Gazette article quoting Livesey

Growing wealth disparity underlies Occupy protests, experts say

ALEX ROSLIN, The Gazette : Sunday, November 06, 2011 12:44 PM

The eight-week-old Occupy Wall St. movement has highlighted mounting anger at a financial system that allowed out-of-control bankers to plunge the global economy into its worst downturn since the Depression, only to bail them out with billions in taxpayer money while they rewarded themselves outlandish bonuses.

Some commentators say the answer is tighter financial rules and an end to billion-dollar bank bailouts.

But would this make the economy fairer? Would it get the protesters to put down their signs and go home?

Such changes might not be enough, say some economic experts. That’s because, they say, a deeper underlying cause is behind both the Wall St. protests and the weak financial oversight: a huge and growing wealth disparity between rich and poor.

In Canada, income inequality is by some measures the worst it’s ever been in 90 years of recorded history, worse even than at its previous peak in the Roaring Twenties, said Armine Yalnizyan, a senior economist at the Canadian Centre for Policy Alternatives.

“The system is concentrating wealth in fewer and fewer hands. It’s not a sustainable trajectory,” she said.

In a study last December, Yalnizyan found that the richest one per cent of Canadians capture a whopping 32 per cent of all income growth.

That’s a far bigger slice than even in the 1920s, when the wealthiest one per cent took in 17 per cent of income gains.

“Canada’s elite are breaking new frontiers in income inequality,” she wrote in the study.

“Nothing in the course of the previous century resembles what has occurred in the last generation.”

The excesses of the 1920s eventually resulted in the 1929-32 stock market crash, which ushered in two decades of depression and world war.

Yalnizyan predicts growing social unrest and strife in many nations unless governments make sweeping changes to reverse today’s extreme richpoor gap.

It means simple policy reforms may not be enough to make the Occupy movement go away, she said in an interview from her office in Toronto.

And even if the Occupy tent camps in hundreds of cities across Canada and the U.S. are forced to close by winter cold or police arrests, the underlying issues will remain and protest is likely to continue in other forms, she said.

Various economic heavyweights have made similar predictions in recent weeks.

“Any economic model that does not properly address inequality will eventually face a crisis of legitimacy,” wrote New York University economist Nouriel Roubini in an opinion piece about Occupy Wall St. in late October.

Roubini famously predicted the 2008-09 market crash. He now predicts growing unrest if the conditions that sparked Occupy Wall St. aren’t addressed:

“The protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.”

“Globalization, unfettered financial capitalism and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct,” Roubini wrote.

Already, he added, similar problems have sparked unrest elsewhere in the world, including the Arab Spring protest movement, riots in Britain in August and anticorruption protests in India.

Joseph Stiglitz, the Nobel-winning former chief economist of the World Bank, also weighed in with a speech at the Occupy Wall St. protest in October. “You are right to be indignant. The fact is the system is not working right,” he said.

Jacques Attali, former president of the European Bank for Reconstruction and Development, called the rich-poor chasm in the U.S. a “scandal” and “extremely grave” in an interview with La Presse last month.

“We are creating the conditions for violence,” he said. “Never has wealth been so concentrated.”

Armine Yalnizyan has been writing studies about the growing wealth disparity off and on for nearly 20 years. It’s never been seen as the sexiest topic, but now, suddenly, everyone is paying attention.

On Wednesday, thousands of Occupy protesters in Oakland, Calif., shut the fifth largest port in the U.S. as part of the city’s first general strike since 1946.

“It seems like everybody finally gets it in the last month,” she said.

“It reminds me of a consciousness-changing moment, like the civil rights and women’s rights movements. It feels like we’re at the beginning of a similar consciousness-raising.”

Yalnizyan, who has sat on federal and provincial advisory panels on labour issues, said the Wall St. protests could usher in major changes that transform societies.

In response to the 1930s Depression, governments implemented new social programs and better union rights that buoyed incomes of the middle class and lower-income people.

They also raised taxes on the wealthy and tightened financial and securities regulations to curb market speculation.

Income inequality quickly fell to modest levels, where it remained for the next 50 years.

Between the 1930s and ’70s, the wealthiest one per cent of Canadians saw their share of total income gains remain flat at a tame five to 10 per cent.

But this great postwar social pact started to unravel in the 1980s. That’s when many Western governments began to cut social programs and deregulate industries such as the financial sector, allowing banks to effectively police themselves.

They also cut tax rates dramatically for the well-to-do. In 1948, the top marginal tax rate in Canada was 80 per cent. Today, the top rate is 43 per cent.

