Davos: Soros And Solutions

David Serchuk

The Forbes.com Investor Team hopes that the Davos attendees conspire to bring down global interest rates. Meanwhile, George Soros warns of further collapse.

With the world in the worst economic spiral since alcohol consumption was a crime, it's no wonder the World Economic Forum at Davos, Switzerland is a muted affair this year.

Goldman Sachs has reportedly called off its annual party, which is only fitting for a firm that's stock has fallen 56% in a year. The list of bigwigs staying away is as noteworthy as the list of attendees. Then again, with a theme of "Shaping the Post-Crisis World" Davos' planners had to know they planned a somber powwow.

At least the theme presumes the crisis will end someday.

George Soros brought his usual glad tidings to the party. The "financial structure we used to take for granted has collapsed," he said, echoing the theme of his latest book, The New Paradigm for Financial Markets, in which he argues that the current crisis is the popping not of a real estate bubble but of a 20-year-old credit bubble. Soros also noted that the financial system is on "artificial life support."

Soros believes that a "good bank" needs to be created, one spared of the so-called "bad" assets that have wrecked the world's economies. Soros also believes the creation of new credit instruments will have to be regulated in the future and that the entire world, but especially the West, needs to prepare for slower economic growth in the years ahead. Though Soros supports a "good bank/bad bank" solution as well, his "good bank" would serve as the world's new lender while the rest of the financial industry tries to heal itself.

The Forbes.com Investor Team also had its own set of answers for what they would like to see the world's economic mavens do when they gather in their conferences, back rooms and parties.

Robert Froehlich, chief investment strategist of DWS Investments, the retail branch of Deutsche Bank (nyse: DB - news - people ), says he would like to see the Bank of England, the European Central Bank and the U.S. Federal Reserve all convene and cut interest rates to match the U.S. "Talk about shock 'n' awe for markets," he says.

Froehlich donned his "Dr. Bob" had and added a somewhat sci-fi vision of the kind of infrastructure investments he would like to see globally. No mere roads and bridges for him; he wants governments to finally commit to the monorail. "The light rail should be used for all city-to-city travel under 1,000 miles," he says. "Also a series of moving sidewalks would help as well. And everything should be powered by solar and wind."

On a more quotidian note, Froehlich also endorses the idea of having the world's sovereign wealth funds create a global "toxic" fund, where every country chips in. This fund would take toxic funds off balance sheets worldwide, rebooting the system.

John Osbon, head of Osbon Capital Management, thinks such a mega-wealth fund is not a realistic option but is still in favor of a U.S. aggregator bank to house illiquid debt securities: "With the U.S. creating a toxic bond pricing structure and market prices, the rest of the world would quickly follow," he says.

The erudite Osbon also remarked that, "As David Smick points out in his excellent book, The World Is Curved, 'Today we find ourselves in a situation in which the globalized financial system both enables and threatens our national well being.'"

Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, agrees with Froehlich's direction, even if he doesn't think it can all be put in place. "Anything close to these would certainly be beneficial," he says.

he Forbes.com Investor Team hopes that the Davos attendees conspire to bring down global interest rates. Meanwhile, George Soros warns of further collapse.

What The World Needs Now …

Osbon: With the heads of the second, third and fourth largest (Japan, China, Germany) economies in the world speaking, we should definitely care what is said in Davos. With the title of "Shaping the Post-Crisis World" as its theme, Davos is an ideal opportunity to hear how world leaders are planning to collaborate to get us out of the global economic mess we are in. And we are in it together.

In markets, we have seen how correlation goes up as markets go down, leaving investors with almost no place to hide. As David Smick points out in his excellent book, The World Is Curved, "Today we find ourselves in a situation in which the globalized financial system both enables and threatens our national well being."

In my opinion, investors are the perhaps unwilling new partners in a new era of global government involvement, but we are partners. The "stock of the bureaucrat" has risen dramatically in the last year as financial engineers and money masters have been so wrong on such a fantastic scale.

I would look for statements of collaboration and common interest from heads of state first and foremost. Words do matter. Promises may not be kept, but the effort is worth a lot.

Froehlich: If you think of Davos as a gathering of political, business, labor, academic and religious leaders, I can't think of a more important time ever for a Davos event than right now. If we are ever going to get out of this, everyone must come to the table with an open mind. Business as usual is not an option. We all must change the way we think and the way we act. We are all in this together, and the only way out of this is together. Us vs. Them doesn't work in the global village.

The best thing we can hope for out of Davos is the behind-the-scene one-off meetings between various parties that may plant the seed for a future breakthrough on some front. I don't focus too much on what is being publicly said at Davos. It is such a big stage and everyone is acting. Instead of listening to what they say, let's watch what they do and pray.

Forbes: Any back-room deals you'd like to see take place at Davos?

Froehlich: Well the first deal I would like to see done is a Bank of England, European Central Bank, Fed Reserve Board agreement where the B of E and ECB dramatically cut rates all the way down to 25 basis points matching the U.S. Talk about shock 'n' awe for our markets.

Then I would like to see the U.S., China, Japan and Europe all change their infrastructure focus. And instead of building the same old roads, how about a transit system for the future instead of more of the same. The short answer is think Disney.

I believe we need a series of urban monorails in every major city. In addition, we need a light rail transit system linking major metro areas that works. The light rail should be used for all city-to-city travel under 1,000 miles. Also a series of moving sidewalks would help. And everything should be powered by solar and wind.

Finally, I would have the Sovereign Wealth Funds step up to the plate and jointly create a global "toxic" Sovereign Wealth Fund. Every country pays in their fair share. This fund takes all the toxic assets off the balance sheets of financial companies the world over and the system is rebooted.

Frederick: Dr. Bob's goals seem rather idealistic, but anything close to these would certainly be beneficial.

Osbon: Follow the money would be my suggestion for divining the Davos results. London and the ECB interest rates are still out of line relative to Japan and the U.S., so Bob is spot on in looking for cuts to zero-plus rates there.

I would also look to fiscal stimulus plans--China is leading the way right now with a $500 billion plan, or 25% of their economy. We can't accept all the Chinese numbers at face value, but the announcement is a significant signal.

On the fiscal side, I find it ironic that the U.K. and the rest of Europe, which have a history of nationalization and are much supportive of government involvement in their everyday lives, have not announced "re-socialization" plans involving more spending and investment. They are behind the market curve right now, in my view.

Lastly, a mega-TARP and "big, bad bank" outside of national boundaries is not realistic in my view. Unilateral leadership on toxic assets could make a big difference, however, which I why I am in favor of the U.S. creating a "bad bank," although I object to it philosophically. With the U.S. creating a toxic-bond-pricing structure and market prices, the rest of the world could quickly follow.

Why could any of the above happen? For two reasons involving competitive cooperation. The alternative of "doing nothing" doesn't work, and the politicians who move first will get the a larger share of the benefits of the solution for their respective countries.