A Credit Deficit or a Democratic Deficit?

The remedy today lies not simply in deleveraging but in re-democratizing -- recreate social capital and trust will follow. Then and only then will markets calm.
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Economic remedies for the fiscal crisis continue to frustrate their political backers. On that black Monday when the U.S. Congress refused to pass the 700 billion dollar bailout, the market plummeted 477 points. A few days later, after Congress reversed itself and passed the 700 billion dollar bailout, the market dropped nearly 800 points. Since then, it has gyrated wildly, drawing markets in England, Europe and Asia into the maelstrom. What's going on? A crisis in economic capital? Or in fiscal confidence?

Not exactly. As the ongoing global hysteria makes evident, trust is at stake, but not purely fiscal or economic trust. Deleveraging banks, insuring deposit accounts, penalizing CEOs and socializing risk can't do the trick because trust is ultimately political - more specifically, democratic.

Trust is a crucial form of social capital, a recognition of the common ground on which we stand as citizens. It is the glue that holds rival producers and consumers together and lets them do the business that would otherwise do them in. Whereas the whole point of the market is competition - selfishness and narcissism as self-conscious instruments of market calculation.

The dirty little secret is, however, that complacent market capitalism works only when it can feed parasitically off of active democratic social capital. When too many mortgages fail and too many banks come under pressure and too much bad paper gets sold and too many hedge funds don't realize what they've bought, and credit freezes up and stocks tumble, then the trust deficit appears. And no amount of fiscal tinkering, government pushing, banking reform, resolute de-leveraging or Presidential and Ministerial rhetoric can make up for this democratic deficit.

Because the secret of the invisible hand is not economic capital but social capital. Because Adam Smith knew moral sentiments no less than capital markets undergirded the wealth of nations. The liquidity crisis is a political crisis; the credit deficit is a democratic deficit. For trust is the social capital that permits private capital to be exchanged, contracts to be enforced, promises to be kept, expectations to be realized. Democracy is the common sea in which all those competing market boats and bickering fiscal sailors are kept afloat.

So although it was bad loans and greedy bankers and stupid hedge fund managers and ignorant investors who made the mess, it has been four decades of de-democratization that has done the real damage. A hemorrhaging of social capital that nobody noticed because government was supposed to be the problem and markets the solution. Runaway Thatcherism and exuberant Reaganism railed against government until citizens were literally talked out of their democracy.

Government was allegedly the villain but government was just democracy's tool, not always very efficient and often insufficiently transparent and accountable, but democracy's tool nonetheless. And democracy's real product was trust. As the war on government became a war on democracy it drew down the well of social capital and eroded trust, causing citizens to lose faith in each other and their common power to govern themselves.

Why now should consumers trust banks? Or bankers trust one another? Or investors trust the stock market? Or anyone at all trust the Prime Minister or the U.S. President or his Treasury Secretary or for that matter the M.P.s and Congressmen who don't trust their own leadership?

Trust is at once both precious and precarious, foundational but fragile. No leveraging without trust. No housing market without faith. No stock market without fidelity. No international trade without confidence. All products of social capital, all victims of the "cash nexus" that Marx associated with capitalism's essence. For capitalism is rooted in selfishness and cold calculating self-interest and necessarily dedicated to the welfare of shareholders rather than common goods and it thus is incapable of generating the trust on which it depends.

The way out of the crisis then demands more than technical fixes or propping up banks or pumping billions into the frozen credit market. It means consumers must also be citizens if contracts and promises and mortgages are to be honored.

Remember Jimmy Stewart in the Christmas classic "It's a Wonderful Life"? An accidental loss of economic capital drove his neighborhood bank to the brink of ruin and Stewart to the brink of suicide. No stemming the run on his bank and the economic chaos it produced. Until his friends and neighbors and good willed fellow citizens who had benefited by the bank's neighborly policies and felt affection for Stewart assembled their own neighborly assets and saved Stewart and his bank. Social capital rescued Bedford Falls from the consequences of economic capital run amok.

The lesson? The remedy today lies not simply in deleveraging but in re-democratizing. Recreate social capital and trust will follow. Then, and only then, markets will calm and lenders lend again, investors invest again, consumers buy homes again, and - with the private economy once more subordinated to the public good - prosperity again become possible, disciplined by civic faith and democratic justice.

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