Capitalism Seen in Crisis by Investors Citing Inequalities

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Manhattan office leasing fell 36 percent in the third quarter from a 12-year high in the previous three months as demand retreated from what had been a “phenomenal” pace, Cushman & Wakefield said. Photographer: Scott Eells/Bloomberg

International investors say capitalism is in crisis, with almost one in three backing radical changes to the system, according to a Bloomberg survey.

As the global financial and business elite gather in Davos for their annual forum, a majority in the Bloomberg Global Poll agree that income inequality hurts the economy and that governments need to do something to address it -- ideas at the heart of “Occupy” protests worldwide. Those surveyed also voice reservations about the financial industry’s role in society, with seven in 10 seeing at least some truth in the argument that banks have too much power over governments.

“Capitalism is in crisis because there is a huge and growing disparity in income/wealth distribution in Western economies, and an equally divisive generational disparity,” poll participant Michael Derks, chief strategist for FXPro Financial Services broker in London, said in an e-mail.

“It requires government intervention on an enormous scale, because an economy cannot survive if it does not invest in the younger generation,” Derks said.

More than 70 percent of those polled believe the system is in trouble, with 32 percent saying it needs a “radical reworking of the rules and regulations.” The other 39 percent think the turbulence will ebb on its own, according to the quarterly poll conducted Jan. 23-24 of 1,209 investors, analysts and traders who are Bloomberg subscribers. Fewer than one in four say free enterprise is working as it should.

Seventy percent of those surveyed say Europe’s economic troubles will cause social instability in 2012, including riots or other unrest.

Role for Government

The 459 U.S. investors who answered the survey view capitalism more favorably than their counterparts elsewhere, with roughly one in five saying the system needs an overhaul, according to the poll.

U.S. participants are also more wary of government action to tackle income disparities. Half say such official intervention would be inappropriate. More than three of four European investors and more than four in five Asians see a role for government in dealing with the issue.

The future of free enterprise was discussed today at the start of the World Economic Forum’s annual meeting. The opening panel featured Carlyle Group LP co-founder David Rubenstein, Bank of America Corp. Chief Executive Officer Brian Moynihan and Sharan Burrow, general secretary of the International Trade Union Confederation.

Rubenstein said the Chinese-style “state capitalism” model “will prevail” if the U.S. and Western European economies don’t fix their debt problems.

Message Resonating

As 2,600 delegates meet in the ski resort’s conference center, young Swiss Socialists are erecting igloos under the banner of “OccupyWEF,” which draws its inspiration from last year’s “Occupy Wall Street” protests against the financial industry and the concentration of wealth in the top one percent of the society.

Their message is resonating with global investors, according to the results of the poll. More than half of respondents say that income inequality hampers economic growth. Some two-thirds think it is appropriate for governments to pursue policies to tackle the issue, although a plurality -- 48 percent -- says it can be addressed over time. Fewer than one in five back urgent action to deal with the gap.

“There is a large and growing wealth disparity and I think it is unhealthy,” Steve Morton, a director at Natixis Securities in New York who took part in the survey, said in an e-mail. “The lower levels of the pyramid don’t have enough money to buy things and keep the economy going.”

Criticizing Banks

The financial industry also comes in for criticism in the quarterly poll. About two-thirds see at least some truth in the argument that bankers’ actions are driven by greed and harm the economy. More than four in five voice some sympathy for the contention that top bankers get large bonuses even when their firms don’t do well. And only 14 percent completely disagree with the statement that banks need to be regulated so that they’re not too big to fail.

“There’s too much power, it’s time to reset,” Burrow said at the Davos panel. “If you’ve got a group that is too big to fail, what it means is that you are the biggest bullies on the planet. The financial sector has lost its moral compass.”

Growing Gap

“The banking culture has evolved radically, to the point where the perception amongst most members of society is that their actions are driven by the relentless pursuit of earnings with no regard to their potential negative impact on communities,” said Anson Rosewall, a poll participant and sales trader at BBY Ltd., a financial services firm in Sydney, Australia.

“The fact that banks have taken government cash, while the average person has lost his job and house without help, will probably forever tarnish the reputation of these major institutions,” he said in an e-mail.

The gap between rich and poor is widening across most developed economies as executives, bankers and skilled workers reap more rewards, the Organization for Economic Cooperation and Development said last month.

The average income of the richest tenth of the population is now about nine times that of the poorest tenth, the Paris-based OECD said. The gap has increased about 10 percent since the mid-1980s with Mexico, the U.S., Israel and the U.K. among the countries with the biggest divide between rich and poor.

Tax Debate

President Barack Obama has signaled that he intends to highlight the issue in his re-election campaign by repeatedly calling for legislation to ensure that people with incomes of more than $1 million a year pay at least the same percentage in taxes as middle-class households.

Republican presidential candidate Mitt Romney earned $21.6 million in 2010 and paid 13.9 percent of that amount in income taxes, using the preferential rate on investment income and charitable contributions to pay a smaller share of his earnings than top wage earners typically do, according to tax returns released by the former Massachusetts governor yesterday.

U.S. investors are not convinced that income inequality is a threat to the economy: a majority of those surveyed say it does not hinder growth. More than 50 percent of Europeans and 60 percent of Asians think otherwise.

Skeptical of Regulation

Poll respondents from America are also less enthusiastic about bank regulation. Only about one in three U.S. investors are completely convinced that banks are in need of regulation to prevent them from being too big to fail. Majorities of investors in Europe and Asia are sold on that idea.

The poll’s overall results aren’t completely negative for the financial industry. Only about a quarter of investors completely disagree with the argument that banks do a good job routing capital to businesses that have the best chance of creating jobs.

More than three in four also voice at least some support for the statement that strong bank profits are good for the economy because financial institutions will have more money to lend to consumers and companies.

Structural changes, in particular new capital requirements and regulation, are holding banking profits down, according to roughly three-quarters of those surveyed. Only about a quarter blame the lower profits on a temporary slowdown in the economy and financial markets.

The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 2.8 percentage points.

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