Dorn, Ν. (2014) “The real lesson from the financial crisis is that we need to stop insulating financial regulation from democracy“, LSE EUROPP, 15 July.
The financial crisis has generated a number of policies and discussions across Europe aimed at reforming financial regulation. Nicholas Dorn writes that while there is widespread recognition that a rethink is required to prevent a similar crisis from occurring again, the core problem underlying the crisis has yet to be addressed: the fact that financial regulation is not subject to democratic pressures. He argues that party politics should play a key role in regulatory approaches and that this would lead to more diverse approaches being adopted within individual states, thereby reducing the potential for large systemic crises to spread across the world.
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.
Relevant posts:
- Merkel, W. (2014) “Failing Union Of Capitalism And Democracy Fuels Rise In Inequality“, Social Europe Journal, 03 June.
- Mc Donnell, D. (2014) “The minimal rise in turnout in the EP elections shows that voter apathy is still the greatest threat to European democracy“, LSE EUROPP, 31 May.
- Booth, S. (2014) “The European Parliament is a failed experiment in pan-European democracy – national parliaments are the key to solving the democratic deficit“, LSE EUROPP, 21 May.