Will protesters make Wall Street moguls finally bow?

Dennis Morrison, Contributor

Americans are just now beginning to mount protests against the excesses of the Wall Street barons that brought their financial system to the brink and sent the economy into a deep hole.

It has taken three years of punishingly high unemployment (9.1 per cent), a stunning rise in poverty levels and the highest foreclosure rate in the country's history to spawn the 'Occupy Wall Street' protests that are gathering momentum.

Despite recent economic reports that show an increase in the number of jobs created in the last three months and a rebound in America's auto industry, a backbone of its manufacturing sector, nearly 14 million people are out of work. Indeed, the combined unemployment and underemployment rate now stands at a miserable 16.5 per cent. It is, therefore, not surprising that two out of every 10 homeowners in America owe more on their homes than they are valued and that 46.2 million people are now living below the poverty line, the highest number since 1952.

But side by side with these harsh realities is the fact of a concentration of wealth that is the highest ever in America's modern history. Amazingly, the top one per cent of Americans take in 24 per cent of national income and hold more than 40 per cent of the nation's wealth. It is this gross and extreme situation of haves and have-nots that is the backdrop to the backlash against the moguls of Wall Street.

Mountains of debt

While Wall Street may be the epicentre of the Ponzi scheme that almost crippled the global financial system, the wave of liberalisation and deregulation that gave bankers unbridled control of the system spread way beyond the United States (US). So though America's banks and some key British banks, like the Royal Bank of Scotland, were hit the hardest in the 2008-2009 meltdown, the debt crisis now raging in Europe is the latest manifestation of the loose regulatory environment set in motion by the financial liberalisation.

The effects are reflected in the mountain of debts accumulated by governments, particularly in Ireland, which has bailed out failing banks that were caught in the real-estate bubbles pumped up by these banks and in Greece. With the risk of sovereign debt default rising in Greece, French and German banks, which are heavily exposed, have been bombarded in financial markets, generating uncertainty worldwide. To defuse the turmoil, European governments must now provide financial support, an unpopular move in the current economic doldrums.

Up to now, protest action in Europe has been limited mostly to Greece, where citizens are objecting that austerity programmes imposed to satisfy creditors have fallen mainly on have-nots, with the haves who benefited from the financial bubble escaping. Spain could be the first to witness the full extent of the political fallout of the financial crisis, as it has suffered the deepest economic downturn. Its unemployment rate is above 20 per cent, the highest in Europe, and hence in the elections due soon, the incumbent party is likely to be thrown out.

Financial-sector overgrowth

Looking more broadly, a consequence of the excesses of the Reagan-Thatcher liberalisation and deregulation policies is that the financial sector came to absorb a greater share of the economies of major advanced countries and, in particular, of the US and the UK. Bloated by new instruments (derivatives, etc.) that were created by non-bank financial institutions and the banks themselves, and reinforced by the frenzy of mergers and acquisitions, the financial sector moved to dominate these economies. And this went beyond the extent that would be in keeping with the natural progression to post-industrial society.

Rather than being the transmission system to move savings to areas of investment in the real economy, the financial sector in the US had by the mid-2000s displaced manufacturing and other real sectors to become the largest sector of that economy. This distortion showed up in the decline in investment in the real sectors, jobless growth, the overall weakness in the US economy and the bubbles leading up to the meltdown of 2008/2009. And it is one of the key structural flaws of the US economy which will have to be tackled if the process of allocating resources is to support the return to a long-term sustainable growth path.

But the moguls of the sector are mounting powerful lobbying efforts to block the implementation of the regulatory reforms flowing from legislation passed last year. Will the 'Occupy Wall Street' protests serve to raise the consciousness of the American people about the fundamental issue of how reform of the country's financial sector is critical to the revitalisation and strength of its economy? Can they exert sufficient pressure on the political class to break the stranglehold of the lobbyists? The outcome of this political struggle has implications for America's job and poverty crisis.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.