Roubini and Soros want more bank regs, not less

The political fall-out from the bail-out of banks, growing political resistance toward ongoing stimulus spending, and general long-term economic pessimism shows no sign of letting up.

Yesterday, under tough questioning in Washington, US Treasury Secretary Tim Geithner defended the $130 billion rescue of AIG saying it was necessary to prevent "a second Great Depression".

In Davos, Switzerland, George Soros (above) warned that moves to reduce state economic support risk pushing the global economy back into recession. "I think that since the adjustment process to the recession is incomplete, there is a need for additional stimulus," he said. "The political resistance to it increases the chances of a double dip in the economy in 2011 and after that."

Many leading economists and investors attending the World Economic Forum's annual Davos summit showed little confidence that good times are coming back. The US and Europe will have "U-shaped" or "W-shaped" recoveries, panelists argued. Many said the upturn of late 2009 will fizzle out later this year.

Soros's warning of a new downturn was echoed by others. Economists believe indebtedness will weigh on governments and households in the US and Europe, while hopes for global growth will rest on fast-developing BRIC nations.

The world faces a long, slow recovery ending in "subpar" growth, with the risk of a renewed recession along the way, said Nouriel 'Dr. Doom' Roubini, the New York University economics professor who predicted the financial crisis in Davos three years ago.

Others took note of how traditional economic order has been upended. "Emerging markets used to be associated with indebted governments, lax monetary policy, suspicion of markets, a polarised electorate and a suspect private sector," Raghuram Rajan, finance professor at the University of Chicago, told the panel. Now, he said, that description better fits the world's advanced economies.

Rajan warned that the new political mood toward protectionism posed a serious risk. "We have moved from a period of great economic uncertainty to a period of great political uncertainty". Politicians, he said, may resort to "populism" and protectionist measures.

Both Roubini and Soros expressed enthusiasm for additional restrictions on banking practices and new rules to separate commercial banking from investment banking.

It was in Davos in 2007 that Roubini predicted the bursting of the mortage and credit bubbles that would trigger the financial crisis and recession. Now, he's calling for more regulation. "I think the proposals are going in the right direction. But they are not enough," he said.

But bankers, stunned by the new assaults on their business practices, aren't going to take the bitter medicine without a struggle. Barclays president Robert Diamond told the Davos forum he sees little advantage to limiting the size or practices of the banks.

"I've seen no evidence that suggests that shrinking banks and making all banks smaller or more narrow is the answer. 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." ·