coffee” reference to Starbucks, which recently came under fire for paying only a few million in taxes on billions of U.K. revenue in the past 14 years. (The firm volunteered to cough up $31 million as a result.)

Of course, whether Cameron or any of the other G-8 leaders will be around long enough to enforce that threat is another matter. As the multinational Trust Barometer survey unveiled every year at Davos by the p.r. firm Edelman shows, faith in public officials in many developed countries is low. This year there’s a big gap in trust between elites and the common man: the former put a lot more stock in public institutions of all kinds than Mr. Main Street does. That’s one bit of conventional wisdom that the Davos establishment would do well to remember.

Rana Foroohar, TIME Magazine, Vol. 181, No. 5, February  11, 2013