Democracy failure

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 programs 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 stock exchange session. 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 per cent 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 United States and tip the world into a tumble, is meanwhile growing.

More immediately worrying is the way frustration and anger with parties, politicians and governments are mounting, particularly in highly vulnerable countries, such as Iceland, Belgium, Hungary and Latvia, whose democratically elected governments collapsed under pressure either from distress or despair, or from irruptions of public violence.

China is obviously a key player in handling the crisis. We shall see what happens there: whether the signatories of Charter ’08 impeccably timed their demands for monitory democracy, or whether instead the Party authorities can handle the (poorly reported) growth of private and public anger, perhaps even by escaping the dollar trap and using current American weaknesses to accelerate the drift toward bipolarity in world politics.

We’ll also see whether the fledgling institutions of monitory democracy can survive this crisis. The French historian Emmanuel Todd, concentrating on the rise of Berlusconi-style governments, forecasts its death. That seems premature, if only because the prediction understates the novelty of our times. During the build-up to the last Great Depression, democracy arrived late on the scene; in consequence, it failed badly in countries as different as Chile, Poland and Japan. This time around things may turn out differently. Monitory democracy is more shockproof than old-fashioned representative democracy; and much now depends on shocks unknown, choices unmade and policies unformulated.

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 amid 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. Green jobs programs, social investment and citizen care schemes and other public solutions to privately suffered problems are important priorities. The short-sighted worship of GDP and “leveraged” mass consumerism will everywhere have to be restrained, especially in high-debt countries such as the United States and Britain.