It’s commonplace to describe the financial crisis as a once-in-a-century event, but I question whether that is the case. Perhaps we’re not in the midst of a short-lived financial shock, but a long crisis that stretches back into the 1990s.

Here’s Paul Blustein on Alan Greenspan:

The Fed chief told the G-7 that in almost fifty years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks.

Greenspan wasn’t speaking in Autumn 2008 when Lehman’s collapsed, however, but ten years’ earlier in the wake of the spectacular blow-up of Long-Term Capital Management, which lost $4.5 billion almost overnight in what the fund’s principals post-rationalised as a 100-year flood.

Long-Term (with its superbly hubristic name) was brought low by derivatives, just as Lehman’s would be a decade later.

(Robert Rubin, Clinton’s Treasury Secretary, was one of those left picking up the pieces – part of ‘the committee to save the world’, with Greenspan and Larry Summers. Rubin went on to preside over Citigroup as it needed a succession of massively expensive bailouts, when its derivatives tanked in the subprime crisis.)

The proximate cause of Long-Term’s failure was Russia’s Rouble crisis, when the country defaulted on its debt after the IMF refused to mount a second bailout.

The Russian crisis itself came in the midst of a long series of dramatic economic failures that hits the world between 1997 and 1999, mostly in East Asia (Thailand, South Korea, Indonesia etc), but which also battered Brazil and would devastate Argentina in 2002. Blustein again:

Time and again, panics in financial markets proved impervious to the ministrations of the people responsible for global economic policymaking.

IMF bailouts fell flat in one crisis-stricken country after another, with the announcements of enormous international loan packages followed by crashes in currencies and sever economic setbacks that the rescues were supposed to avert.

Greenspan believed that the crisis of 1997-1999 was caused by “more investment monies flow[ing] into these economies than could be profitably employed at modest risk.”

Ben Bernanke,his successor at the Fed, took a similar view. In 2005, he argued that, in response to the crisis, East Asian countries became net exporters of capital, rather than net importers. Even countries such as China, which had survived the crisis unscathed, built up reserves, in part to hedge against future financial turbulence.

In practice, these countries increased reserves through the expedient of issuing debt to their citizens, thereby mobilizing domestic saving, and then using the proceeds to buy U.S. Treasury securities and other assets.

Effectively, governments have acted as financial intermediaries, channeling domestic saving away from local uses and into international capital markets.

In the meantime, the money that had flowed into emerging markets was looking for a home. During the dot.com era, it found it in technology stocks. But they crashed in 2001, costing investors $5 trillion of losses. To restart the party, Greenspan then cut interest rates savagely (and even more so after 9/11). Rates were down at1% well into 2004.

As a result, the United States (and the UK and various other deficit countries) were faced by the toxic combination of low interest rates and what Bernanke dubbed a ‘global savings glut’ (e.g. lots of capital competing to find risk).

And my, how the debtors loved it! Bankers went stark raving mad, lending standards collapsed, and a massive asset price bubble was inflated. It ended in a colossal hangover (mostly confined to the West, it should be remembered), once US housing prices finally started to fall in March 2006.

In a seminar I led at Brookings with Bruce Jones earlier this week (discussing our recent paper with Alex on globalization’s woes), I argued that perhaps we should stop pretending the financial crisis started in 2007, but should instead picture it as a truly global crisis that has had (so far) three main waypoints:

• The East Asian crisis (with hits on other countries outside Asia).
• The dot.com crash.
• The ‘subprime’ crisis, (which may itself be triggering another wave of sovereign debt crises).

Admittedly, there was some push back to the notion that we are in the midst not of a shock, but of a slow motion car crash. But the connections seem strong to me. At the very least, it unwarranted to claim that recent events have been ‘unprecedented’ accidents that will only occur every century or so.

It all makes me think of The Way Things Go, a famous and fantastic film by the Swiss artists Peter Fischli and David Weiss – in which you watch unfold a chain reaction of levers, pulleys, slides, seesaws, and lots of whizzes, bangs and explosions. The full film is half an hour long, but the short clip at the top of this post gives you a flavour.

The analogy is not perfect though. Fischli and Weiss understood the causality that tied together their mish mash of junk and chemicals. They could tell you where it was all going to end up. Their whole thing had been intelligently designed.

Our economy, I think, has surpassed human understanding. We can bash, poke and kick it, and hope it will start running smoothly again. But it would be foolish to trust those who confidently pronounce this crisis over, and even less those who claim to know what is coming next.

Update: Alex sends me this 1999 essay on Long-Term Capital Management by Michael Lewis, who has written a much heralded book on the recent crash. Here’s an extract:

It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world. There is obviously now a very great social pressure on the young professors [who reinvented bond trading and whose models blew up Long-Term] to abandon the thing they cherish most, their hyperrational view of the world…

Oddly, the question that occupies them is not whether to push on with their models of financial behavior but how to improve the models in light of what has happened to them. ”The solution,” [Nobel Prize winner and Long-Term partner] Robert Merton says, ”is not to go back to the old, simple methods. That never works. You can’t go back. The world has changed. And the solution is greater complexity.”

