netakias from Economist

Bypassing the voters

Technocratic solutions may come back to haunt politicians

“THE people have spoken. The bastards.” Dick Tuck’s reaction to defeat in a Californian state Senate race in 1966 is not that far from the attitudes of the authorities since the 2008 financial crisis. They have tended to act first, and hope that voters approve of their actions afterwards. Often this has involved the introduction of improvised measures that the people might not have favoured, and the use of bodies that were free from democratic constraint.
The unpopularity of the Bush administration’s bank bail-out in 2008 created a strong sense of caution among elected leaders. Congress initially voted the rescue down in response to a backlash among constituents that eventually created the Tea Party. Although the bail-out was pushed though in the end, many of those who voted in favour lived to regret it.
Given the public’s views, letting the central bank take the main role in generating economic recovery made a lot of sense. Getting Congress to sign up to further fiscal stimulus became impossible after the Republicans took control of the House of Representatives in 2010. The Federal Reserve kept interest rates at historic lows and unveiled further quantitative easing (QE) to drive down bond yields. Some Republican Congressmen still grumble about the Fed’s actions to this day but they have been powerless to do much about it.
This shift of power is clear in the financial markets. For traders, what really matters are the decisions of Janet Yellen, the chairman of the Federal Reserve (and, before her, Ben Bernanke). The Fed has been hugely effective in shoring up asset prices; the fear is that when it starts pushing up interest rates, maybe later this year, markets will suffer. It is hard to think of a decision by Barack Obama or Congress that would be anything like as influential.
In the euro zone, politicians fumbled and prevaricated but Mario Draghi, the president of the ECB, was the one who stopped the rot in 2012 with his “whatever it takes” speech about saving the currency. For European governments, institutional and democratic constraints ruled out what might have been the simplest solution: a write-off of debt and a direct transfer of funds from governments in Germany, the Netherlands and others to struggling countries like Greece and Ireland. Instead, European leaders created the European Financial Stability Facility (EFSF) and its successor, the European Stability Mechanism (ESM). They also summoned the help of the IMF, a body with much experience in sovereign rescues.
These collective funds may have been approved by national parliaments but they resemble the kind of off-balance-sheet vehicles that were popular before 2007 in the American mortgage market. In the case of the EFSF, countries agreed to guarantee the debts of the vehicle, rather than put up hard cash (even if Eurostat does treat the guarantees as debt). For the ESM, euro-zone countries had to stump up €80 billion ($87 billion) in real money as initial capital but another €620 billion could theoretically be needed if the fund suffers losses. The amount of taxpayers’ money at risk was rather less clear to voters than it might have been.
But that risk was very clear when EU negotiators were haggling with Greece about its latest bail-out deal, and helps explain why they were reluctant to accept debt restructuring. It was all very well for economists in America and Britain to urge a debt write-off but their countries’ voters weren’t being asked to take the hit. There were fine words from the IMF and the ECB on the need for debt restructuring—but no sign that they were willing for their own balance-sheets to be shredded.
Democracy is a double-edged sword for economists to wield. There was much talk about the refusal of the EU to respect the wishes of Greek voters when negotiating the latest deal; rather less discussion of what voters in the creditor countries might have said had they been allowed to express an opinion on the negotiations. There is no easy democratic way of reconciling the wishes of voters in one country with those of another.
Voters may also want inconsistent things: lower taxes, higher spending and a balanced budget at the same time. Politicians ought to make those tough choices. To the extent that they pass the buck to technocrats, or to international bodies making backroom deals, politicians lose control of their own destiny. Indeed, the feeling that their elected leaders are not in control may be one reason why voters in some countries are so angry, and are turning to parties outside the mainstream.
^{Economist.com/blogs/buttonwood}