THE BLOG
01/26/2016 02:51 pm ET Updated Jan 26, 2017

Is Davos Credible?

Do you remember anyone at Davos discussing how to avoid another Wall Street Crash of 2008, in past years? No. Or how can our "elite" bankers build a more stable financial infrastructure? No. So what does that tell you? A conference for ego stroking? For one up-manship? As the Dutch Finance Minister Jeroen Dijsselbloem said that European economies are far "too dependent" on the banking system.

The real problem, as former Secretary of the Treasury Timothy Geithner notes in his book, Stress Test, is that this crash and the subsequent Great Recession wiped out $15 trillion in household wealth, destroyed nine million jobs, five million homeowners lost their homes, and brought nine million Americans below the poverty line.

Let's deconstruct. Here is why a collection of elites who are supposed to be the leaders of our society are out of touch with the realities of the nations they supposedly claim citizenship to.

1) When a person earning $50,000/year worries about the markets it is considered foolhardy, but when that person earns $25 million it is a serious consideration? Looking at the same problem with similar views is not deserving of that $25 million salary.

2) Banks are returning to "business as usual." Remember when they said "everyone is doing it" led to the Wall Street Crash of 2008? The current fad is "FinTech." Davos was buzzing with FinTech. The exception proves the rule; Morgan Stanley's James Gorman said regulation is still a bigger deal for banks, and bemoaned the "near hysteria" surrounding FinTech.

3) When executive management gives itself handsome pay increases while laying off their workers, it shows something is amiss. In manufacturing this sort of executive self-rewarding would be unthinkable.

So the question we have to ask ourselves is, have our "leaders" lost touch with reality? Or are those at Davos to be trusted with leadership?

How did this happen? I can trace it back to financial theory. Finance teaches us that if we construct a portfolio of many securities, this automatically diversifies away the unsystematic risk. The risk of management and corporate behavior. That is, bankers and corporate managers can do unethical and undesirable things to their companies and it won't show up, for example, in our retirement portfolios. But wait, didn't Enron teach us that this is false?

What Davos has become is place to homogenize executive management views. This in turn will homogenize investors' expectations which will lead to market crashes. See my book on unsystematic risk i.e. the negative homogenization of investors' expectations is what causes markets to crash.

A final thought. Dissidents are not opponents. They are people who can see the fallacies in the argument and hope to prevent another Wall Street Crash of 2008. Remember Aleksandr Solzhenitsyn?