Jeremy Warner's Outlook: Davos mood turns ugly

There's an old joke about economic doomsters which this year in Davos, with the financial markets in crisis, doesn't seem quite so funny as normal: that they have managed to predict all eight of the last three recessions.

After years of ridicule, their time seems to have arrived. For a change, Nouriel Roubini, chairman of the US-based Roubini Economics, smugly lapped up the praise for being the only member of a similar panel of pundits a year ago to have correctly predicted that a rapidly deteriorating US housing market in combination with high oil prices would result in a credit crunch which would plunge the American economy into recession.

He was joined in predicting more gloom this year by that other noted "perma-bear", Stephen Roach of Morgan Stanley. Mr Roach said that what worried him most about the Federal Reserve's emergency interest rate cut was that policymakers were reaching back into the play book which had created the problem in the first place – excessive liquidity.

The difference at this year's World Economic Forum annual meeting is that these previously marginal views are now the consensus. Not everyone thinks there is going to be a US recession, but those who don't are thin on the ground. One who does not hold to this view is Sir Martin Sorrell, chief executive of the advertising goliath WPP. He thinks that next year, after the US presidential election and the Beijing Olympics, is the one to worry about.

Fred Bergsten, director of the Peterson Institute for International Economics, is even more upbeat. As much a "perma optimist" as Mr Roach is a "perma bear", Mr Bergsten thinks a global recession is "inconceivable", with fast-growing emerging markets likely to rescue world growth from outright disaster. Kamal Nath, India's minister of commerce and industry, said that the momentum of growth in the developing world was such that it would take a truly momentous recession in the US to stop it.

Yet these voices are the exception rather than the rule. The mood at Davos is a notoriously unreliable indicator for the year ahead. Regrettably, the high anxiety among business leaders and bankers this time around may be all too correct.

Bernanke put

The Fed's rate cuts may take the edge off the downturn, but there is palpable concern here about the "moral hazard" that repeated central bank bailouts is creating in financial markets, with participants already referring to the "Bernanke put". Hardly anyone was willing to praise the cut, and many were highly critical of what one delegate called "inept" policy-making. Mr Bernanke stands accused of underwriting the excesses of financial markets in the same way as his predecessor at the Fed, Alan Greenspan. "Wall Street says jump, and Mr Bernanke jumps", says one banker here. "There may be something to be said for getting the pain over now in one go, rather than repeatedly trying to put it off".

Both Mervyn King, Governor of the Bank of England, and Jean-Claude Trichet, president of the European Central Bank, have appeared to indicate that they will not be rushing to emulate the Fed, casting doubt on the likelihood of the sort of co-ordinated action many think necessary. Another marker for the future from here: monetary policy has got it seriously wrong by ignoring asset bubbles to concentrate wholly on controlling inflation in goods and services. Monetary objectives and frameworks need radical re-thinking.

Greed is bad

Greed is not a word often aired in this temple of Mammon, yet this year it was identified in one session as posing a greater risk to the world economy than protectionism, terrorism, natural disaster and pandemic disease. Lord Levene, chairman of Lloyd's of London, said that if he had predicted a year ago that Merrill Lynch and Citigroup would sink into the red and have to be bailed out by the sovereign wealth funds of the developing world, people would have wondered what he'd been smoking. It was extraordinary that hugely well-rewarded individuals at the top of major banks had so little understanding of the risks they were running, or that governments and regulators were so ill prepared for the consequences.

Confucius says

Confucius-like wisdom from Cheng Siwei, vice-chairman of the National People's Congress of China, who identifies the problem at the root of the world economy as being that "Asians save today's money for tomorrow, while Americans spend tomorrow's money today". Quite so.

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