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

[Sciguy]

Very interesting post, sir. Very interesting. I'll have to chew on this for a while!

[pundit27]

But this credit crunch needs to play out to a full-blown depression before re-democratization can truly begin. Or am I too pessimistic?

[Overd0g]

You are correct. Those that sinned must suffer, and that includes a large percentage of the people.

[Chubbster]

"Although it was bad loans and greedy bankers and stupid hedge fund managers and ignorant investors who made the mess."
One has to realize that Bill Clinton got the ball rolling with legislation that banks make risky loans to unqualified buyers. You have to start there. All the rest followed. Not to understate the disaster named Bush.

[doyle005]

Let's not forget Reagan and his call for deregulation of almost everything. People try to pin the beginning of this on Clinton, but you need to look further back to see when Wall Street took over.

[Car84]

Reagan was for deregulation. Clinton was for social meddling that ultimately polluted the mortgage market. If that's what passes for "regulation," I'm not for it.

[Bruupo]

That simply isn't true. The percentage of the total bad mortgages that came from that program is not even a majority, just as Freddie and Fanny loans themselves are not even the majority of those mortgages.

Our economic system could have dealt with the bad mortgages just fine if they hadn't been rolled into the dishonestly valued derivatives. And we would never have had this bad of a housing crisis if the wholly private part of the lenders hadn't created so many predatory loans with terms it takes an advanced mathematician to figure out.

The REAL thing that got this ball rolling was allowing speculation in the energy markets. It inflated the cost of energy to everyone to NO ONE's real benefit, look at how the price of gas dropped like a rock when the crisis finally presented itself.

[Bruupo]

By allowing the speculation, the cost of gas, electricity, fuel oil- it all went up across the board, for EVERYONE, acting like a tax which benefited only those who had the liquid cash to keep cornering segments of those markets. It dried up first, the consumer power of the masses that the economy is driven by, and then it dried up the ability of a whole lot of people to even pay bills, including mortgages- even many that weren't predatory.

There was a damn good reason we had forbid speculation in those markets, and the only justification for Gramm removing that law was that it would be another place to 'make money' and that must be good, even though wages and buying power were already stagnant. It wasn't good. It started all of this. And the reason that oil and gas prices have dropped so much is that the cash for that speculation has dried up.

[Overd0g]

Sure, but Bush was a big cheerleader for home ownership for all too. But why do the deadbeat borrowers get no blame? Sure the loans shouldn't have been offered, but the root of the problem are those that borrowed money knowing they probably wouldn't be able to pay it back.

[GlenRast]

Is there a reason for trust? For decades we've been hearing that GOP deregulation mantra. Trust businesses not to put their profits before consumer safety and environmental responsibility. Trust Wall Street and mortgage brokers not to line their pockets at the public's expense. When has business and industry EVER done anything to earn public trust. Time and time again it's been shown that that trust has been taken advantage of.

The old adage of fool me once fool me twice is now on fool me for the 50th time. The only way to get that trust will be tight regulation coupled with aggressive enforcement and severe penalties.

[Ono4Hoopono]

Benjamin, this is such an important essay. You nailed it. I've been skittish for years about investing simply because "Something is rotten in Denmark," and we all sense it.

When our values change, our fortune will change. This economic collapse may be the thing that saves us. I know for my part, I'm already appreciating the values shift that has accompanied our new frugality.

In the end, greed is not so good. In fact, greed is just greed.

True Democracy=Justice=Happy People=Higher Productivity=More $$$ for All=A Healthy Market Generating even more $$$ for those with the bright ideas so you can still make your million. Justice works for everyone, and it makes it sustainable.

[Buddhabelli]

Well said Ben.
We have an opportunity to reconstruct our society based on
more traditional American ideals of fair play and responsibility.
We watched as American business practices we're being corrupted in the pursuit
of enormous greed. Where wealth became virtue and the common good became a joke.
The last twenty years have shown us that Reaganism has not worked to make us a stronger nation.
We hobbled our gov't agency's and received in return suspect food, water and air pollution.
Let us build a better country that puts it's people before business.

