Talk of the end of the Great Recession and a return to normality is premature. Surging profits in the City of London and Wall Street should remind us that in matters of political economy,the worst is not over. Mired in spiralling unemployment,state debt and public frustration with parties,politicians and governments,much of the world economy continues to suffer the shock effects of a massive market failure that threatens to knock the life out of democracy itself.
Let us remember: the true cause of the deepest economic slump since the Great Depression of the 1930s is that democracy sleepwalked its way into a deep crisis. 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 Moodys and Standard and Poors 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 monitory bodies to blow whistles or sound alarm bells. Brave individuals who did so were ignored,silenced or sacked. The consequence: banks,investment firms and hedge fund operators,shrouded in corporate secrecy,were allowed to pursue front running and Ponzi schemes and other reckless adventures that brought the worlds banking and credit institutions to the edge of a cliff.
Bursting bubbles have regularly plagued market economies since the seventeenth century Dutch tulip craze; they are intrinsic to unregulated markets,contagious and destructive of human lives. More will happen unless new early warning systems are put in place. Monitory democracy is the best check against hubris,and that is why toothier ways are urgently needed for doing things that central banks,bankers,securities regulators and accounting standards boards manifestly failed to do. Gordon Brown may believe in granting more power to the Treasury and the Financial Services Authority (and less to the Bank of England) so that they can work financial miracles. But blind trust in either markets or government regulators is folly. The urgent political priority is to find more open and equitable ways of preventing future breakdowns of credit markets,which are bound to remain the drivers and potential depressors of markets in general. The question is not just whether governments are too big or too small or whether they work (the words used by Barack Obama in his inaugural address). The question is also whether governments and market institutions are held publicly accountable for their actions by citizens,and by their various elected and unelected representatives.
There is of course a feel-good factor when speaking about greater public accountability of markets. Who (aside from animal-spirited bankers and hedge fund operators) could be against it? The trick is to find robust methods of clamping down on market failure. Platitudes about oversight and the need for real reform of our regulatory architecture (phrases used in recent months by Henry Paulson,Lord Turner and other failed regulators) are simply not good enough. Tough talk needs to be translated into the construction of new monitory bodies. The recent EU leaders decision to establish a Systemic Risk Council,supervisory colleges and a single European rule book applicable to all financial institutions certainly count as examples. Embattled proposals by the US Treasury secretary to regulate hedge funds and traders of credit-default swaps and other exotic financial instruments run in the same direction. So would first-ever global regulatory structures in the fields of banking,insurance and securities credible forums that would crack down on fraud,discourage excessive risk-taking,foster best practice through open-minded counsel and provide a means by which the millions hurt by this crisis may seek redress.
At its London summit,the G20 acknowledged the pressing need for new global regulatory structures. The era of banking secrecy is over,it declared. It agreed to rename and upgrade an obscure close-knit body of central bankers,finance ministries and regulators known as the Financial Stability Forum,whose replacement,the Financial Stability Board,will include representatives from all G20 countries so making it the prototype of the worlds first financial monitor. Based in Basel and working alongside the IMF,the FSB will have an elevated mandate to provide early warning of macroeconomic and financial risks and the actions needed to address them. For the moment,its officials deny they plan to act like guardians of the global credit system. Their diffidence reflects the fact that there is no formal provision for enabling citizens and independent experts to input their views to the FSB,which will operate entirely at the behest of states,some of which (the United States,China,India) are in any case profoundly sceptical about the need for stronger global-level intrusions into markets. The secretariat of the FSB is to remain tiny; it has no formal powers to impose anything on anybody; and,for the time being,it will function as a clearing-house advisory and information-sharing body that hosts meetings and sets up supervisory colleges that issue reports on potential risks,best-practice principles and revamped regulatory systems. How the FSB would act to avert or resolve cross-border disputes triggered by the future insolvency of troubled companies like Citigroup,AIG and the Royal Bank of Scotland is unknown.
The new FSB will be better than nothing. The European Systemic Risk Council and the commitment of G20 governments to clean up domestic banking and credit practices are also promising initiatives. But whether potent and durable monitory institutions within financial markets in fact result from these beginnings,or whether these monitors will be built quickly enough,is for the moment quite unclear. Tough and testing is the road ahead. The age of rebalancing public finances through harsh spending cuts and increased taxes that have deeply regressive social effects is coming. Democracy as the developing crisis in California shows is stumbling through hard times. Whether such trends will be resisted and reversed now depends heavily on citizens and their representatives. Just one thing is absolutely certain. Given that the root cause of our economic and social crisis is political,the prevention of future crises has to be political,this time by finding the best remedy for democracy failure in the strengthening of democracy itself.
The writer is professor of politics at Westminster University. His book,The Life and Death of Democracy was published last month