Sean O'Grady: A bewildering week of bad news – so how did the market recover?

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The Independent Online

That was the week that was: the most economically eventful and financially volatile seven days since the attacks on America on 11 September 2001.

It started with the markets enduring their worst crash for almost six-and-a-half years; we breached more new ground on Tuesday with the Federal Reserve's emergency rate cut of three quarters of a percentage point, one that actually made the market's jitters worse; by Thursday, when the news broke that a lone rogue trader had managed to lose the French bank Société Gé*érale billions of dollars, there was a sense that pretty much anything could happen. And it all came on top of an already stormy economic and geo-political outlook: of a credit squeeze in which banks are refusing to lend to each other and, increasingly, anyone else, record oil and food prices, slumping house prices on both sides of the Atlantic, Northern Rock and the mess in Iraq.

Yet, by the close of business last night, the markets had regained their composure; some even ended up on the week. It's been a bewildering time.

And where were many of the world's leading chief executives, bankers, economists and politicians as the chaos ensued? In a small Swiss ski resort called Davos. Yet it was not a case of plutocrats quaffing champagne, guzzling fondue and getting out on the ski slopes while the capital markets burnt. Paradoxically, this collection of 2,500 of the richest and most powerful people in the world, meeting as usual in the Alps for the annual World Economic Forum, was as good a place as any to watch events unfold.

Bill Gates, Condoleezza Rice, Rupert Murdoch, Gordon Brown, Tony Blair, Ban Ki-Moon, Henry Kissinger, bank chairmen, telecoms bosses, Indian biotech millionaires, Gulf oil princelings – they and many more have had their say. There is no other event where, in the queue for coffee or in the back of a shuttle bus , you can tap a Wall Street investment banker or a Nobel Prize-winning economist for a bit of wisdom on the crisis.

In the series of panel discussions, speeches, lunches and dinners, as well as more fleeting, informal conversations, you can make some sort of sense of the week, though it's fair to say, with so many personal and corporate fortunes at stake, hysteria was never far away.

Certainly the mood by Tuesday night was apocalyptic. There was plenty of talk about "the mother of all recessions". An avalanche of pessimism covered Davos. And, just as sometimes all that may be needed to cause a real avalanche is to shout the word long and hard enough in the right conditions, so it seemed a few days ago that the world's leaders were almost bringing on a recession simply by chattering about it incessantly.

It had become obvious – so it seemed – that the credit crisis was spreading to the share markets and the "real economy" of jobs and output. Cuts in interest rates, as the markets screamed for them, only seemed to push shares ever lower; such ungratefulness. Someone remarked that the markets were acting like a spoilt pet pot-bellied pig (they must have had first-hand experience). Yet now, at the end of this crazed week, perhaps we know different.

The three big stories of the week could in fact be related. One factor in the market's recent weakness may have been the troubles at Société Générale – but before they became public knowledge. As the bank tried to sell off its excess of shares, acquired by their rogue trader, the market smelled blood, pushed prices even lower and landed SocGen with a life-threatening loss. When the Fed saw what was happening, it sought to allow the markets to borrow money on the cheap to tide them over what they could see was becoming an even more torrid time.

Yet whatever the truth about that, an intellectual step back, perhaps afforded by the quasi-academic atmosphere of Davos (and there are a few score professors and university presidents kicking around the town), revealed the following truths: that SocGen was a one -off, similar to the Nick Leeson/Barings affair 12 years ago: that the fast-growing emerging economies represented in some numbers here – India, China and Russia especially – are probably "decoupled" enough from the West to prevent the world sliding into slump evenif America and Europe stumble; that their sovereign wealth funds, accrued from their trade surpluses with us can be used to refinance our banks, a process already seen at Citibank, the world's biggest; and that the Fed's rate cut and President Bush's plans to cut taxes and raise public spending will certainly help matters.

There's a more sober acceptance, too, that the "repricing of risk" – that is, a reduction of greed – is probably a good thing. More than anything perhaps, there's still a good deal of optimism about what most of the Davos-ites care most about: corporate profits. Judging by the exuberance at last night's parties – live jazz funk at McKinsey & Co and the ArcelorMittal Speakeasy – international capitalism is growing relaxed about living through more volatile times.

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