Nicholas Dorn argues that the failures that led to the financial crisis were symptoms of a deeply entrenched historical democratic deficit. The whirlwind of regulatory activism post-crisis at international, European and national levels has yet to touch the core problem, which is that there never has been public regulation of financial markets in the UK. If the historically-constructed separation of regulation from democratic deliberation and design can be breached, then one result would be less global convergence in regulation, less herding in markets and less international contagion and systemic crisis.
Following the financial crisis, there is acknowledgement within political, regulatory, and legal scholarship that it has been a little behind the curve. Henceforth it must be more innovatory and cross-disciplinary. Julia Black has called for new ways of “seeing, knowing, and regulating financial markets” that have the general effect of “moving the cognitive framework from the economic to the social” and hence revitalising regulation. I would add that we also need a historical and political dimension to the analysis. This is because the crisis is not simply a symptom of market failure, nor an indication of regulatory failure and of need for more regulation or more invasive or smarter regulation, but also a symptom of something deeper and more structural: a failure of democracy.
Let’s go back in time to ‘the mother of democracies’. As I show in my new book, despite the universal franchise from 1918 (1928 for women under thirty), ‘club’ self-regulation in the City of London was hardly touched by democracy. In the first half of the twentieth century, governance of the City remained inwardly-focused, cartelist and circumscribed in terms of class and culture. These historical developments had a consistently democracy-excluding effect, which was deepened by subsequent international networking and convergence of thinking amongst regulators. These British characteristics, together with US regulators’ long-running commitment not to allow ‘significant’ (large) financial firms to fail, provided the breeding ground for systemic crisis and continue to do so.
The orthodox position on financial regulation – which dominated the literature as well as policy thinking before the crisis – concedes that, whilst claiming that self regulation was swept away from the 1980s onwards. The opening up of the City by ‘Big Bang’ and the formation of an ‘independent’ regulator, the Financial Services Authority, terminated club self regulation: so says the conventional history. But that’s not so, say Michael Moran, Karel Williams and their colleagues who have explored the ideational and structural conditions that nurtured the pre-crash ‘great complacency’. They suggest that regulatory arrangements in the UK constituted a Potemkin village. That is perhaps a bit strong, since Potemkin villages are deliberately constructed to mislead, whilst the policy evolutions that led to the FSA may have been more confused than that – as much a series of sins of omission as a coherent sin of commission. George Gilligan’s deployment of the notion of ‘relative autonomy’ to describe UK financial market regulation drives in a similar direction, without implying bad faith. Either way, we have ended up with what I describe in my book as ‘private regulation behind a public façade’. Post crisis, there has been a whirlwind of regulatory activism at international, European and national levels, however this ‘tightening up’ has yet to touch the core problem: there never has been public regulation of financial markets in the UK. Not even today. Actually, the technocratic nature of regulation seems more firmly seated than ever following the crisis. Experts argue amongst themselves in a language that is as assertive as it is impenetrable to citizens.
This is both a normative problem and a functional one. Normatively, it must be unacceptable that such a core aspect of governance should be convened outside the arena of common politics. We need to re-visit the political separation between democratic politics and markets – and the parallel disciplinary separation between economics and politics. We need to challenge the political structure within which basic assumptions are shaped, knowledge is constructed and the broad lines of policy are negotiated. Looking at the contexts within and levels at which financial market regulation occurs – the restricted, technocratic circles involved and the upward, elitist drift of networking – one notices the lack of wider political debate in the run-up to the crisis. Did we see widespread and vigorous contestations, through which not only politicians but also political parties and citizens might get engaged? Not really, nor even that much after the crisis hit. Even in the ‘periphery’ of the Eurozone, where the lives of many have been deeply touched by down-turns in investment and by the austerity measures that are the flip side of bank bailouts, responses have been muted. There has been public anger, yet this has taken the form of widespread cynicism over elites alongside displacement of anger unto foreigners and marginal groups – rather than attempts to move banking and other financial services into the centre of political debate and democratic decision-making.
Centrist political parties of both left and right hold much responsibility here, for their failure to take up fundamental questions about banking and other aspects of financial markets and to stimulate debate and deliberation. Shamefully, it has been left to fringe parties to engage with these issues, starting from the political orientations of their constituencies, then from there articulating visions of the broad purposes that should be served by financial markets. For example, unreconstructed free marketers, such as neoliberal Republicans and Tea Party people in the US, disfavour state ‘interference’, whether that would restrict, shape or support capital; they favour leaving the industry to its own devices. By contrast, and with some relevance in parts of Europe, political constituencies that are left wing articulate the issues in terms of economic justice, close direction of the sector and possibly public ownership of some categories of financial entities or infrastructures. Alternatively, for green parties the purposes of the financial industry, as with other industries, include transformations aiming to safeguard the planet and its ecosystems. That could mean special attention to modes of financing (and hence governance) of commodity producers and traders, and control of financial instruments referencing foodstuffs, for example. And so on…
The general approach indicated by such vignettes is that party politics can and should start not with bankers’ or regulators’ agendas, but rather with its own, diverse convictions, then seeking to shape finance accordingly: chacun à son gout. What good might such politicisation (and possible polarisation) of debate on financial markets do? The key claim is that, if the historically-constructed separation of regulation from democratic deliberation and design can be breached, then one result would be less global convergence in regulation, less herding in markets and less international contagion and systemic crisis. The vagrancies of democracy would introduce greater diversity into international regulatory regimes, which would address deep-seated issues of ‘too connected’ and ‘too similar’ financial markets. Stepping towards such a diversified international regime means re-assessing so-called ‘Balkanisation’ of financial market policies and regulations, championing this as a global public good. Pluralisation is not a curse, it is a blessing.
Of course, democratisation and diversification of finance will not stop it having crises – that’s the nature of the beast – but the crises that occur will be more idiosyncratic, local, less systemic and less devastating. Whenever an apple cart overturns, there can be a messy situation, which nevertheless is locally confined. If the apple carts are increasingly tightly roped together then the situation can be more serious. The answer is to untie the apple carts. Democracy provides the means.
Historically, democracy fluffed three opportunities to address financial markets. First, at the time of the general franchise, private regulation of financial markets sidestepped the realm of public politics. Secondly, at the time of Big Bang in London, private regulation adopted a public guise at home and a networked persona internationally. Thirdly, within the European Union, recent signs have not been entirely encouraging, mechanisms being put in place to save the Eurozone and its banks whilst binding its citizens. Although some EU member states are mildly resistant to technocratic calls for further centralisation of regulation, this seems to have more to do with ‘their’ banks’ perceptions of their interests, than with democratic debate with the countries.
“It was ever thus”, one is tempted to say in the light of the history that has been sketched here. However it is time for change. Financial market regulation is not the only field in which issues of global/local governance, homogeneity/diversity and technocracy/democracy arise – international security and energy/environmental policies being others – but financial market regulation has now become a key site.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Image credit: Julian Mason
Nicholas Dorn is a sociologist, inclined to law and politics. Until the end of 2013 he worked for Erasmus School of Law, Rotterdam. His book Democracy and Diversity in Financial Market Regulation is published in August 2014 by Routledge.