[Chubbster]

"reconstruct our society" That's what Lenin said.

[Connolly1916]

So? This is a hugely different context. I suggest you go read up on Russian and American revolutionary history before you go spouting McCarthyite nonsense.

[Overd0g]

Funny. It's the people, and their greed for houses they couldn't afford, that sit at the heart of the problem. Don't imagine that "the people" aren't any less corrupt and despicable than the business men.

[RAStewart]

A very perceptive article. I voted early on Saturday, and as it happened, that afternoon the guest on a local politcal program was a representative of the county election board. He fielded a call from a listener who wanted to be certain that his votes were going to be recorded as he cast them. The official seemed honest and very reasonable, and the host--a seasoned political journalist who now does liberal commentary--obviously respected him, but nothing they could say could reassure the caller. It occurred to me while listening to this conversation that, in fact, there can *never* be a totally foolproof, tamper-proof, transparent electoral system. Don't get me wrong--we can have much better systems than most of us have now, systems that approach that ideal. But none that absolutely get there. Democracy depends on a certain level of trust, and one of the most poisonous legacies of the radicalized right-wing Republican ascendancy is how deeply and extensively they have damaged that trust. And as you have pointed out, that basic trust, or its absence, weaves right through the entire fabric of society.

[doyle005]

What kind of nonsense is this? Perhaps if everyone got together and had themselves a Coke we would live in perfect harmony!!! The days of living in a village, knowing everyone in town is over, a majority of Americans live in urban centers.

Social capital is used by academics as the cure all to everything. As an academic myself, this has to end, this nonsense that if we all trust one another everything will work out.. Consider the fact that it takes only a handful of greedy market mangers to ruin the "Social Crapital ' of tens's of millions!!!

Nice reference to It's a Wonderful Life. If I remember that story, he pushed for everyone to have the American Dream; a House with a yard and a white picket fence. Funny how that very idea is what seems to have driven the mortgage collapse as too many were given too much in order to pursue this American Dream.

I live in an apartment in an urban area, I could have gone into debt with a mortgage I knew I could not afford in order to chase this dream, but instead I lived within my means. And now it seems that I shall be paying for those that leapt at the chance to have this American Dream even though they could not afford it. Somehow this does not make me want to trust anyone as I'm being hurt by those you state I need to trust.

[GlenRast]

Being another apartment dweller who ignored all those wonderful opportunities for home ownership I was bombarded with I agree whole heartedly. I have little or no sympathy for the lenders who pushed mortgages or the people who were foolish enough to take them.

[Overd0g]

Yes. Being a responsible person, you are now the cash cow for the do-gooders. You are at the typical point of entry into Conservatism. Unfortunately for you, there is no significant party that represents conservatives in America.

[NeldaDee]

The lenders should take most of the blame - when trying to sell something to someone, the salesman can dupe the buyer in so many ways. My husband and I purchased our second home in March 2007 (yick) and heard every sales pitch you could think of from three different mortgage brokers. Some wanted us to lie about our income, others told us we could afford more, no problem. Luckily we weren't green at the whole game, so we knew not to get ourselves in over our heads. Not everyone has an educational background in home buying. The liars are to blame.

[Ciganka]

This is absolutely true. I work in a humanitarian organization that focuses on access to higher education for a population that normally cannot access these opportunities. For years now bankers and heads of large companies have practically sneered in my face when I tried to fund raise. The level of self interest and complete lack of vision for the future has been astonishing. Everything was about short-term profit and no one could see any sense in any kind of investment in a better future. I was told that my ideas
were completely foolish and did not fit into the paradigm.

[VRON]

Global poverty is such a huge issue and is inclining. It would be great if both candidates really focused on this issue along with the other huge issues.
According to The Borgen Project:
$30 billion: Annual shortfall to end world hunger.
$540 billion: Annual U.S. Defense Budget.