How Bush has shot US capital markets in the foot

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Europe and Japan. Once upon a time, stalled growth in these two one-time economic powerhouses used to dominate discussion among business leaders and policy-makers here in Davos. Today, they barely get a mention. Breakout sessions on the European and Japanese economies are sparsely attended at this year's World Economic Forum annual meeting, and although thanks to the buoyancy of the world economy they are at least growing again, the debate doesn't seem to have moved on in 10 or more years. The glacial pace of structural reform is still the main story.

China and India. Other than climate change, few seem to want to discuss anything else. Analysis of the consequences of their integration into the global economy eclipses most other debate.

As for the UK economy, in public sessions it has failed to figure at all, despite a record number of British participants this year. Behind the scenes, on the other hand, the UK is winning a somewhat higher profile. Or more particularly, the growing success of the City as a financial centre, and the march it is stealing on New York, is a source of constant discussion among the sizeable contingent of financiers and investment bankers here.

There's a big show from Nasdaq, the American technology market, this year. Bob Greifeld, the chief executive, even went so far as to open stock trading in a mock ceremony from the snow-covered slopes of this Swiss ski resort.

Yet the razzmatazz and public display of confidence fails to disguise the fact that, barring an 11th-hour surprise, his takeover bid for the London Stock Exchange is about to fail.

He is also hand-over-fist losing the battle to London for the latest generation of high-tech IPOs. Even American companies, never mind the foreign ones Nasdaq would once routinely have attracted, are choosing to list in London because of the misery of Sarbanes Oxley, an onerous set of rules and regulations that America has imposed on its publicly listed companies.

Yet these defeats are only the high-profile end of a much wider loss of competitiveness. Across the piste of the financial markets, New York is losing out to London. Few here will talk publicly about the phenomenon, yet off the record there is common agreement about the causes.

The light touch, principles-based regulation pursued by the Financial Services Authority is plainly one reason. This is widely acknowledged as more conducive to the operation of the capital markets than the rules-driven approach of the Securities & Exchange Commission.

Yet the bigger cause is that the fast-growing economies of the developing world, together with the old and new petrodollars of the Middle East and Russia, simply don't trust the US with their money. Never mind what else it has done, George Bush's foreign policy has succeeded in shooting American capital markets in the foot like nothing else. In the process, it has cemented London's position as the default centre of choice. Few stories here in Davos better illustrate the conference's theme of the shifting power equation.

According to one participant here, US homeland security measures that require banks to monitor all transactions in dollars have encouraged a significant shift into euro-denominated assets in international markets.

The growing success of the City is one thing. Another Brit attempting to showcase himself here in Davos is David Cameron, the Conservative Party leader. One inch of snow back in London came closer to cancelling the trip than several feet of it here in the Swiss Alps. Despite being motorbiked to the airport, the chaos of London still caused Mr Cameron to miss his flight.

When he eventually got here, one of the first people he bumped into walking down the street was Peter Mandelson, one of the architects of New Labour and now a European commissioner. "What are you doing here?" Mr Mandelson asked, as told by Mr Cameron. "There are no votes in Davos." Mr Cameron disagreed. "In the vote between me and Brown," he asked, "which way will you jump?" That's a no-brainer, Mandelson is said to have answered. What could he have meant?

In any case, Mr Cameron seems tailor-made for the Davos zeitgeist, which he rapidly plugged into by proposing a new global authority to police greenhouse gas emissions and much else besides.

Other hot topics at the WEF include the explosive growth of derivatives trading in global capital markets. Even top financiers confess to being at a loss to know whether this growth has succeeded in its purpose of reducing the volatility of capital markets and the global economy or whether it has only built up new concentrations of risk which nobody has yet identified and will be tested in the next downturn.

In a keynote speech at the World Economic Forum, the German Chancellor, Angela Merkel, said proposals to shed more light on hedge fund operations would be a priority for her leadership of the Group of Eight industrial nations this year. "We want to minimise the systemic risks in international capital markets and to raise their transparency - above all, I see the need to catch up with hedge funds," she told business and political leaders.

The possibility of a major market crisis caused by financial derivatives is replacing the danger of low interest rates driving asset markets to unstable levels as the top issue on policymakers' worry list.

"Policymakers are not entirely happy on the risks of the explosive growth in derivative trading," Stanley Fischer, governor of the Bank of Israel, said on the fringes of the conference.

Mr Fischer claimed that even dealers and banks are unable accurately to assess the overall risk on their books, and that a bad trade could cause a freezing-up of the payment and finance system. The financial system has not yet been tested on derivatives, he said.

Investment banks make huge fees by designing and selling ever more complex derivative instruments, and although there is growing concern about the lack of transparency in the financial system their use brings about, few are prepared to call time on such a lucrative trade.