Davos postmortem: must find answers that we can bank on

In the UK the recession is technically over. For many countries growth in output is once again forecast, albeit at varying rates. The US output growth is projected to grow from -2.5% in 2008, to 2.5% in 2010 slowing to 2.4% in 2011. Perhaps the UK fiscal stimulus was too little too late. The UK output decline was -4.8% in 2008 and is projected to rise by only 1.7% in 2010 and 2.2% in 2011. For the emerging economies such as China, output was still growing by 8.7% in 2009, as it managed to ‘decouple’ from the US economy, and is projected to reach 9.7% by 2011.

Scotland still lags behind the rest of the UK which in turn lags behind European output levels. Locally, small business owners report that although there may be credit easing generally, it is still very difficult to refinance their business and that the terms are not very favourable. The wealthiest nations have this in common as there has been a 10% fall in the number of start ups—an essential requirement for any sustained recovery.

Any robust financial system is predicated on an effective banking business—but business as usual is not an option. The bank debt has been underwritten to such a degree that Laurence Summers, Director of Obama’s National Economic Council stated that "There is no financial institution that exists today that is not the direct or indirect beneficiary of massive taxpayer support for the financial system".

Everyone then is a stakeholder. The system of banking needs to change and that change needs to be global. Governance must be set in place which ensures transparency and competition to meet market requirements for credit not for the short term gain but for long term prosperity.

Without a global solution banking arbitrage will take over. Banks will locate where the regulations are weakest and eventually it will be back to bubble blowing. The bankers pay a lot of tax and have a powerful lobby. In the UK the top 5% of earners, many of whom are from the financial sector, constitute 43% of total tax revenue.

Obama wants to break up some big banks and ensure that retail banks cannot invest more than their customer’s funds—an idea that finds support in the UK. Investment banks could then fail without the consequent financial meltdown. There are also proposals to ensure that financial decisions are focussed more on long term rather than short term criteria.

There would seem to be a need for some sort of global liquidity ratio to reduce risk, perhaps underpinned by a supplementary leverage ratio which further cuts the potential for risk taking. When times are good, it would be good practice to build up a buffer to help when times are bad; measurement systems should be based on the needs of all the customers and not the needs of shareholders.

At Davos there is a lot to discuss. Probably the most basic question is why this all happened. What it boils down to is a question of values. Short term investments and hedge funds are the norm for publically traded companies which make up 85% of all UK FTSE companies. Is it time to look at the basic forms of business and how they are funded? Oh and trust, responsibility, reliability…