A Credit Deficit or a Democratic Deficit?

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.

Comments

[Nusraf]

Hear, Hear! Have we forgotten that the simple exchange of legal tender is predicated on a social contract. That's why every dollar bill has written on it, "In God we trust."

[JXJASON]

Senator Obama can be trusted to do the things necessary to solve our problems.

What is unknown to me is if the dishonest people in the US can understand that ethics are very very important and that they must become honest people.

It doesn't cost anything to be honest. Honesty and responsibility go hand in hand with ethics.

My mother was born in 1918. She died when she was 60 because she trusted a doctor who was negligent in performing his duties. Mom said things like "Do unto others as you would like them to do unto you. Honesty is the best policy. If you cannot say something nice about someone then do not say anything at all."

We need a leader who understands what the author has said. Barack Obama is that leader. Barack has run a smart campaign, has told us what he intends to do, is a positive thinker and has surrounded himself with people we can trust.

My girlfriend and I voted early in PA for OBAMA/BIDEN 08

You should do the same.

OBAMA/BIDEN 08

[Car84]

So, capitalism relies on destructive competition, does not engender trust, and therefore can't produce democratic social capital. Blah, blah, then some Marxist lingo, "cash nexus," democracy is an economic system(?). Yum yum that system that has failed MISERABLY every time it has been tried, rather than one that generally works well?

Space only to examine one venue of social capital " the family.

This may seem like a cruel punch in the face, but how many parents have failed their spouse or their children? If a family unit is without a responsible adult who can demonstrate some level of wisdom and restraint, then there can be no social capital at that most basic level. People choose what they want to afford (relationships, things, hobbies, huge mortgage, children, more children, etc.), often pretending, often with disastrous results. Wants become needs. Needs become what you demand and expect, as a matter of right, from the government - you know, the thing that Reagan didn't trust, the one body that has a lower popularity rating than George Bush, the institution that avoids transparency and accountability, yet demands it of everyone else.

This solution offered in the article was, quite predictably, developed briefly with exhortations and platitudes, which is all you can use when you're striving for Utopia.

Capitalism, with its warts, is the best system there is. It all starts with the individual. I say, "Suck it up and be responsible so I can trust in you and depend on you."

[susanava]

Actually, it isn't. Capitalism has eroded the American family. How many extended families do you know of in this "individual" centered culture? How many households with 2-3 generations under one roof? Some more questions: why do American families find it so difficult to spend time with each other? Why are there so many 2 income families? Why are American children spoiled consumerist who spend more time on myspace than reading books?
People choose what they want to afford? If most people lived within their means they'd be homeless. Wants must become needs, which is why we are flooded with advertising on all fronts at all times. Our economy is driven by irresponsible spending, misuse of credit, and overconsumption.
Learn a little before you go shooting your mouth off.

[ElBruce]

IT'S THE DEFICIT, STUPID.

The deficit is the 8-ball that any incoming President finds himself behind. Stimulus checks paid for on the deficit = tank in the stock market as capital flees to countries that are more fiscally prudent. We won't calm the market until we show some form of fiscal restraint and economic intelligence. Incremental change. A sensible rebuilding of the regulatory structure. Well-explained return on investment for government spending.

These principles are not at all in opposition to the majority of Obama's proposals, but he's going to have to articulate how they work together. I'd also feel a lot more comfortable if he drops his call for a second round of stimulus checks. Don't get me wrong, I'll take it if he issues it, but if I could, I'd vote against it because it's damn stupid.

[jsarets]

We have to pay down the debt, but we can't do it by taxing or borrowing Federal Reserve dollars, which themselves represent interest-bearing debt. We could refinance the national debt to the Fed by completely replacing it with Fed dollars borrowed at today's low low interest rates, but that's just a stopgap.

No, the only way to pay down the debt is to pay it in a currency that isn't backed by more debt. Thankfully, our Constitution permits Congress to coin and regulate money on behalf of the people as per Article I Section 8. If interest-free money is deposited into the money supply backed only by the fact that it is replacing an equal quantity of outstanding Fed debt-dollars that are retired with the debt they represent, then we can be free of debt without any inflation.

Then we can begin to regulate the money supply to serve not only the public interest in the facilitation of commerce and trade, but also in the full employment of the willing workforce. If the supply of money and the allocation of credit is proportional to the number of people employed, then enterprise would have the means and the incentive to provide jobs for everyone. Let us make that the central pillar of our entitlement policy.

[jackwaddington]

"It's the economy that is stupid" An economy based on a symbol, money, creating what we erroneously believe to be value, is where the problem is. A subject as simple as 'what comes in be balanced with what goes out' is now a 5 year university degree into all the machinations of so called economics. Economics, in this sense, is stupid. Sadly, every one is scarred and what we are all scarred of is that capitalism has failed and there is NOTHING to replace it. All attempts so far are mere band aids and the (forlorn) hope that it will all reverse and we'll be back to where we were -- Myth. The only hope is that we humans will somehow learn to co-operate without this insane symbol: money. The notion was first suggested more than 400 years ago.

