Mike Smyth: is democracy the least worst system?

Mike Smyth calls for more professional management and decision-making as political leadership in economic policy has often proved incompetent or corrupt. A radical reform of the liberal democratic system is needed.

Something which has been bothering me for a very long time is the deep flaw in our liberal democratic system which I believe lies at the heart of the economic malaise engulfing the developed world at the present time.

Winston Churchill is believed to have expressed the view that “democracy is the worst form of government except all the others that have been tried.”  While he may have been right in so far as it goes, is it sufficient for us simply to undertake substantial reforms of our banking, finance and budgetary systems without at the same time reforming our liberal democratic institutions?

It is my contention that our current economic, financial and fiscal difficulties cannot be explained glibly, even during this open season on banks and bankers, by the behaviour of large financial institutions and their senior management. While I acknowledge entirely the megalomania that was rampant in Lehman Bros, Royal Bank of Scotland, AIG, Bear Stearns, Anglo Irish Bank etc. the behaviour of these banks was made possible by the ‘reformed’ banking regulation environment that was created on both sides of the Atlantic during the 1990s by the political classes.

In the US, Bill Clinton repealed important sections of the Glass Steagall Act in 1996 and while not the sole cause, their repeal probably accelerated the process which gave rise to Alan Greenspan’s phrase “irrational exuberance” and which effectively meant banking behaviour akin to the Wild West.  The arrival of financial derivatives such as collateralised debt obligations, and then the credit default swaps which accompanied them, should have received much greater regulatory oversight in both the US and the UK and Europe but it did not.

In the UK, the phenomenal growth of the financial services sector brought with it an implicit political bribe. In speech after speech in the late 1990s and early 2000s, the then-lionised ‘Iron Chancellor’ Gordon Brown (the man who also sold off a substantial part of the UK gold reserve at the very bottom of the bullion market) extolled the virtues of “light touch regulation”, which was code for “as long as the City of London keeps contributing tens of billions of pounds to the Exchequer, we will impose as light a regulatory burden as possible.”

With the benefit of hindsight it may not have been the wisest move in the wake of previous banking horrors to take away financial supervisory powers from the Bank of England and create the Financial Services Authority. Who could forget the BCCI and Barings horrors?

In any case, for most of the 1990s and early 2000s in financial markets we now know that the lunatics were in charge of the asylum and that the manifest lack of regulation led to something of a free-for-all. RBS outbid Barclays at the top of the market madness to buy ABN Amro for £70 billion, and in their due diligence they failed to uncover a colossal exposure to the collateralised debt obligation nightmare. Not only were there failures in financial regulation but the Monopolies and Mergers Commission, the Office of Fair Trading and other regulators were caught sleeping.

Warnings

As we now know, repeated warnings by Eurostat during the 1990s and into the early 2000s about the integrity and veracity of the public finances of Greece were ignored by the Council of Ministers and the European Commission. In fact, even if the Commission in Brussels had heeded Eurostat’s warnings they may not have had the intrusive powers then that they now have to intervene.

In any case, there was no political will in Brussels to interrupt the success story that was the euro in the early 2000s. As recently as 2007, there were proposals to create a European Monetary Fund which could have internalised the sovereign debt imbalances of Greece, Portugal and Ireland and prevented the present sovereign debt nightmare. These proposals were not acted upon because it was feared that they would necessitate a treaty revision and there was little appetite in Brussels for referenda after the nail-biter that was Ireland’s second referendum on the Lisbon Treaty.

There is a common causal thread running through all of the sovereign debt crises in Greece, Portugal, Ireland, Spain and Italy. The political leadership in all of these countries has been shown to be, at best incompetent and at worst corrupt. In the case of Greece the corruption stemmed from a governing party that had been in power for many years and which indulged in measures to conceal the true level of public indebtedness.

In Spain and Portugal, governments of left and right presided over unsustainable property booms financed by low interest rates in deregulated banking systems. In Ireland the then political leadership claims that it was not made aware of housing and property bubbles. Even the dogs in the street were aware of the over-dependence of the Irish Exchequer on the housing and property boom.

In all of these instances, what is glaringly obvious is that the political decision-making and political processes in these countries were singularly not fit for purpose. It is no surprise to note that the Republic of Ireland under the present coalition Government is making a decent fist of austerity. This is because neither of the coalition parties has any substantive political power.  Ireland, to all intents and purposes, is run by the troika of the European Central Bank, the European Commission and the International Monetary Fund.

It is no surprise that Mario Monti is making a decent job of steering Italy through this crisis because he is not elected. It is no surprise to note that Lucas Papademos, the last Prime Minister of Greece, who managed to steer through the second bail-out, was also not elected.

Qualifications

Citizens place their health in the hands of qualified doctors; they entrust their safety on the roads and in the air to highly qualified engineers; they place their trust and even their liberty in the hands of qualified lawyers. Every five years or so those same citizens place theirs and their children’s future in the hands of elected politicians.

In no other walk of life are such important issues and decisions put in the hands of those who are so manifestly ill-equipped and unqualified. It is not sufficient just to shrug your shoulders and say that democracy is the least worst system.  Our liberal democratic system itself is in desperate need of radical reform.

In my view, the United States has a slightly better governance system. It is far from perfect and has given us such notables as Donald Rumsfeld and Dick Cheney. But Timothy Geithner (pictured), who was appointed by President Obama, has steered the US economy very well through a most difficult period. This is not so surprising. He has had a wealth of financial, commercial and business decision-making experience, being responsible for organisations employing tens of thousands of people. But he is not elected.

Why do we persevere with a party political system in the UK that hands over  important public policy portfolios such as health and education to elected politicians who so are frequently simply not up to the job? Surely we must try to reform our system so that there is more professional management and decision-making?