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Financial meltdown reveals democratic deficit

October 20, 2008 - 9:00am -- Nick Young

How many of the world’s citizens understand what began a year ago as ‘problems in the sub-prime mortgage market,’ was rapidly promoted into a ‘credit crunch’ and has since become a ‘global financial crisis’ and ‘looming depression?’

After repeated analysis and explanations from economists, journalists, politicians and financiers we have all got the point that something went badly out of control. Many people vaguely feel that unchecked greed was largely to blame. The general climate of opinion seems to be that Reagonomics is over; or, as Nicolas Sarkozy put it, (grabbing the chance to immortalise a French sound bite that Anglophones would understand) ‘Laissez faire, c’est fini.’ Even The Economist has pronounced that ‘Capitalism [is at] at Bay.’ New phases of capitalism, nearly everyone now agrees, need new rules. But how many of us grasp in any detail what actually went wrong, and thus what rules are needed?

The more thoughtful news media have tried their best to show how the mess unravelled and to educate the public—or at least that part of it with the necessary attention span—about ‘bundling’ and ‘contagion’ of ‘toxic assets,’ lack of ‘liquidity’ in the inter-bank markets and how, mysteriously, this liquid absence ‘spills over’ into ‘the real economy.’ It’s quite some language game. But how many of us previously had any real grasp of the size, complexity, importance and apparent fragility of the unreal economy, the ‘hedge funds’ that were created in order to sidestep financial regulation, the zillions of dollars ripping round the world every day in bets on currencies or oil and pork belly futures? Five per cent of the adult population? Probably less. Certainly, those who spotted serious trouble coming (barring repeat soothsayers of the final crisis of capitalism) were an invisibly tiny minority.

Most of us, truth to tell, have no more idea how global financial systems work than how the inside of a computer or a human gall bladder works. We rely, just as much as when our computer or gall bladder breaks down, on experts; who, in the case of economics and finance, guide us with broad ideological brushstrokes—the conventional wisdom for the last 20 years being that free markets in almost any kind of economic activity are more ‘efficient’ than any attempt to regulate them. We hear this so often that even those who feel intuitively suspicious of it end up thinking that, well, maybe they were wrong.

Yet expert opinion in finance and economics is given to strange turns. A decade ago, during the ‘South East Asian economic crisis,’ many orthodox pundits were pointing the finger at Indonesian and Thai banks, tutting about the corruption and cronyism of ‘emerging markets’ and warning that the Chinese banking system might also collapse any day because of excessive state controls, political interference and the lack of commercial orientation. Now, strangely, we hear that Chinese banks, along with those of South Korea and Dubai, are among the strongest in the world and possible contenders for bailing out Western financial institutions that have used their market freedom to inflict wounds upon themselves. And, equally strange, in the financial services sector we hear experts retreat from the previous orthodoxy that bankruptcies are a necessary purgative for the capitalist system. The thinking lay person, and even the non-thinking lay person, has every reason not to know what the hell to think.

It is interesting that the crisis is unfolding during the final stages of the most expensive election in the history of the world’s greatest power. News reports keep putting it the other way round—reminding us, redundantly, that the election is occurring against a ‘background’ of financial crisis and gloom, as if the contest were a sporting event and these are the weather conditions the contestants face—yet neither candidate has come anywhere near to illuminating the gloom with a clear statement of what they would do to dispel it. All we get are solemn assurances that this and that will be ‘protected’ followed by big smiles and handshakes all round. It’s as if it would be unsporting of the electorate to expect any specific policies because those details need to be settled once the electee is installed in office and has assembled his ‘team.’ So have a look at the material on display, ladies and gentlemen, and please place your bets.

Isn’t this a bit strange? Or are these in fact the natural limits of democracy? Is the best we can expect to select people we trust, based largely on our perceptions (mediated through TV) of their personal qualities and competencies, to manage affairs of which we understand rather little? (This would be less disturbing if there were more sign that politicians understand things any more than the rest of us do.) Sure, we have the chance to dis-elect our leaders a few years later if we believe they have messed up, or if we just tired of seeing them on TV, and this is doubtless better than rule by hereditary monarchs or an entrenched club. But it seems like a rather meagre return on 18th century visions of the ‘sovereignty of the people.’

Nick Young
October 20 2008, Kampala