Recessionary times will stress-test not only our financial system but also the pillars of our democracy, writes Tony Kinsella
THE FIRST three words of the United States constitution - "We the People" - launched a global revolution in 1787, replacing the established system of anointed monarchs with democracy. Just over 200 years later that radical innovation has become the global norm. The US founding fathers drew some inspiration from ancient Greece, or to be more precise, ancient Athens.
Athens had developed a limited form of democracy, still celebrated in the modern Greek word for a republic - dimokratia. The root of this was the word "dimos", a word with at least two meanings. There was the largely positive "we the people" sense, and the more menacing concept of "the mob", an unpredictable mass of people on the rampage.
We had a worrying chance to witness both meanings in interconnected action last week in Athens and in Washington. Our world is entering a global economic depression. This will be no short-term blip. Joseph Stiglitz, winner of the 2001 Nobel economics prize, believes the downturn will last for at least 18 months, and possibly a good deal longer. The chief economist of the OECD, Klaus Schmidt-Hebel, hopes for the beginnings of a recovery in the last quarter of 2010.
We have learned from past mistakes and we have also learned that those lessons are insufficient. The 1929 Wall Street crash grew into a global depression partly because governments allowed the banks to fail. In 2008, governments and central banks acted with uncommon haste and co-ordination to rescue our financial systems with mind-boggling billions. The first tranche of the US rescue package, $350 billion, was made available last month. All but $15 billion had been committed by the end of last week.
The banks have been saved, but are either not lending, or lending extraordinarily carefully. They also remain extremely coy about the scale of the toxic assets still hidden in their balance sheets. One UK treasury official commented: "Banks say they are increasing lending but the anecdotal
evidence from people and firms is that loans are hard to come by."
Reduced access to credit coupled with a growing uncertainty has led individuals and organisations to postpone planned purchases, further deepening the recession. In October sales of new cars fell by 32 per cent in the US (45 per cent for General Motors), by 15 per cent in the EU and by 30 per cent in Russia.
Mitsuo Kinoshita, vice-president of Toyota, says "the current situation is an emergency of a magnitude we [have] never seen before". From Brazil to Russia car plants are either closed for enforced month-long holidays, or working short time. Global oil demand has dropped in 2008 for the first time since 1983. Companies from the incompetent GM to the dynamic Fiat are all in trouble.
Last Thursday night US Republican senators, in what has all the airs of a fit of short-sighted, pig-headed, sectarian vindictiveness, rejected the joint Bush administration/House of Representatives proposal to provide emergency bridging finance for GM and Chrysler. They almost certainly signed a death warrant for Chrysler, very probably one for GM, and possibly even one for Ford.
Was it a case of Republicans confirming their belief in the effectiveness of the death penalty as a political response?
Sheila Blair, the George Bush Republican-appointee who heads the US Federal Deposit Insurance Corporation, is struggling to make participation in a foreclosure-prevention programme a condition for US banks and mortgage lenders to receive federal assistance.
Ms Blair's comment that "there are some in the Republican Party who resent the idea of helping others. But the market is broken right now, and unless we intervene these people and the economy won't be helped" speaks volumes.
The market is broken. We the people, through our governments and central banks are going to have to embrace what economists politely refer to as "quantitative easing" (printing money) to sustain whole swathes of industry through this meltdown. Such massive levels of support must have serious price tags attached. In short there is every likelihood of a de facto nationalisation of banks and major industries over the next two years.
Even under the most optimistic scenarios, where global demand begins to grow from late 2010 onwards, there can be no question of simply returning to where we were aeons ago, at the beginning of this year. The depth of economic transformation we are experiencing cannot but involve tectonic social and political shifts.
Young Greeks provided a first chilling demonstration of the mob version of dimos last week. The spark came from the death of a teenager but the fuel was provided by desperation over their country's economic and social stagnation.
The EU offers one vital pillar of economic and political stability in the challenging chaos our planet faces over the coming years. The EU, the guarantor of our economic and general security, now faces a very difficult six months as the undermined Czech prime minister, Mirek Topolánek, struggles to provide its presidency.
The EU has no established president because we prevented it from appointing one by rejecting the Lisbon Treaty. The Irish dimos could do worse than avoid shooting itself in its other foot next autumn.