The Future According to Davos

At first everyone agreed that the U.S. couldn't evade recession. Then optimism reared its head.

DAVOS - "I ran into the chief executive of a major telecommunications company on the main street. While we were chatting, Mark Zuckerberg, who founded Facebook, passed by. I called him over and introduced them. It turned out that they were supposed to meet later that day anyway. Things like that only happen at Davos," related one of the many businessmen in the Alpine town housing the World Economic Forum.

This year, Davos again served as a platform not only to exchange ideas but to network - to rub shoulders with businessmen from all over the world. Despite concern about the state of the global economy and international financial markets, everybody seemed to be having a marvelous time. The mood in the warmed auditoriums was cheerful.

That said, what next? What is the world in for? The following are the questions with which the business and political leaders of the world are grappling, and it has to be said that the underlying sentiment changed as the hours passed.

Is the U.S. heading for slowdown or recession?

As the week started, the prevailing feeling was that the U.S. couldn't escape recession. By the week's end, the optimistic scenario was gaining momentum. The pessimistic camp was led by Merrill Lynch's John Thain, who believes that the subprime mortgage crisis and ensuing credit crunch haven't reached their lowest point, and that the worst is yet to come for both America and the rest of the world. The optimists, on the other hand, foresee two or three quarters of slower growth for America, followed by a rally.

Are the financial troubles the U.S. is experiencing similar to Japan's problems in the 1990s? If so, what can be done?

There are similarities. Japan's crisis also started with a property bubble that burst. A government attempt to stimulate consumption with a $1.6 trillion financing package proved a dismal failure. It took Japan five years to overcome, not two or three quarters.

Could the rising consumer class in Asia compensate for the American consumers if the U.S. does slide into recession?

Forget it, is the word at Davos. Not at this time. Asian consumers have a quarter of the purchasing power of American consumers, at most. The populations of Asia are vast, to be sure, but that's no comfort to a western company whose revenues have collapsed.

What triggered the crisis, anyway?

The opacity of financial instruments, and the greed of the lending banks. But the true evil is the lack of transparency. Loans of dubious quality were bundled into financial instruments that were so incredibly complex, even regulators - the central banks - couldn't understand them, or their true risk potential.

And the lack of transparency continues, because nobody really knows how much money is linked in some form or other to bad loans. There is a figure bandied about, $600 billion, that's supposed to represent total exposure to dubious debt, but nobody knows if it's anywhere near accurate, which does nothing for the public's faith in the banking system, or the stability of the markets.

As for the banks' greed, well, they forked over loans to all comers in order to make more money. Some are even accused of abetting bad borrowers by winking at falsified documentation.

Where were the regulators? What is their role in the crisis?

The central banks failed to read the writing on the wall. They ignored calls that the U.S. was developing a property bubble. They did not properly supervise the evolution of financial instruments that took iffy loans for housing and turned them into a sweeping, chasmic crisis.

The Fed gets especially low marks, but the people at Davos applauded its firm and rapid reactions when the meltdown began.

Why do the Americans think that artificially stimulating consumption will solve the problem, when one of the worst structural problems America has is nonexistent savings and rampant, unchecked consumerism?

Well, at the moment people think that the way to save the economy from recession is to increase consumption. That's why Americans received tax benefits ranging from $300 to $1,200, so they would feel they had something to spend. As for savings, that's a cultural matter that will require long-term attention, so Washington has shelved the issue for now. It could well stay on the shelf.

The dollar has been steadily weakening for a long time. Is China responsible for this, having replaced part of the dollars it held in foreign currency reserves with euros? China isn't saying, for fear of being accused of undermining the dollar. But when pressed to the wall they admit that it's possible.

What next?

"It's dangerous to make predictions, especially about the future" - Mark Twain again, at least some think he's the one who said that. They love that quote at Davos. But more to the point, the business leaders of the world seem largely unafraid of things to come, even recession. Business is cyclical, they point out. What went up will come down and then rise again, like some latter-day digital phoenix. Recession is an opportunity to clean out the stables and become efficient, they say.

Lovely. Could a major American bank collapse because of the bad loans? No, says Jacon Frenkel, vice president of the AIG insurance company and formerly the governor of the Bank of Israel. Frenkel is an avowed optimist and he thinks an American bank collapse unlikely. The banks are like ships in a stormy sea: they get buffeted and they sail on.

Pessimists say that listening to Frenkel makes them think of the Titanic and the iceberg.