CNBC Debate: Who's in Charge?
Wednesday 23rd January 2008 - 10:45am - 12:00pm
CNBC Debate: Who's in Charge?
Ibrahim S. Dabdoub · Angel Gurría · Nandan M. Nilekani · John W. Snow · George Soros · Joseph E. Stiglitz
Maria BartiromoWednesday 23 January
Sovereign wealth funds, hedge funds and other new stakeholders in the global economy have become the emerging power brokers in the international economic order, and central banks have lost focus and control when it comes to economic governance. But, at the same time, there is no need for a new global sheriff to help police volatile financial markets.
These were the conclusions of three votes taken during a CNBC debate at the World Economic Forum Annual Meeting 2008 on "Who’s in Charge?" – and whether the present guardians of economic stability are exercising the necessary authority at a time of huge international financial and economic uncertainty.
Central BanksIn support of a motion that central banks have lost "focus and control with respect to economic governance,"
Joseph E. Stiglitz, University Professor, Columbia University, USA, said the authorities have become too narrowly focused on inflation, and made bad judgements and had not foreseen that the US housing bubble would burst. "We have the foreseeable consequences of bad economic management," he said. The US Federal Reserve Bank has now reacted, but too late.
John W. Snow, Chairman, Cerberus Capital Management, USA, argued that for the past two decades, the central banks have done a remarkable job. "For the past 20 years, we have seen these institutions perform better than others," he said. Inflation has been largely tamed. "We are fundamentally better positioned today because of the central banks." Referring to the current crisis, he said that perhaps the US central bank could have done more, could have taken other steps, but the answer to whether it is capable of bold action was answered on Tuesday. "Have the central banks been asleep at the switch? No," he said.
Among the participants, Egyptian Finance Minister Youssuf Boutros-Ghali said that Stiglitz was criticizing policy rather than the system itself. "We are talking about policy mistakes, not systemic mistakes," he said. Lawrence H. Summers, Charles W. Eliot Professor at Harvard University, said that central banks cannot "create prosperity". While their performance over the past 25 years was positive, it is hard to give them a positive grade over the past two years because they failed to spot the housing "bubble" and were then "behind the curve" in their response. There is a need for better international coordination, he said.
George Soros, Chairman, Soros Fund Management, USA, there is no doubt that the central banks had lost control of the situation. He said that they had failed to understand the new financial techniques developed by financial institutions to spread risk. "It is easy to see a ‘bubble’ through a rear-view mirror," Snow countered. But the vote went 59% to 41% against the central banks.
Sovereign Wealth FundsOpening the debate on sovereign wealth funds,
Ibrahim S. Dabdoub, Chief Executive Officer, National Bank of Kuwait, said that the funds currently control some US$ 8 trillion, which could rise to between US$ 15-20 trillion over the next five years. "That is a lot, even for Kuwait," he joked. "We believe that it is a fundamental shift in global financial wealth to other parts away from the United States and Europe." But Gulf country funds are not political players, they are merely seeking to diversify their income as oil earnings declined.
Arguing against the motion that sovereign funds are the new power brokers,
Angel Gurría, Secretary-General, Organisation for Economic Co-operation and Development (OECD), Paris, said that they are "powers" but not "power brokers". He said that there is already too much protectionism in the global economy and sovereign funds should not be added to the targets without any evidence of wrongdoing. Their size should also not be exaggerated, he said, adding that in 10 years they will still amount only to a fraction of the economic power of pension funds. "If there is going to be abuse, we will detect it, but do not create a systemic problem when there is not one. They should be challenged for their deeds, not for their owners," he said.
Sir Martin Sorrell, Group Chief Executive of WPP, United Kingdom, said that the rise of sovereign funds amounts to a power shift with important geopolitical implications. They might take decisions for strategic reasons rather than going after the highest possible return. The issue should be discussed. For C. Fred Bergsten of the Peterson Institute for International Economics, USA, sovereign funds are power brokers, able to decide which institutions survive and which fail during liquidity crises, for example. Summers agreed that caution is needed when key stakes can be sold to other governments in what could amount to a sort of cross-border nationalization. For Stiglitz, the question comes down to the need for good anti-trust laws. If they are in place, sovereign funds are not such an issue, he said.
Regardless of the arguments, the audience clearly felt there is cause for concern. The vote went 81% to 19% in favour of the motion that new stakeholders, sovereign wealth, hedge and private equity funds have become power brokers.
A New SheriffFinally, Soros proposed the motion that the financial world needs a new sheriff. Left to their own devices, markets go from "euphoria to despair", he said. Globalization has allowed the US to suck up the savings of the world and consume 6% more than it produces. What the world is now witnessing is the end of a 60-year-old credit system based on the dollar. "I think we are seeing the end of the dollar as the international currency and we need a new sheriff," he said.
Nandan M. Nilekani, Executive Co-Chairman, Infosys Technologies, India; Member of the Foundation Board of the World Economic Forum, dismissed the idea as "impracticable, irrelevant and implausible." He said that the origin of the current woes is essentially domestic and, therefore, it is up to national institutions to resolve them. If existing international institutions are not able "to get their act together" in areas such as trade and the environment, there is little hope for any new financial sheriff. "The solution is certainly not a new sheriff who cannot shoot straight," he said.
From the floor, a participant said there is a need to reform existing institutions, such as the International Monetary Fund, to make them more representative. Summers said that he agreed with Soros that the authorities need to do what they have not been doing, but he doubted that this will involve the creation of a new sheriff. "We have a lot of people with sheriff responsibilities but they have been averting their gaze," he said. Another participant suggested that a new international steering committee is needed to bring together the world’s three economic superpowers – the US, the EU and China. Gurria urged better coordination and above all better communication between the financial authorities and the markets.
The vote went 25% to 75% against a new sheriff.
Anchor and Global News Editor, Fox Business Network, USA
Graduate in Journalism, New York University. Formerly: Producer and Assignment Editor, CNN; Reporter...
Joseph E. Stiglitz
Professor, School of International and Public Affairs (SIPA), Columbia University, USA
1964, BA, Amherst College; 1967, PhD, MIT. Formerly with: Yale, Princeton, Stanford, MIT; Oxford; Wo...
Nandan M. Nilekani
Chairman, Unique Identification Authority of India (UIDAI), India
1978, Bachelor's in Electrical Engineering, IIT, Bombay. 1981, with Infosys, including: 1999-2002, C...
Chairman, Soros Fund Management, USA
1952, graduate, London School of Economics. Founder: 1979, Open Society Fund; 1984, Soros Foundation...
- Ibrahim S. Dabdoub
Secretary-General, Organisation for Economic Co-operation and Development (OECD), Paris
Graduate, School of Economics, National Autonomous University of Mexico; Master's in Development Fin...