Davos Recap: With castigation stage over, collaboration begins

The United States attracted the bulk of the forum's rebukes, with leaders from China and Russia essentially blaming the U.S.'s regulation-thin economic system -- and its low savings rate, overconsumption, and large budget deficit -- for the present state of things, while simultaneously calling for a new financial order, The Wall Street Journal reported (subscription required). The rebukes by Russia and China would have been more effectual had the two offered a model for that new financial order, so says economist David Wang, but they did not. Nor were there any joint communiqués by other world leaders on what the contours of that new financial order should look like, he said.

China and Russia also weakened their own arguments by not pointing out their role in the onset of the crisis, Wang said, namely China's overdependence on export sales and Russia's oil-dominant economy.

On the bright side, China and Russia, the E.U., Japan, and major developing countries such as Brazil and Mexico agreed that there's plenty to do to both stabilize the global financial system and end the global recession, which is probably the best one could hope for coming out of Davos, in Wang's interpretation. Davos "is part political posturing for domestic voters, part note trading session among economic and financial decision makers, and part vacation," he said. "It's more a diagnosis of the patient, than anything."

The real work, Wang says, occurs at the Treasury and central bank levels, where, after evaluating hard economic data, public officials propose legislation, implement policies, and in some cases coordinate responses with G20 member nations. With the above in mind, should the recession deepen, look for calls for larger/additional fiscal stimulus packages to grow, Wang said, as well as additional cash infusions to stabilize banks, and/or purchase toxic assets.

Economic Analysis: Wang said the U.S./global economies are in poor shape, but he remains "cautiously optimistic" regarding policy makers' ability to find solutions. In spite of the financial shock waves that occurred in 2007-2008, the U.S. and other major industrialized economies retain enough resources to get their economies on sustainable growth tracks. And as is so often the case, the key issue, in the United States and elsewhere, concerns who pays -- "something each nation's political process has to decide," he said.