The Fiscal Meltdown Reveals the Democratic Deficit

In response to this financial crisis, consumers must become citizens again, reclaiming their democratic right to fiscal transparency, political oversight and market regulation.
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I participated last Monday night in the BBC "Economist Debates" on the economic meltdown broadcast from the heart of the City, London's financial district. Nearly all of the CEOs, financial consultants and bankers on our over sized debate panel echoed the media coverage, treating the crisis as a technical problem, a puzzle economists had to solve. The market paradigm within which the crisis unfolded is taken for granted and solutions are sought within the paradigm.

But the problem is the paradigm of four decades of a Reagan/Thatcher privatization ideology that has insisted government can do no right and markets can do no wrong. We now have had forty years of old Republicans and New Democrats, Bill Clinton included, old Tories and new Labor, Tony Blair included, all conspiring to deregulate media, deregulate banks, deregulate the financial industry and get government out of the way of the market's invisible hand. In their foolish assault on 'big government' and 'welfare bureaucracy' and in their political campaigns against Washington, these representatives of the democratic process have in fact undermined democracy and made war on the very spirit of the commonweal.

Government is us: the political arrangements we forge in order to be able to do together the many public things we cannot do one by one; the deliberative processes we establish so that public policy will reflect public goods rather than private preferences. The Washington against which we rail is also us, the political home of those we choose to represent us, like Senator McCain, and yes, Senator Obama.

But a seductive market ideology has talked us out of our citizenship, talked us into believing that all that is demanded from us as citizens can be achieved by us as consumers. Hence, voting has become a form of shopping, elections a version of American Idol.

Yes, there is to be sure a technical issue in the crisis: it's called leveraging and it is a the very foundation of the banking system. Leveraging is what allows banks to put your deposits to work by reinvesting most of them and keeping only a small percent on hand for depositors wanting their money back. But for a system of leveraging to work there must be transparency, full disclosure and a reasonable limit on just how much leveraging is permitted. Normally, governments establish and enforce transparency and limits.

But not in the age of free market dogmatism, not under conditions of exuberant deregulation. At the heart of the market ideology is a demand that democratic oversight be withdrawn. The buying and selling of paper is to be left to the whims of private actors who often are as economically ignorant as those ordinary mortgage holders who get stiffed when the original variable rate mortgages get sold and then screwed again when the banks that sell this dubious paper go under and are bailed out by mortgage holders as taxpayers.

The media reports banks are being bailed out by government, but that is just another word for the taxpayers. We are consumers when it comes to buying bad credit, but citizens when it comes to paying for the costs. This is the new market form of socialism, where risk are socialized (we pay for them) but profits remain private (market pirates keep them).

What does this all mean for the crisis? It means that the way out lies not just through technical fixes or pumping public money into failing banks and insurance companies. It means reasserting our rights as citizens to regulate the market. It means insisting we will not support the new 'socialism of risk' unless we also share in the profits (that's another way to reduce taxes!)

In short, it means consumers must become citizens again, reclaiming their democratic right to fiscal transparency, political oversight and market regulation. It means the public sector must come back not just in the default mode when the private sector fails, but actively and constructively so that the public weal takes precedence over private interests in good times as well.

Such an arrangement has a name: democracy. The crisis will have been worth it if we finally learn this lesson.

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