[frisbeeredcat]

We as a nation need to reverse the mindset of the "individual can do it all". It has been proven time and again that people working together are stronger. The "I got mine, screw everyone else" attitude is what got us to this crisis. We glorify the rich (due to TV, movies), and to get to be/stay rich, it doesn't matter how you do it. Crime, cheating, lying have been rewarded for so long, the rich never seem to pay a penalty as they buy off politicians, judges, the press. So to the rest of us, "the rich/powerful cheat and it works, so why not myself?"

Working persons wages and benefits have shrunk since the mid-70's. McCain calls fair wages and benefits for the workers Socialism, when 2/3's of the corporations in the U.S. paid no taxes from 1998-2005. Many rich hide their assets in off-shore bank accounts to avoid taxes. They stole billions with the S&L crisis, and we bailed them out, now they are back for more. There is not enough money in the world to back the CDO's, CMO's, CLO's, credit swaps, and SIVs to hide the bad debt. The game is up and the government can't pay the way to solvency.

Cheaters and manipulators need to be held accountable to gain the public trust back. We need to make this country better for all, not just the top 1 or 2%. "Liberty and justice for all."

[SoutheastReview]

I play backgammon with the math and computer geeks who produce the wealth-enhancing formulas that drive the buy/sell programs that 'guaranteed' that they would come out atop the heap regardless. They're all now singing REM's tune, "The End of the World(As We Know It)."

Those posters who want to blame individual IRresponsibility completely miss the point of this excellent essay, that individual responsibility becomes impossible as mechanisms to empower collective responsibility break down. The entire Ayn Rand scheme of things rests of ludicrous premises that our media, cultural, and educational institutions nonetheless support, in particular that individuals create themselves instead of arising out of a biological(YUM!)and then a social nexus.

Where does all of this leave us? The answer is simple to calculate, if politically difficult to actualize: social democracy--either we create the political context for sharing and mutual capacitation or our little planetary experiment in Homo Sapiens Sapiens is likely to end ugly.

[jtarre]

This essay, however beautiful, rests on the assumption that the end of the market is competition. This is false.

Free markets exist to allow people to bid on goods (by buying in the market) to improve their condition in life. Competition is the natural result of producers jockeying to satisfy their consumers.

The desire to change human nature into something more perfect is admirable. When that day comes, maybe we will have a social democracy. True economics, however, only seeks to explain human behavior as it is, and right now, the best available option to improve a person's station in life is the free market.

I apologize for this direct response to your post. I do not direct my comment at you in particular, but the large swath of people that think that a free market feeds parasitically off a democratic society. There is a reason people call a free market free.

[SoutheastReview]

You needn't apologize. Good Lord! You speak moderately, and you are wrong, so what could be the problem? I have written extensively about unexamined assumptions, which your reply contains 'in spades,' as the saying goes.

Only one of these needs a note here, perhaps, as a basis for continued discussion if you like. "Human nature" is a very pliable concept. What it contains, whether it even is useful as an organizing principle, these and other issues can provide the fodder for many lifetimes of enjoyable conversation--from Hume to Bloom, as it were.

Clearly, you not only think you know what this slippery idea represents, but you hold it in particularly high esteem. However, if it contains any sense whatsoever, it must begin with the admission that we come from a social nexus. The individual is impossible without social relations. Social relations have evolved much more quickly and extensively than have our animal packages, altering our consciousness apace.

Thus, the idea that, somehow or other, for the past however many tens of thousands of years we can agree human beings have existed, 'human nature' has remained the same and has required a "free market"(don't get me started about the presumptuousness of this phrase; just read "Wealth of Nations" to ascertain that most 'free markets' do not deserve the label)is silly and disingenuous at best.

[swedg]

"Reaganomics" is exemplified for me in the "California Merge," a driving practice which entered my awareness sometime in the Nineties in Walnut Creek, California. All at once drivers, merging into a single lane, began passing the other drivers and forcing their way in, ahead of other traffic, at the point of merge. The whole line of other drivers is forced to stop repeatedly, and the progress of all is slowed radically beyond what used to be when drivers were accustomed to cooperating and taking their turn. This practice is now widespread, if not standard, and results in a few aggressive drivers getting ahead temporarily and clogging the system for everyone else. The surprise is that drivers still yield to these aggressors"a few cases of road rage or simple refusal would likely put the brakes on this kind of behavior.

[jtarre]

Actually, "the California Merge" keeps traffic moving at the optimal speed, as Tom Vanderbilt demonstrates in his book "Traffic". Here is an excerpt of the first chapter from the New York Times Sunday Magazine:

http://www.nytimes.com/2008/08/10/books/chapters/traffic-chap.html?pagewanted=1&ref=review

On page 3 Vanderbilt says, "We talk about 'beating the traffic' or 'getting stuck in traffic,' but we never talk " in polite company, at least " about 'beating people' or 'getting stuck in people.'"

