What’s the state of the world’s economy and financial system?  The annual gathering of the world’s leaders in the field at the World Economic Forum at the posh ski resort of Davos, Switzerland, painted a very nasty picture.  The financial world is crumbling, unfair, and full of unacceptable risk.

One of the great questions through this stage of the depression is how alarmed the great thinkers are about the current situation.  Make no mistake – this conference was sobering at best, terrifying at worst.  It you’re looking for good news, take comfort in the fact that the world’s leaders have clearly sounded the alarm bells.

The conference itself seems almost dreamy, held at one of the most exclusive ski resorts in the world.  But their mission is serious.  Their goal is nothing less than to make the world a better place, and the organizers have no delusions as to how hard that is.  “Today, we live in the most complex, interdependent and interconnected era in human history. We are increasingly confronted by major adaptive challenges as well as profound transformational opportunities. This new leadership context requires successful organizations to master strategic agility and to build risk resilience.”

In plain language:  things are changing rapidly, and the keys to getting on top of it to make a better world are good strategies and resilience.  Regular readers will recognize these themes immediately.  So what was actually said at this conference?

Echoing a theme Barataria readers will recognize, bond trader George Soros noted that “The established theory has collapsed but we haven’t actually got a proper understanding of how financial markets operate.  We have introduced synthetic instruments, invented derivatives where we don’t fully understand the effect they have.” In other words, the financial system is Too Big to Understand and has already collapsed in practical terms.

One of the harshest talks came on the economics of happiness, of all things.  Joseph Stiglitz, A Columbia University Prof, Nobel laureate and former chief economist of the World Bank, had nothing but harsh words for our current system’s inability to create harmony, opportunity, and the pride in work that creates real happiness.  Claiming that bankers are creating “negative value”, he chided their insular view of their jobs.  “Most people try to see what they do as having intrinsic worth.  The fact that there’s no evidence doesn’t bother them.”

Stiglitz also blasted the stagnation that has plagued the US for a generation, saying “America likes to think of itself as a land of equality and opportunity, the so-called American dream is very deep to our sense of identity.  The stats show otherwise, the US has one of the worst opportunity rates of any of the advanced economies. A child’s life chances are more dependent on the income of his or her parents than most other industrial economies.”

Where are things working?  In Brazil, the last 20 years of bipartisan work to lift the nation has created a track record we should envy, according to Stiglitz.

The issue of happiness in particular resonated the most with the press reporting from Davos.  Nearly everyone agrees that economic stagnation has been a key feature of developed nations for a generation, especially among the middle class.  But is that all there is?   Searching for new measures of national well-being and happiness, rather than national wealth, was a key topic that generated the most press by far.

All of these are topics that we have covered here in the past in various forms, but it’s good to hear that they are resonating with the leadership of the world.  Where we go from here is always hard to answer, but the leaders of the world understand just how bad the situation is.  They are even looking for ways to measure progress in a world where economic growth remains elusive.

What should we take away from the World Economic Forum?  The leaders of the world are not afraid to openly and plainly discuss the things that are holding us back. It’s always the stuff that no one is paying attention to that can sneak up and ruin everything.  In economics, bad news is often good news, and not just because things are screwed up beyond belief.  Bad news from the leaders is bad news that is in the process of being fixed.

Very few of us will ever make it to Davos, whether just for the skiing or for an eonomic conference.  But what matters is that in between hitting the slopes the world leaders have no illusions as to how challenging these times are.  On a cold day in January here in the flat parts of the US I can take some comfort in that and I hope you can, too.