DAVOS, Switzerland (Reuters) - Global business leaders warned Western governments on Wednesday that a populist crackdown on the financial industry could crimp a fragile recovery from the worst recession since the 1930s.
The worried response to U.S. President Barack Obama’s plans to curb big banks and a British assault on bankers’ pay came as 2,500 business leaders and policy makers met at the annual World Economic Forum in the Swiss ski resort of Davos.
French President Nicolas Sarkozy delivered a tirade against the excesses of financial speculation, deregulation, the bonus culture and accounting tricks which he said driven the world economy to the edge of the abyss a year ago.
Only concerted government action had saved the world from financial meltdown, he said, and the first glimmers of recovery should not be a signal to let up on regulatory reforms.
“We can only save capitalism by refounding and moralizing it,” Sarkozy said in a keynote address, warning central banks against an abrupt withdrawal of monetary stimulus measures that might trigger a collapse of the world economy.
Surveys produced for the conference showed global economic confidence on the rise after deep gloom in 2009 and a cautious return to hiring, especially in emerging markets.
But the specter of uncoordinated, heavy-handed regulation and government intervention in the economy was the biggest cloud on many business leaders’ horizon. Uncertainties over whether China will rein in its feverish pace of growth and concerns about how Greece will tackle its debt crisis also weighed.
Obama jolted markets on January 21 with proposals to force commercial banks to cut ties with hedge funds and private equity funds and to stop proprietary trading. Obama also said he wanted the financial sector to pay for a massive taxpayer bailout.
BANKS HIT BACK
Barclays President Bob Diamond challenged Obama’s effort to limit the size of big banks and restrain risk-taking.
“I’ve seen no evidence that suggests that shrinking banks and making all banks smaller or more narrow is the answer,” he told the opening forum session.
“If you step back and say large is bad, and we move to narrow banking, the impact of that on banks and on global trade, the global economy, would be very negative.”
Standard Chartered bank CEO Peter Sands said there was a growing risk that fragmented regulatory initiatives would “create enormous amounts of complexity” and encourage financial companies to arbitrage among regulators.
Sarkozy endorsed Obama’s proposed curbs on Wall Street but stressed the need for a global consensus on financial regulation in the Group of 20 major economies.
U.S. Congressman Barney Frank, a key Democratic lawmaker on financial regulation, said that unlike in 2002 when the Sarbanes-Oxley Act accounting rules drove many firms out of the United States, regulators in Washington and London were now working closely together to avoid future crises.
“You can’t play mommy and daddy against each other now,” he said.
A study by accountancy giant PricewaterhouseCoopers showed business confidence bouncing back after the sharpest drop in economic activity since World War Two, prompting more industry leaders to start hiring again.
The survey of 1,200 chief executives in 52 countries found 39 percent of industry bosses aimed to hire extra staff in 2010, while 25 percent planned more job cuts, down from nearly half who slashed jobs last year.
But recruitment will be on a modest scale and mostly in booming emerging economies such as China and India, rather than in the developed world, the report showed.
Billionaire financier George Soros said Obama’s plan to impose a tax on large banks was premature and his wider proposals to rein in banks’ activities may not go far enough.
U.S. economist Nouriel Roubini, who had warned that the 2008 financial crisis was coming, said loose U.S. monetary policy was now fuelling asset price bubbles that would cause the next bust.
“It’s become too much, too fast, too soon and U.S. monetary policy is being exported to the rest of the world,” Roubini told a forum session.
In contrast to many speakers, he said he was not concerned about over-regulation but about a return to business as usual.
“It’s not fair for banks (to get) an insurance policy to be involved in excessive risk-taking from trading activity,” he said. “I think the banking system is delusional if they believe they can stop these things. “
But in contrast to the boom years, some high-profile bankers, including Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase’s Jamie Dimon, pulled out of this year’s meeting.
Additional reporting by Krista Hughes, Natsuko Waki, Clara Ferreira Marques and Martin Howell, writing by Paul Taylor, editing by Hans Peters and Lin Noueihed
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