Governance regulating and mitigating systemic risk in credit markets developed in a piecemeal fashion and has long been distributed among public and private actors. Reliance on these private governance structures, which in turn depends upon "market discipline" and the dispersion of
risk among participants, has recently proved naïve and unable to manage systemic risk adequately. I employ the metaphor, with apologies to Hannah Arendt, of a "new alliance between the mob and capital (and the state)" in order to explain how private global governance of systemic financial
risk went so wrong and created a global financial crisis with ruinous effects on the global real economy. Few parties are found blameless in this evaluation: the cupidity and stupidity of private financial actors in creating complex structured investment vehicles (SIVs) and Collateralized
Debt Obligations (CDOs); the highly leveraged, yield-hungry global investors who bought them; and the inadequacy of state regulatory agencies in responding to this leverage have all contributed to this crisis. In addition, the insistence by mass democratic publics that the state attempt
to abolish the business cycle (through the constant application of Keynesian demand management) is also at fault, because it results in chronically asymmetric monetary policy. Credit is quickly and violently loosened at the hint of an economic downturn, but only belatedly and insufficiently
tightened as asset bubbles build. This hyperresponsiveness of monetary institutions to public demands for loose credit conditions may lie at the heart of the waves of excessive credit creation that generate destructive asset bubbles. There were some proper public regulatory responses to the
failures of private financial governance; there were also many instances in which public actors were incapable of acting as a firewall against the failures of private governance. Mass democratic publics have been handed precisely what they demanded from private and public financial actors,
and may now be experiencing the consequences of waves of cheap credit and the long (though never indefinitely) deferred contraction in the cycle of expansion and contraction that characterizes the market economy.
Document Type: Research Article
Publication date: April 1, 2009
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The St Antony's International Review (STAIR) is the only peer-reviewed journal of international affairs at the University of Oxford. Set up by graduate students of St Antony's College in 2005, the Review has carved out a distinctive niche as a cross-disciplinary outlet for research on the most pressing contemporary global issues, providing a forum in which emerging scholars can publish their work alongside established academics and policymakers. Past contributors include Robert O. Keohane, James N. Rosenau, and Alfred Stepan.