Robert Reich recently asked “Which do you trust more: democracy or financial markets?” His article was written in response to Greek Prime Minister George Papandreou’s proposal to hold a national referendum on whether to accept the conditions of a bailout on their unserviceable government loans. He concludes the piece asking readers whether we should “…rule by democracy or by financial markets?”
Fundamentally, yes, I prefer democracy. In fact, I strongly suspect that 99% of the people who live in democracies would choose democracy over financial markets if forced to choose one type of “rule of law.” However, Reich presents a false choice by conflating the Greek experience with the American one. The Greeks are socializing their excessive government debts across the borders of their sovereign neighbors. A referendum that essentially chooses default is a vote confirming that national interests are more important than international interests. Reich minimizes these international interests by casually noting that a Greek default would cause a run on Italy and likely collapse banks across Europe and maybe even in the U.S.:
“Of course, if Greek defaults on its loans, global investors (fearing that a default in Greece sets a dangerous precedent) may yank their money out of Italy. This would almost certainly bust several big European banks – and generate panic on Wall Street.”
By favoring a referendum that could produce such results, Reich implies these costs are both acceptable and not ultimately catastrophic. Reich offers up an unquantified likelihood that the Greek economy can grow and create jobs soon after a default without stating how. Will Greece’s neighbors eagerly buy the exports of a country they will surely blame for a new European economic disaster? Will they even have the wherewithal to buy?
Americans socialized excessive private debts across the boundaries of a public sector ill-prepared to absorb these costs. There was no national referendum on the bailouts because no such structure readily exists in our constitutional democracy. When Reich notes that “of course Congress hastily agreed” to the bailouts, he conveniently skips over the House’s initial rejection of the bailouts. Democracy worked. Soon thereafter, the markets failed to work, panicked and that financial panic quickly translated into political panic. Our democracy stumbled. The recovery process continues as the political fallout from the passage of the bailout continues to resonate from ballot boxes to party politics to city streets.
I do not only want democracy to work. I also want financial markets to work. Markets need established rules that are enforceable. Otherwise, increased unpredictability and decreased reliability in transactions exacts high economic costs. A referendum on honoring obligations sits in a fuzzy space. For example, if the rules of the game stated that the payment of sovereign debts may be subject to popular vote, then Greece would likely have never had access to as much money as it did. At a minimum, Greece would have paid much higher interest rates much earlier to account for the risk that people will likely choose not to pay when given the option and when convinced that it is the path of least personal/national pain.
Reich has an incredible and enviable skill for simplifying complex issues into digestible concepts. In this case, he glosses over the implications of deconstructing the financial crisis into a battle between democracy and financial markets. Each of the planet’s strongest democracies have thrived on functioning financial markets, including financing their operations in these same markets. Riding the complicity of people who benefited from public expenditures, governments have weakened themselves by acquiring levels of debt that leave them exposed to the natural vicissitudes of the markets. Moreover, this exposure has lowered their capacity to buffer their people from economic calamities.
I sympathize with Reich’s need to spotlight how the machinery of financial markets have recently worked against the public interest. But suggesting that a real or rhetorical choice exists to dump the discipline of the markets for the will of the people appears to me as an unnecessary distraction from the more important and inescapable relationships connecting the two.
Full disclosure: no positions