My arguments are no vindication of the PAD, whose reckless actions I find condemnable and ultimately counter-productive and whose proposals (including the 70% vote) are misguided. My intention was to provide some background on the current political situation, background that I found lacking in my main news sources. And to challenge the simplistic notion that what we are seeing is a rejection of democracy by rich urban elites who feel threatened by a democratic government that cares for and represents the poor. There are many valid reasons why ordinary citizens from all walks of life united against an elected government: their primary motive was not to defeat democracy, rather to fight its abuses.

The portrayal of the current political crisis as a battle of rich urban elites versus a majority of poor rural folk united behind the popular Mr. Thaksin is inaccurate and unhelpful. Poor farmers in the north like Mr. Thaksin. Poor city-folk in Bangkok don’t. Poor Muslims in the south hate him. While Mr. Thaksin’s party gained the most seats in parliament, more people voted against him than voted for him. He doesn’t have the kind of broad-based popular mandate that many commentators credit him with.

Conversely the PAD are not a homogenous group. As last week’s Economist put it: “the PAD is a motley bunch, united only in its fanatical hatred of Mr. Thaksin”. It is Mr. Thaksin’s abuses of power that they are outraged about, not his policies to help the poor. People did not take to the streets in protest when Mr. Thaksin first announced and implemented his “populist” policies. Neither were there street protests when his crack-down on drugs led to extrajudicial killings of hundreds (thousands?) of supposed drug traffickers many in dubious circumstances. Neither did they take to the streets when he botched up the relative peace in the south. Thais have a high tolerance for politicians’ professional shortcomings.

But what many Thais could not stomach was Mr. Thaksin’s reckless bending of the system to suit his own personal needs. The straw that broke the camel’s back was when Thaksin used some cunning structures to avoid paying tax on the sale of Shin Corp to Temasek. He also had changed a law to aid in this sale. That was what brought people into the streets in protest, and led to the formation of the PAD.

The PAD is a political movement with a focused agenda – i.e. to stop Mr. Thaksin’s continued meddling in the nation’s politics. As a movement it has changed a lot over the past two years: alarmingly, its tactics and rhetoric signal a growing disillusionment with democracy. Their proposal of a 70% appointed legislative body – which would clearly constitute a dilution of democracy – is particularly ill-considered.

The Economist points to the Monarchy’s meddling in Thai politics as a cause for the current mess. Well, if that is objectionable, why is Thaksin’s meddling any better? The PAD denounces precisely that. And even if I disagree with them on many ideas and tactics, I agree with them on this issue. While the Crown’s interventions are postulated by political commentators deciphering hearsay, hints, and signals, there is ample and strong evidence of Thaksin’s meddling in the public domain. Frankly, would Mr. Somchai Wongsawat have been given the premiership had he not been a trusted ally (brother-in-law) of Thaksin? Mr. Somchai himself said upon being forced out that he was relieved as, in his words: “I was not working for myself” (quoted in the IHT, December 5th, 2008). By his own admission, Thaksin has vowed to stay in politics, despite being barred from political participation for another four years by the country’s highest court. And he is not shy about meddling. The phone-in appearances at mass rallies in Bangkok and the bribing of deserting MPs (at the tune of THB 55 million per head) to join his new party are some examples of his brazenness. The PAD rightly points out that Mr. Thaksin’s continuous meddling in politics and state affairs is unlawful and unconstitutional.

The PAD’s blockading of the airport was wrong, and pointless. The government didn’t capitulate: in the end it was a court decision that ousted the PM and his government. That siege has tainted Thailand’s image, further weakened its already fragile economy at peak tourist season, and set back its dreams of becoming a hub in ASEAN. The country will take years to recover from the hole it has dug itself into, and I hope those responsible will be brought to justice.

But while I blame the PAD for taking the airports for ransom, I find it harder to blame the police or the army for not moving in and removing the protesters by force. The Economist points to the reluctance of the army and police to intervene as evidence of Royal backing for the protestors. But is it really a bad thing that the armed forces were determined not to use violence to disperse crowds – both yellows (PAD) and reds (pro-Thaksin) alike? Many of those occupying the Government House and two airports were women and youngsters, and an intervention will have been very bloody.

Perhaps I over-egged the pudding somewhat in commenting that we are witnessing the teething pains of a maturing democracy. These are testing times for democracy in Thailand. But the real threat to democracy is not in the obdurate challenges to an elected government (which is merely a tyrant’s façade). Mr. T more than anyone else is to blame for the current sorry state of democracy in Thailand.

