At the time of last winter’s World Economic Forum meeting in Davos, and at meetings of the WEF Global Risk Network (of which I’m a member) over the following months, much was said about the mismatch in the risk perceptions of the investment community and the policy community.
Then, it seemed as though the financial and investment community was full of the joys of spring – and apparently oblivious to all the risks that people in the policy community and the global commentariat were becoming increasingly concerned about. Risks like…
…how the US is badly bogged down in wars in Afghanistan and Iraq; an increasingly unstable Middle East and dangerous energy dependence; nuclear proliferation that has already occurred in North Korea and that is coming in Iran; the potential weakness of lame-duck political leaders in the US and other major democracies; record global trade imbalances and rising protectionist pressures; increased levels of public and private sector borrowing combined with record low saving in the US; falling home prices and middle class economic insecurity.
Yet, as former US Treasury Secretary Lawrence Summers (whose words are quoted above, from the FT on 26 December 2006) observed:
The new year will begin with the greatest divergence for a generation between the general view of global risks as reflected by conventional wisdom and the risks as priced in financial markets. While the commentariat has been more alarmed about the state of the world than global markets for some years, the gap increased in 2006 as markets became more serene and everyone else grew more anxious.
Fast forward to today, and the tables have turned through 180 degrees. The current crisis in the markets has made minimal impact on commentariats and non-financial policymakers. Newspapers other than the FT are not covering it on the front page (or indeed outside the business section); it has yet to make any serious impression in foreign affairs ministries; there is no buzz about it in on the international summit circuit (e.g. the forthcoming APEC summit).
Yet in the business and financial press, people are going nuts. Yesterday, the FT devoted five full pages to the crisis. A letter to the editor from the global head of market economics at BNP Paribas – admittedly one of the firms worst hit by the sub-prime crisis – showed signs of panic:
When the patient is in seizure and the extremities are starting to turn blue it is not the time to worry about the patient’s longer-term dietary plans or about undesirable side-effects of the current treatment. Yet I fear that this is what central banks will do. The next set of steps had better be convincing and decisive, otherwise a much wider financial market implosion and economic recession will become very likely.
As with the ‘red’ and ‘blue’ sections of the US, the apparent inability of the financial community to communicate with or understand the wider policy community – and vice versa – is something that ought to cause worry on both sides.
And here’s another thought. If this is what happens when just one of the chickens cited by Lawrence Summers comes home to roost, what are the prospects if more than one comes fluttering in at once?