I could replace the word traffic with the word market and his sentence would still hold. The market is, at its core, a collection of billions of people interacting at every moment. Each actor makes decisions about the future that if made successfully, will improve his or her's quality of life.

[FearlessFreep]

On the other hand, drivers who are quick to change lanes to get ahead clearly slow down traffic.

[SoutheastReview]

While jtarre's point about the mechanical operation of traffic is mathematically demonstrable--"give a gap, take a gap," is how I put it, but the point is easy to prove as a calculus or geometry theorem--his analogy with the social and political expression of marketplaces is at best highly dubious. In practice, evidence to support such a comparison, at least at any 'macro' level of analysis, would be impossible to marshall effectively for any but the Randian, Libertarian true believers of the 'free-markets-are-next-to-God' choir.

[julianne]

Thank you. We're not consumers, we're sovereign citizens of the United States. You may be labeled a consumer in the context of a conversation about the relationship between buyer and seller but, like even the men and women in the military, they are citizen soldiers, always citizens first. Also, there is a thing called ROI (return on investment) which precludes the corporate assumption of Americans as disposable labor. You invest your years into a business and you should receive your end as you contribute and at the end of your contribution. All larger businesses should put their workers on a par with owners and investors. That's real democracy, not corpoatism.

[Overd0g]

You do. You receive 4 years of pay (or whatever you agreed to).

[helen]

Really? That's a laugh. In an at-work state you receive whatever the company decides you receive. Period.

[joekutz]

The problem with social capital is access. The banks and wall street who rely upon this capital have to have their access severely limited. It can no longer be business as usual no matter what the level of trust is. This dirty little secret is out of the closet now so that those who game the system can no longer be allowed near the gaming tables. Not now not ever. We are rapidly moving into an age of transparency which bad news for the unscrupulous and good news for social capital. Finally our money can do what it was intended for which is the administration of the will of the people.

[Rakski]

Social Cohesion, The Social Contract... that is with a focus on the top 2%, whom're getting so out-of-touch with how the community allows them the opportunity to excel... And the rise of an aristocracy that removes their children (& votes) from supporting public schools or limits the idea of giving loans to the poor & middle class for attending college & universities, because they already have their piles of cash? Whom supported the infrastructure that allowed success above the mean... When the wages of the ultra-rich get too far out of sinc with those of the entry level, isn't it social unrest that follows? When a college teacher has to cobble together 2 or 3 part-time jobs, in order to have full-time wage... Or the Walmarts of the world race to the bottom, by limiting work hours below the 17 hrs. that would require them to offer benefits... I'd suggest a comprehensive look at things like health care, where to counter the race to lack of benefits, the govt. mandate proportional benefits based on hours worked, that is 10 hrs. of work, meaning 25% of base benefit package... How is it that my health care insurance went up 17% in cost, but there's still millions of people uninsured, whom're working? We need as a community to focus on the reasons that regulations happen that is that Wall Street's a symtom of a broader problem that need addressing compreshensively - a commitment to social cohesion issues...

[citizenfirst]

Very true - The change in language that we have experienced over the years - going from American "citizen" to American "consumer" - should have been a red flag to us all. The loss of our democracy was slowly eroding away right before our very eyes, as we blindly accepted our new status as a "consumer". For those of you who do not recognize what was lost, here are the definitions of each word courtesy of Merriam-Webster:
Citizen: a person owing allegiance to and entitled to the protection of a sovereign state. Citizen is preferred for one owing allegiance to a state in which sovereign power is retained by the people and sharing in the political rights of those people.
Consumer: one that consumes: as a): one that utilizes economic goods b): an organism requiring complex organic compounds for food which it obtains by preying on other organisms or by eating particles of organic matter. Bon Appetit, Republicans, you have devoured us from the inside-out!

[MatoSka]

Trust. Why is it that Democrats spent so much time and energy attacking Ralph Nader when he argued for new regulation, new representation and exposed Congress's domination by corporate interests? The fact is that it is not only the economy that is broken, but our very political institutions that have been warped and have acted in ways that drove the economy off the cliff.

Who can we trust? Nader for one.

[Chetdude]

There can be NO democracy in USAmerica while corporations are allowed to be "persons"...

"To assess the "personality" of the corporate "person," a checklist is employed, using diagnostic criteria of the World Health Organization and the standard diagnostic tool of psychiatrists and psychologists. The operational principles of the corporation give it a highly anti-social "personality": it is self-interested, inherently amoral, callous and deceitful; it breaches social and legal standards to get its way; it does not suffer from guilt, yet it can mimic the human qualities of empathy, caring and altruism. Four case studies, drawn from a universe of corporate activity, clearly demonstrate harm to workers, human health, animals and the biosphere. Concluding this point-by-point analysis, a disturbing diagnosis is delivered: the institutional embodiment of laissez-faire capitalism fully meets the diagnostic criteria of a "psychopath."

http://www.thecorporation.com/index.cfm?page_id=312

[RallyGrrrl]

Well put, sir.