Nouriel Roubini of New York University, Dennis Nally, Chairman of Pricewaterhousecoopers and Heizo Takenaka of KEIO University in discussion during the World Economic Forum in Davos.
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That reality — of tens of millions of jobless Americans and Europeans — is shaping up to be a game changer. Ordinary hardworking Joes (and Josefs) watched as one company after another got bailed out by governments while they got little, if any, help with their own economic struggles. "I've had lots of conversations with very, very senior bankers in the last couple of years who said, 'Look, we didn't suffer enough pain. We did wrong, but we didn't get punished,'" said Arif Naqvi, CEO of the investment firm Abraaj Capital, based in the United Arab Emirates.
That's a sentiment large sectors of the developed world understand very well, which is why politicians across the rich world are finding an appeal in populism and why bankers need to understand where it comes from. Those in the banking community who opposed the proposed reforms of the Obama Administration, megainvestor George Soros told a lunch later that day, were "tone-deaf."
Anger and resentment, however, are rarely sensible drivers of policy — especially in an area as complex as financial-market reform and regulation. Taking back fat-cat banker bonuses plays well on Main Street, but it's not a particularly meaningful structural change if what you're going for is preventing the next near collapse of the financial system. Bringing transparency to the shadow banking system is more difficult to wedge into a sound bite — Heizo Takenaka of Keio University in Japan said the need to regulate the shadow banking system was one of the key lessons of his time as a policymaker — but it would be a wiser goal.
Or consider the movement now afoot, thanks to the so-called Volcker rule, to impose size limits on banks as well as prohibit deposit-taking banks from trading on their own accounts. At first blush, that seems like a simple and sensible policy solution, said Rajan. The problem: a quick look at history shows that the sheer size of banks isn't necessarily the culprit. In the 1930s — a time when thousands of small, local banks were going under across the U.S. — the problem was not "too big to fail" but "too many to fail." The right policy solution almost certainly exists deep in the weeds. Yet the more policy is driven by politicians trying to appeal to the (rightfully) outraged crowd, the less room there's likely to be for nuance. "In the democratic process, the support of the general public is very much needed," said Takenaka. "The education of the general public is indispensable."
And here's one of the more difficult lessons to teach: how to coordinate an international response for regulatory change. "In the long run," said Soros, "you can't have global markets without global regulation." That doesn't mean getting there is easy. International cooperation can quickly fall afoul of national politicians anxious to preserve — or at least appear to preserve — sovereignty. And as we have been reminded in the wake of crisis, institutions like the G-20 find it difficult to make even the simplest proposals stick. "At the World Economic Forum," said Rubenstein, "you should always say, 'Yes, multilateralism is possible, and we should come together.' But getting national solutions is difficult enough."
Those difficulties suffused the mood in Davos. It's a certain type of person who comes to this spectacular valley — surrounded by steep mountains, bitterly cold at night. And even those hardy souls this year kept a lucky rabbit's foot in their pocket. "I think most people who find their way to Davos are just naturally optimistic," said Naqvi. "But we've been through such a massive shock in the global system that we can't expect to recover from it overnight."