The Shifting Battleground

✑ ASAD ZAMAN | 1,085 words
‟The wealthy elite staged a counter-revolution in the 1980s.

"[After 1929], the wealth shares of the bottom 90 per cent increased, while that of the top 0.1 per cent decreased until 1980. To counteract this decline, the wealthy elite staged a counter-revolution in the 1980s, to remove restrictive banking regulations".

Asad Zaman is an economist, professor and social scientist from Pakistan. He is currently Vice Chancellor of the Pakistan Institute of Development Economics, Islamabad. He has a Ph.D. in economics from Stanford University (1978) and has taught in Economics Departments at U. Penn., Columbia Univ., Johns Hopkins, Cal. Tech, Bilkent Univ, Ankara, and LUMS, Lahore. Visit his personal website and read his articles on the WEA Pedagogy Blog.

Originally published on the WEA Pedagogy Blog on November 12, 2017.

T he bull charges the red flag being waved by the matador, and is killed because he makes a mistake in recognizing the enemy.  A standard strategy of the ultra-rich throughout the ages has been to convince the masses that their real enemy lies elsewhere. Most recently, Samuel Huntington created a red flag when he painted the civilization of Islam as the new enemy, as no nation was formidable enough to be useful as an imaginary foe to scare the public with. Trillions of dollars have since been spent in fighting this enemy, created to distract attention from the real enemy.

The financial deregulation initiated in the Reagan-Thatcher era in the 1980s was supposed to create prosperity. In fact, it has resulted in a sky-rocketing rise in inequality. The gap between the richest and the poorest has become larger than ever witnessed in history. Countless academic articles and books have been written to document, explain and attempt to provide solutions to the dramatic increase in inequality. The American public does not need these sophisticated data and theories; it experiences the fact, documented in The Wall Street Journal, that the quality of jobs and wage earnings are lower today than they were in the 1970s. Growing public awareness is reflected in several movies about inequality. For instance, Elysium depicts a world where the super-rich have abandoned the ruined surface of the planet Earth to the proles, and live in luxury on a satellite.

The fundamental cause of growing inequality is financial liberalisation. Just before the Great Depression of 1929, private banks gambled wildly with depositors’ money, leading to inflated stocks and real estate prices. Following the collapse of 1929, the government put stringent regulations on banking. In particular, the Glass-Steagall Act prohibited banks from speculating in stocks. As a result, there were few bank failures, and widespread prosperity in Europe and the US in the next 50 years. Statistics show that the wealth shares of the bottom 90 per cent increased, while that of the top 0.1 per cent decreased until 1980. To counteract this decline, the wealthy elite staged a counter-revolution in the 1980s, to remove restrictive banking regulations.

As a first step, Reagan deregulated the Savings and Loan (S&L) Industry in the Garn-St Germain Act of 1982. He stated that this was the first step in a comprehensive programme of financial deregulation, which would create more jobs, more housing and new growth in the economy. In fact, what happened was a repeat of the Great Depression. The S&L industry took advantage of the deregulation to gamble wildly with the depositors’ money, leading to a crisis which cost $130 billion to the taxpayers. As usual, the bottom 90 per cent paid the costs, while the top 0.1 per cent enjoyed a free ride. What is even more significant is the way this crisis has been written out of the hagiographies of Reagan, and erased from public memory. This forgetfulness was essential to continue the programme of financial deregulation which culminated with the repeal of the Glass-Steagall Act, and the enactment of the Financial Modernization Act in 2000. Very predictably, the financial industry took advantage of the deregulation to create highly complex mortgage-based financial instruments worth trillions, but with hidden risks. A compliant ratings industry gave these instruments fraudulent AAA rating, in order to sell them to unsuspecting investors. It did not take long for the whole system to crash in the Global Financial Crisis (GFC) of 2008.

Unlike the Great Depression of 1929, the wealthy elite were fully prepared for the GFC 2008. The aftermath was carefully managed to ensure that restrictive regulations would not be enacted. As part of the preparation, small media firms were bought out, creating a heavily concentrated media industry, limiting diversity and dissent. Media control permitted shaping of public opinion to prevent the natural solution to the mortgage crisis being implemented, which would have been to bail out the delinquent mortgagors. Princeton economists Atif Mian and Amir Sufi have shown that this would have been a far more effective and cheaper solution. Instead, a no-questions-asked trillion dollar bailout was given to the financial institutions which had deliberately caused the disaster. Similarly, all attempts at regulation and reform were blocked in Congress. As a single example, the 300-page Dodd-Frank Act was enacted as a replacement for the 30-page Glass-Steagall Act. As noted by experts, any competent lawyer can drive a truck through the many loopholes deliberately created in this complex document. This is in perfect conformity with the finding of political scientists Martin Gilens and Benjamin Page that in the past few decades, on any issue where the public interest conflicts with that of the super-rich, Congress acts in favour of the tiny minority, and against public interest. Nobel Laureate Robert Shiller, who was unique in predicting the GFC 2008, has said recently that we have not learnt our lesson from the crisis, and new stock market bubbles are building up. A new crash may be on the horizon.
‟The tool of enslavement is no longer armies, but debt — both at the individual and national levels. 
While billions sink ever deeper into poverty, new billionaires are being created at an astonishing rate, all over the globe — in India, China, Brazil, Russia, Nigeria, etc. Nations have become irrelevant as billionaires have renounced national allegiances and decided to live in small comfortable enclaves, like the Elysium. They are now prepared to colonise the bottom 90 per cent even in their own countries. The tool of enslavement is no longer armies, but debt — both at the individual and national levels. Students in the US have acquired trillion-plus dollars of debt to pay for degrees, and will slave lifetimes away, working for the wealthy who extended this debt. Similarly, indebted nations lose control of their policies to the IMF. For example, ex-Nigerian president Olusegun Obasanto said that “we had borrowed only about $5 billion up to 1985. Since then we have paid $16 billion, but $28 billion still remains in interest on the original debt.”

Like the gigantic and powerful bull, each pass through a financial crisis wounds the bottom 90 per cent by putting them deeper in debt, while strengthening the matador of the top 0.1 per cent. Sometimes, the bull can surprise the matador by a sudden shift at the last moment. On this thrilling possibility hangs the outcome of the next financial crisis: the masses achieve freedom from debt slavery, or the top 0.1 per cent succeeds in its bid to buy the planet, and the rest of us, with its wealth.






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