Wednesday, March 31, 2010

Democracy and financial reform

Lots of interesting stuff going on in the States regarding financial reform: usual blogging guides to what's happening are Krugman and Simon Johnson. The story would appear simple: the financial sector got out of control, made lots of money and then lost most of it, but governments had to cover the losses with public money, thus bailing the banks out. To the extent that expectations of a government bailout - the 'too big to fail' problem - fuelled excessive risk-taking, there needs to be an institutional response to ensure that this doesn't happen again (apart from anything else because there's no money left for a second round of bailout on that scale). What issues does this institutional response raise (just the politics here: for details on the technical side look elsewhere, such as Deus Ex Macchiato and the other blogs mentioned above)?

1. Too big to fail, too complex to understand. Voters don't understand CDSs, CDOs, leverage and the Basle 2 Rules. And neither do I. So, regulating the financial sector is an issue displaying high levels of information asymmetry, making it easy to pull the wool over voters' eyes (see Krugman on this here).  If the issues are too complex for the electorate to figure out what's going on, we could end up with a regulatory system which will not solve any of the problems.

2. Politicians need money. We're leaving in a new age of plutocracy, where the rich have greater influence over the political process than at any time since the war. The reason for this is that mass political parties, with grassroots organizations and real contact with the electorate, are a thing of the past just about everywhere in the west. So instead, we have politicians competing from TV studios for votes, reliant on large donations to make up for the lack of volunteers willing to campaign for free. In these circumstances, it is far easier for wealthy interests opposed to reform to manipulate the political process to the detriment of the majority. If the majority is not organized, they can't do much to stop this.

3. We're all dependent on Obama. Until the US decides what to do with its financial system, nobody else will reform theirs. A strong EU would be a help in these circumstances, but its pathetic showing over Greece and internal trade imbalances doesn't bode well.

Sorry to be so depressing. Anyway, if Obama learns from the healthcare reform, he will go out and campaign. After all, the details may be complicated, but surely the electorate can figure out that if the bankers don't like it, it's probably along the right lines.