A recent blog by the FT’s Gideon Rachman – whose pieces I frequently enjoy reading – typifies the mainstream view, which is shallow and simplistic both in its account of the situation and in its interpretation of democracy (see article here). According to Mr. Rachman (who by the way likes clichés):

“The urban middle-classes are rising up and demanding that democracy be rescinded.
Do not be fooled by the fact that the group occupying the airport call themselves the “People’s Alliance for Democracy“. Their intent is clearly anti-democratic. They have just brought down an elected government.”

In this vein, the anti-government movement (known as the People’s Alliance for Democracy, or PAD) has been widely condemned on the basis that it unlawfully rejects a government that was voted in through the ballot and thus has prima facie democratic legitimacy. It seems to be a straightforward case of foul play on the part of the urban elites, who directly challenge the people’s choice. Or is it?

The premise that elections in themselves constitute democracy is deeply flawed for a start. Many countries have the vote, yet not many are truly democratic. And ballots have on occasion delivered despots. A narrow procedural interpretation of democracy misses out on what the real substance of democracy is. The essence of democracy resides in the institutions that uphold and protect human rights and the principles of freedom, fairness and order. As my brother Joe puts it, voting makes you only 20% democratic, the other four prerequisites for democracy being: a credible opposition; checks and balances; a free press; and the rule of law free from intimidation. When democracy is abused, it is often these four aspects that are attacked, not the people’s right to vote (see his article ‘What Democracy is Not’).

Thailand’s educated middle classes have good reason to protest. The problem with the current government is that it remains firmly in the grip of the brazenly corrupt and patently undemocratic – indeed tyrannical – Mr. Thaksin. Mr. Thaksin’s net worth tripled during his years in office. He used his fortune – which was ill-gotten from the outset – to concentrate political power in his hands until he became a distorting, destructive force unto Thailand’s democracy. Even from exile he continues to hold the strings, directing money to allies and supporters in Thailand, and putting in place proxy Prime Ministers. Earlier in the year, when the army, and later the police, refused to act on his orders to disperse the PAD rallies, he allegedly brought in paid thugs by the lorry-load to do the ugly work instead.

Democracy calls for checks and balances to hold power to account, and these are needed most where power is most concentrated. Yet Mr. Thaksin nakedly abused his tremendous power by annihilating all checks and balances. Journalists who dared criticise Mr. Thaksin were persecuted. By withdrawing advertising money – which he controlled – or threatening lawsuits, newspapers were effectively coerced into taking approved editorial lines. And when the law inconvenienced him, he simply changed it (doing so was easy as parliament was filled with his cronies and sold-out MPs). He supported a law that protected his monopoly in the telecoms sector by baring foreign ownership, but when a good time came to sell, he changed the law to enable the deal. He further tinkered with the law to avoid paying taxes on the $1.9 bn he made from the sale of his telecoms empire to Singapore’s Temasek. This was the final straw, in the eyes of PAD.

Democracies are not perfect political systems, as Churchill once famously observed. Civil disobedience has often been a progressive force for democratic evolution. It paved the way for Indian independence and democracy, and brought the European empires to their knees. Even in the most mature of democracies it has played a role. It forced through the Civil Rights Bill in America and set in motion political changes that opened the way for America’s election of its first black president. As displeasing and alarming as the PAD protests are, they are holding power to account.

To his credit, Mr. Thaksin does deserve some praise for creating a political platform for the poor farmers of Thailand’s populous North-Eastern Provinces, something his predecessors had failed to do. But most of his rural policies (e.g. cash handouts, easy credit, debt relief) were populist, short-sighted and unsustainable. In a relatively poor and young democracy as Thailand, vote-buying is often par-for-the-course. But where there used to be a near competitive market for votes, Mr. Thaksin created a monopoly with his vastly superior spending power. However, it is in the market for ideas that the PAD should do more to compete with Mr. Thaksin for the ‘hearts and minds’ of these hitherto voiceless farmers, by proposing policies that convincingly address their needs and concerns.

While disapproving of the PAD’s tactics (not least because of the disruption to my wedding!) I can nevertheless understand their impatience. When the highest courts found Mr. Thaksin guilty on corruption charges on the basis of strong evidence, he fled, but he didn’t give up. The proxy government led by his brother-in-law Prime Minister Somchai Wongsawat has been attempting to amend the constitution to protect Mr. Thaksin from facing charges. The PAD’s request to whoever next gets appointed as caretaker PM is simple and clear: ‘drop Mr. Thaksin’s self-serving constitutional amendments, or else face us in the streets again’.

In and out of office, Mr. Thaksin has systematically emasculated the foundations of democracy in Thailand, by compromising all its key institutions – the press, the courts, parliament, law enforcement etc. Against this background the rebellion of the educated Thai middle classes may be seen as a stand for democracy: rather than a backsliding on the democratic scales, I’d like to surmise that perhaps we are witnessing the teething pains of a slowly maturing democracy?