Loory: The World Economic Forum is now in its 39th year in the Swiss village of Davos, a luxurious Alpine ski resort. This year, thousands of the world’s financial and business leaders from 96 countries gathered with 41 heads of state or governments. Davos grew into a gathering of what author Tom Wolfe once called “the masters of the universe,” business leaders who through power, ambition and greed became super rich at the expense of all the rest of us. This year’s theme of the meeting (was) shaping the post-crisis world. The United States took a lot of heat in Davos for its role in instigating what has become the most serious economic crisis since the Great Depression of the 1930s. Russian Prime Minister Vladimir Putin struck that theme in the opening meeting and so did Chinese Premier Wen Jiabao. The bankruptcy of Iceland is also on the minds of most of the attendees. The major banks there failed, and the government has collapsed because it could not deal with the problems. What went wrong in Iceland, and why couldn’t the government handle it?
Carl Blondal, associate editor-in-chief, Morgunbladid, Reykjavik, Iceland: At the turn of the century, the major banks of Iceland were privatized. These banks went on a spending spree, borrowing huge sums of money. By last year, the banks had accumulated a debt 10 times the size of the Icelandic economy. When times turned bad, the banks could not handle it and collapsed. The state was unable to back up the banks because of its relative smallness to the banks.
Loory: That is not the situation here, where the government of the U.S. is much stronger than all of the banks put together. Is that correct?
James Flanigan, business columnist, Los Angeles Times and The New York Times, Los Angeles: That is correct. We are now nationalizing many of the banks. Wen and Putin said that we had a tremendous expansion of credit, or profit, in the American system. This is true, but that expansion of credit, piling derivatives upon simple mortgages and mortgage certificates, was the oil that financed the expansion of China’s industry and exports to supply American consumers. We are certainly not post-crisis; we are in the crisis. Consumers have stopped consuming, the banks have stopped lending, and everything is slowing down to a crawl, a recession. The Internationl Monetary Fund ominously said that world growth this year will be .5 percent.
Loory: To what extent is this based just on the American economy?
Vladimir Isachenkov, reporter, The Associated Press, Moscow: Putin took the opportunity at the Davos Forum to reaffirm U.S. blame. It is clear that Putin is still calling the shots, though he is technically the No. 2 in Russia. The president (Dmitry Medvedev) is clearly taking orders from him. Putin likes to blame the outer force for Russia’s economic trouble to the domestic audience so that the Kremlin won’t be blamed for botching the economy. But the Russian government, Putin particularly, carries a large part of the blame. Russia totally depends on oil and gas for budget revenues. Once world energy prices plummeted, Russia found its dynamic economic growth of the past eight years crawling to a standstill. During that time, they did not encourage growth in high-tech industries or phase out dependence on raw materials. Russia is heading to a long downward spiral because oil demand is not going to suddenly increase. Russia had huge currency reserves, second only to China, but they are now spending it rapidly. They will soon have to borrow money if the situation continues.
Loory: How is Davos being viewed in Japan?
Eric Due, staff writer, Japan Times, Tokyo: Davos is very low on the radar here. The prime minister is going with a couple of his key ministers, but the eyes in Japan are more on the G-20 and G-8 in April and July. It is ironic that Wen’s speech blames the U.S. for creating a bubble that everybody jumped on. China produced ad nauseam for U.S. consumers to buy on credit, to sustain China’s economy for over a decade, Russia also to some extent. To lament the fact that this happened is like saying we wish it would just come back.
Loory: Wen gave what he called an optimistic view of the Chinese economy and its ability to weather this situation. Was he being overly optimistic?
Flanigan: The plan is to pour 16 percent of their GDP into stimulus. It is an intelligent plan to invest in infrastructure and rural housing, the kinds of things needed to build the consumer economy that is not being done in Russia. The American stimulus plan, which passed the House of Representatives (on Jan. 28), has significant investments in infrastructure: the electrical grid, institutes of biotechnology and alternative energy. These things will produce a new economy but not rapidly. The U.S. economy in absolute size is equal to the next five economies combined. So, events in the U.S. have an outsized effect on the world.
Loory: The Chinese plan sounds similar to the beginnings of the New Deal in the 1930s. Some people feel that is the kind of stimulus we need in this country also. It would be an even quicker fix than the Obama stimulus plan.
Flanigan: It could be. All the water pipes in every big city need renewing. After the highway overpass collapse in Minneapolis, it is clear the roads need improving. We need expansion of transportation. There is $11 billion going into the electrical grid, which needs upgrading. I think there is an emphasis, now, in just getting some money into the hands of the people, getting the capital moving and the banks lending.
Loory: How is Iceland going to get out of the fix that it is in?
Blondal: The prognosis isn’t good. The debt is so deep that even the IMF is saying we need to cut. It is hard to see how Iceland will pay off a debt that has quadrupled the annual budget while at the same time maintaining a school, health and welfare system on the standards of the Scandinavian model.
Loory: Where did all that money go? Did they lend it in the U.S.?
Blondal: There is an incestuous atmosphere here, where an oligarchic business community with three or four wealthy individuals have stakes all over the economy, not only the banks, but also in retail, insurance and investment companies. These same people lent money back and forth to themselves and made huge investments abroad. The money wasn’t used to build up factories or companies at home. Now, there is a lot of debt but little to show for it.
Loory: If there are oligarchs anywhere in the world, they are in Russia. To what extent are the oligarchs in Russia responsible for what happened there?
Isachenchov: The state has become the only oligarch here over the past five years by taking control of all key industries, particularly the nation’s oil and gas wells. Putin’s response to the crisis was to give cash to business groups controlled by the Kremlin, pumping cash into several top state-controlled banks. These banks ended up sitting on the piles of cash without distributing it to lower echelon banks. This essentially helped drive down the ruble, a paradoxical situation in which the government itself was funding the decrease. It is one of the more glaring examples of the inefficiency of government.
Loory: What we have heard today is that if there are any so-called “masters of the universe” who are going to get us out of this crisis around the world, we don’t yet know who they are.
Producers of Global Journalist are Missouri School of Journalism graduate students Jared Gassen, Brian Jarvis, Sananda Sahoo, and Melissa Ulbricht. The transcriber is Pat Kelley.