Talk of the end of the Great Recession and a return to normality is premature. Surging profits in the City of London and Wall Street should remind us that in matters of political economy, the worst is not over. Mired in spiralling unemployment, state debt and public frustration with parties, politicians and governments, much of the world economy continues to suffer the shock effects of a massive market failure that threatens to knock the life out of democracy itself.

Let us remember: the true cause of the deepest economic slump since the Great Depression of the 1930s is that democracy sleepwalked its way into a deep crisis. Democracy failure bred market failure. Unelected regulatory bodies and elected politicians, parties and whole governments let their citizens down. The self-regulation model palpably failed; empowering bodies like Moody’s and Standard and Poor’s and the UK Financial Services Authority to look after the credit and banking systems resembled putting alcoholics in charge of a wine bar full of celebrating bankers. There were few monitory bodies to blow whistles or sound alarm bells. Brave individuals who did so were ignored, silenced or sacked. The consequence: banks, investment firms and hedge fund operators, shrouded in corporate secrecy, were allowed to pursue ‘front running’ and ‘Ponzi schemes’ and other reckless adventures that brought the world’s banking and credit institutions to the edge of a cliff.

Bursting bubbles have regularly plagued market economies since the seventeenth century Dutch tulip craze; they are intrinsic to unregulated markets, contagious and destructive of human lives. More will happen — unless new early warning systems are put in place. Monitory democracy is the best check against hubris, and that is why toothier ways are urgently needed for doing things that central banks, bankers, securities regulators and accounting standards boards manifestly failed to do. Gordon Brown may believe in granting more power to the Treasury and the Financial Services Authority (and less to the Bank of England) so that they can work financial miracles. But blind trust in either markets or government regulators is folly. The urgent political priority is to find more open and equitable ways of preventing future breakdowns of credit markets, which are bound to remain the drivers — and potential depressors — of markets in general. The question is not just whether governments are too big or too small or whether they work (the words used by Barack Obama in his inaugural address). The question is also whether governments and market institutions are held publicly accountable for their actions by citizens, and by their various elected and unelected representatives.

... contd.