Stephen Foley: We still face the failure of democracy

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The Independent Online

US Outlook: It has been a week of anniversaries, a week of recollections and reflections, of learning lessons from the collapse of Lehman Brothers and the broader credit crisis that crescendoed that week last September. There have been lists of the failures that led us to disaster, the failures of banking, economics and regulatory oversight, all of which are being tackled – imperfectly, but tackled.

I'm not sure, though, that we have done much to address one of the biggest failures of all, the failure of democracy.

The public anger vented at bankers, and the Schadenfreude enjoyed this week from seeing again all those photos of Lehman employees with their boxes, is so acute not just because Wall Street's activities ruined our livelihoods and wrecked our governments' finances. It is because these were activities we had no idea Wall Street was up to.

None of this activity was secret. But it was ignored. The multi-trillion dollar credit markets churn away, day after day, and there is barely a soul outside of the industry who knows anything about what they are used for. There was precisely zero political debate about those uses, scandalously little media coverage of their extraordinary growth, even on the businesses pages.

Who knew that their mortgage might have been sold to hundreds of other investors? Who knew that their employer might have been paying wages not out of a bank account, but out of short-term debt raised in the credit markets? Who really knew that we had grown a whole shadow banking system that was unprotected from runs, the way that the old-fashioned banking system has been protected since the Great Depression?

The liberal pioneers of democracy always argued that extending suffrage should go hand in hand with the extension of public education. In the modern era we call this transparency, and we insist on it from governments and corporations and all those with power, so that they can be held to account.

Yet somewhere there is a democratic deficit, because all these facts don't add up to understanding. In my experience, articulate and educated people rage against bailing out the banks, without really being able to make the connections between Wall Street and the rest of us. For those of us in business journalism who have been writing about the crisis for more than two years now, it has been a marathon run at sprint speed, having to switch our attentions from the easy-to-track equity markets to the much more complex credit markets. We have had to hastily learn about parts of finance that we'd either dismissed as a backwater or had never even heard of in the first place. It has been hard. That's probably why we didn't do it in the first place.

Even now, I find hardly anyone who realises, in the post-Lehman chaos and the run on the money markets, that we were just a couple of days from companies not being able to pay their workers, with terrifying implications. The politicians and regulators at the heart of it, rightly scared of panic, censored themselves. Clearly, the media didn't find the right words at the time.

Bankers' bonuses we understand. But modern banking itself? Not so much. The democratic deficit remains.

Governments will do quite well, I think, bringing in the reforms necessary to prevent a repeat of this crisis. But as for spotting the next occasion when finance is changing the way the world works, and in potentially dangerous ways? That doesn't seem likely without some sort of major public education effort.

That means the schools for starters. This newspaper has periodically campaigned for compulsory personal finance lessons, so that students are equipped to make good choices on saving and borrowing, and an important part of those lessons could be teaching where financial products come from. You would learn about the motives of, and pressures on, the people trying to sell you them, and get to fill in more of the big picture of global finance.

It also requires new efforts by the media to properly reflect finance's importance, something that ought not be too hard given that the capital markets now hold the fate of debt-burdened governments in their hands. It requires politicians to talk about more than just bonuses, and it puts a responsibility on all of us individually to seek information and educate ourselves.

The credit crisis was a failure of oversight, all right. Ours.

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