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John Keane is Professor of Politics at the
In the following essay, Professor Keane analyses the effect of the now-exploding credit bubble on democracy, with particular reference tp the failure of monitory democracy to hold the global banking and credit sectors to account. Webdiary thanks Professor Keane for kindly permitting the republication of his timely and topical essay.
Eighteen months into the deepest economic slump since the Great Depression of the 1930s, one thing is abundantly clear: the world economy is once more suffering the incalculable shock effects of a massive market failure.
The bursting of the global credit bubble, predictably, is paralysing virtually all market sectors in most countries, even those (like
Such moves against the old free market consensus resemble slamming shut the gates after the horse called Equality has bolted. Among the documented effects of the credit bubble is that most democracies experienced a 30-year widening of income and wealth inequality. The whole trend – toward hourglass-shaped societies – has been bad for democracy. It has spawned an underclass. Middle-class people were deluded into thinking they were growing richer by the day. The spirit of solidarity so necessary for citizenship was corroded by market selfishness. The present bursting bubble is deepening these undemocratic trends. In poor countries, according to the World Bank, only a quarter of governments have the resources to cushion their citizens against the great recession; net capital flows in their direction have fallen to less than a fifth of the level two years ago. In richer countries, where ‘de-leveraging’ is rife, mortgage defaults among the poor are rising. Private wealth levels are plummeting (the Asian Development Bank has estimated that the equivalent of a year’s global economic output has so far been lost in financial assets alone). Pension funds are threatened. As companies slash dividends, preserve cash and reduce employment, trade unions find themselves challenged. Bank bailouts and other mega-forms of government intervention are sharpening the sense of many citizens that while the rich get billions the people get pennies. Then there is the most worrying threat to equality posed by the bust: that when the huge rescue package bills are finally presented, governments will try to rebalance public finances through spending cuts and increased taxes that have further socially regressive effects.
To the extent that democratic institutions have failed to live up to their own standards of citizen equity we can speak of democracy failure. But there is a more troubling sense in which countries such as
The key exception to this unfinished trend that began in 1945 is the failure of monitory democracy to penetrate the banking and credit sectors of the global economy. Authorities like central banks and the IMF never publicly questioned the false belief that selling credit risk to third-party investors would disperse credit risk. Bankers, often lacking professional qualifications, biased by their own company training programmes and happy to collect handsome ‘slice and dice’ fees, seemed ignorant of the risky structured products and quantitative models they embraced. National governments nurtured the unsustainable credit culture. Journalists unspecialised in the field seemed neither to care nor to understand the dangers attached to new-fangled debt instruments, such as collateral debt obligations and mortgage-linked securities. Worst of all, cross-border leveraging of capital went unchecked – an astonishing fact when it is considered that in most other sectors of the global economy regulatory bodies like the IMF, the World Bank, the United Nations Convention against Corruption and the G8/G20 were deemed necessary for protecting local economies from the bubbling anarchy of market failure.
The true cause of our present difficulties is that democracy slept through the making of a deep crisis. It is not that the road to our present hell was paved by good or bad intentions. We find ourselves heading for hell because nothing was ever done politically to prevent it. Democracy failure bred market failure. Unelected regulatory bodies and elected politicians, parties and whole governments let their citizens down. The self-regulation model palpably failed; empowering bodies like Moody’s and Standard and Poor’s and the UK Financial Services Authority to look after the credit and banking systems resembled putting alcoholics in charge of a wine bar full of celebrating bankers. There were few or no monitory bodies to blow whistles or sound alarm bells. Those brave individuals (among them Harry Markopolos, recently awarded a ‘silver whistle’ in recognition of his thwarted appeals to the US Securities and Exchange Commission to crack down on ‘front running’ and ‘Ponzi schemes’) who did so were ignored, silenced or sacked. The consequence: banks, investment firms and hedge fund operators, shrouded in secrecy, were allowed to pursue reckless adventures that brought the world’s banking and credit institutions to the edge of a cliff.
The symptoms of democracy failure are palpable. Almost everything that matters to citizens is suddenly rising or falling, as in a wild day at the stock exchange. Full-time (professional) jobs are disappearing; short-time working and part-time employment, especially among women forced to supplement household income, are generally rising. So too are levels of household debt and families’ felt sense of material insecurity; for the first time in a generation, the size of the middle class is shrinking, along with hopes that its children will in future be better off. Levels of state debt have reached all-time highs. In some circles, there is nervousness about the long-term viability of the greenback – the global currency of the global power which runs a current account deficit of more than 6% of GDP, a level normally linked to a government about to suffer a foreign exchange crisis. The veto power of the Chinese government, its ability to stop purchasing Treasury bonds, and thus to pull the plug on the
Jean-Claude Trichet, head of the European Central Bank, has rightly pointed to the immeasurability of what lies ahead: ‘We don’t know the laws of probability of future events.’ Warren Buffett has a pithier version of the same thought: naked swimmers will only be spotted when the economic low tide comes. This is the most worrying effect of democracy failure: the scale and depth of the bursting bubble are simply unknown. We know neither the extent of leveraging that has taken place nor the measures needed to rein in its lethal effects. And we have no ready answers to the toughest question: whether the credit culture that mushroomed for three decades, fed by deregulation, the meteoric rise of China and India and the anchor role of the United States, itself both the backbone of the global currency system and the world’s biggest debtor country, is any longer sustainable, environmentally or in market or political terms.
No doubt there are democratic opportunities amidst the ruins. Sensitivity to the fact of market failures is rising. Market-based solutions are for the time being unfashionable. Responsible government and redistributive policies are back on the political agenda. But whether and how citizens and their representatives can survive the current onslaught of unchecked power from above is less clear. Culpable governments need to be thrown from office, as has happened in
The quest to abolish folly and hubris from capital markets may never fully succeed. Risk taking and promise making in the banking and credit sectors are by definition neither fully predictable nor capable of transparent regulation. But given the pickle we are in new and more democratic ways have to be found for doing things that central banks, bankers, securities regulators and accounting standards boards manifestly failed to do. There is of course a feel-good factor when speaking about greater public accountability of markets. Who could be against it? The trick therefore is to find toothier ways of clamping down on market failure. Platitudes about ‘oversight’ and the need for ‘real reform of our regulatory architecture’ (phrases now used by Henry Paulson, Lord Turner and other failed regulators desperate to save their own skins) are simply not good enough; and whether bodies like the G20 (which lacks a permanent secretariat and is overshadowed by a sceptical United States) can deliver new monitors is doubtful. Yet viable new monitory bodies are now urgently needed. The
Whether in fact new institutions will be built, or built quickly enough, is for the moment quite unclear. Just one thing is absolutely certain. Given that the root cause of this crisis is political, the solution has to be political, this time by finding the best remedy for democracy failure in the strengthening of democracy itself.