Crisis of Capitalism or democatic system?

Lorenzo  class=”hiddenSpellError” pre=”Lorenzo “>Bini Smaghi keeps giving these speeches. In his recent speech he reviews the hot broad topic- Is this crisis the end of capitalism? He looks at the debate and towards the end says:

 The current crisis has been characterised by many as a crisis of capitalism. I wonder whether it might also be a crisis of our democratic system, a challenge to its ability to manage complex and global financial markets. Indeed, many parts of society benefited from the loose approach to supervision and regulation of the financial activities which took place in the run-up to the turmoil. Market participants have been short sighted, and so have the political authorities and institutions. Can this crisis convince them to look further ahead? Can we expect the longer-term interests of society to prevail once again over short-term incentives which led to instability?

The signals coming everyday from several financial market participants as well as political authorities do not seem so encouraging. The former are waiting for the dust to settle and for things to return to ‘normal’. The latter can only be as far-sighted as those they represent, i.e. those who elect them. What is really needed then, to quote that famous phrase, is somebody who will “ take the punch bowl away just as the party gets going” again; somebody who has the authority to slow the music down. I am fully aware that this is not easily done, but it is not impossible. It took the high inflation of the 1970s to convince the political authorities that monetary policy should be implemented by independent central banks. It would be better not to ‘waste’ another crisis to come to the same conclusion for financial stability.

The debate is happening at very basic level. Failure of democracy is another angle added by Bini Smaghi. And it is sad that as crisis has eased, the willingness to reform is just fading away. The Wall Street/Other financial streets elsewhere is again busy distributing bonuses and treating the crisis as a forgotten event. I firmly believe in what Spitzer says– you need people who want to regulate.

Economists are also coming out with new controversial ideas. Calomiris says you need big global banks to serve big global firms and too big to fail is not a big problem (debate between him and Simon Johnson here). Well what can one say?

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