This week, the annual global economic conference in Davos, Switzerland will be in the news. In past years, the stars of the World Economic Forum were the bigwig corporate executives. This year, economists and politicians will likely emerge as the stars of the global economic firmament. In fact, the organizers brag that this year’s meeting will feature a record number of world leaders, including 40 heads of state, 17 finance ministers and 19 central bankers – but few business stars.
Russian Prime Minister Vladimir Putin will address the opening-day gathering, as will China’s Premier Wen Jiabao. British Prime Minister Gordon Brown, despite a recession and massive bank bailout at home, is also scheduled to speak. Other Davos speakers will be German Chancellor Angela Merkel, U.N. Secretary-General Ban Ki-Moon and Mexican President Felipe Calderon.
The Obama White House is sending its top economic adviser, Lawrence Summers. However, Barack Obama, Treasury Secretary nominee Tim Geithner and Fed Chairman Ben Bernanke will not be attending, since apparently they have their hands full rescuing the U.S. financial system. In particular, the influential Federal Open Market Committee (FOMC) will be meeting this week.
One thing that I hope will come up at Davos – and later, at the upcoming G20 meeting on April 2 – is how the leading nations of the world plan to reel in the speculation in derivatives, like Credit Default Swaps (CDSs) and the products they insure, such as Collateralized Mortgage Obligations (CMOs), Structured Investment Vehicles (SIVs) and the hedge funds that leverage them.
Since companies like AIG, Bear Stearns, Citigroup and Lehman Brothers were able to skirt capital requirements via these derivatives, the Obama Administration, French President Nicolas Sarkozy and other world leaders must agree on what would be the best regulatory framework to determine the value of these obscure Wall Street creations. Considering that CDS’s are more than a $50 trillion market – more than the world economy, or the entire value of all the stock markets around the world – there needs to be full disclosure of all these kinky Wall Street creations.
Back in Washington, DC, the Fed has no room to cut rates this week, so they must examine other tools at this week’s FOMC meeting. Paul Mackel, a currency strategist at HSBC in London, said that although the Fed stands ready to use a host of unconventional measures to flood the economy with liquidity in an effort to stimulate growth, these actions “could hurt the (U.S.) dollar quite badly” later this year. As a result, most experts (and I agree) are expecting a collapse of the U.S. dollar as our budget deficit and banking problems become even more overwhelming. The result of a weak dollar is that it helps commodities and multinational stocks that do a lot of business overseas.