Meanwhile, wages for the average Canadian stagnated as many corporations moved manufacturing jobs to low-wage countries and unionization rates fell.

All this was good news for the bank accounts of well-heeled Canadians. In the 1980s, the richest one per cent of Canadians captured 11 per cent of total income growth.

In the 1990s and 2000s, their portion shot into record territory, climbing to 32 per cent.

Some economists call it the “great u-turn.” Yalnizyan calls it the start of “Canada’s neo-gilded age” – a throwback to the “gilded age” of a century ago when robber barons and tycoons enjoyed opulence and wild excess.

Today’s new gilded age saw “a flip from decades of steady declines in income inequality to its opposite: a steady increase in inequality, in good times and bad,” she said in her study.

“Economic growth no longer paved the path to widespread prosperity. But for a select few, good times never seemed so good.”

In the U.S., income inequality is even worse. The richest one per cent of Americans accounted for a remarkable 65 per cent of total income growth between 2002 and 2007, up from 45 per cent in the 1990s, according to a 2009 study by Emmanuel Saez, an economist at the University of California, Berkeley.

But Canada’s wealth disparity is growing faster than that of the U.S., said a Conference Board of Canada study in September. Canada now ranks 12th of 17 developed countries for inequality (the worst in 17th place being the U.S.), earning it a “C” grade – the only nation of the 17 to see its grade slip since the mid-1990s.

Regardless of who is worse, Yalnizyan said, the rich-poor gaps in both countries have translated into greater political power for the wealthy and the businesses they control, leading to further financial deregulation.

“Corporations captured the policy agenda. Their interests are reflected in our democratic institutions and in our pattern of economic growth,” she said.

The widening disparity has also led to greater economic instability as the affluent pump their gains into market speculation, fuelling asset bubbles such as the dot-com mania of the 1990s and the housing boom of the mid-2000s.

Meanwhile, the economy becomes less resilient in coping with the inevitable market busts, as decades of stagnant income growth have left Canadian and U.S. consumers too anemic to pull the economy out of its current slump.

And a tattered social safety net is less able to play its traditional role of providing a lifeline to lower-income people.

Ermanno Pascutto is sympathetic to the Occupy protesters.

He is a Bay St. lawyer who was director of the market policy division at the Toronto Stock Exchange. He then went on to be executive director of the Ontario Securities Commission.

“The great surprise for me is that Occupy Wall St. didn’t start two years earlier,” he said.

“Financial institutions that gambled with other people’s money were bailed out by average Americans and made lots of money. I can really understand why Americans are so angry.”

The institutions “basically fleeced the American public for hundreds of billions of dollars. It was outrageous,” said Pascutto, who is now executive director of the Canadian Foundation for Advancement of Investor Rights.

Pascutto said the 2008-09 economic crash was “clearly the result of financial deregulation. They took down barriers that had been in place since the Depression.”

“The crazy thing is the Tea Party says there is too much regulation. (But) a lot of the problem (behind the crash) was deregulation and a government corrupted and controlled by the financial system,” he said.

In Canada, the Harper government allowed mortgage insurers to offer risky new products like nodown-payment, interest-only mortgages, which helped fuel soaring house prices.

In the U.S., deregulation went even farther. Depression-era regulations were lifted that had prevented banks, investment firms and insurers from moving into each others’ businesses.

The move allowed banks to move into highly speculative investments without a requirement to keep enough money in reserve to protect deposits.

Banks charged into commodity speculation and the high-flying U.S. real-estate market, shoving high-risk loans at consumers without much care about whether they could afford them.

But when U.S. house prices started to collapse in 2006, eventually falling 30 per cent, some of the biggest U.S. financial institutions like Lehman Brothers, Fannie Mae and insurer AIG went bankrupt or had to be bailed out by Washington.

Canadians were heavily exposed, too. Many Canadian financial institutions also tried to cash in on the U.S. housing frenzy. And when the mania started to come undone, Canadian bank share prices went into free fall, with the S&P/TSX financial services index losing 60 per cent of its value between 2007 and 2009.

Meanwhile, collapsing U.S. housing prices also caused the Canadian corporate loan market to suddenly seize up in 2007. No one wanted to hold corporate loans anymore because it wasn’t clear how much exposure the debt may have to the unravelling U.S. real estate market.

That forced Canadian financial institutions to freeze $32 billion in commercial loans for 17 months. It was the most complicated financial restructuring in Canada history, resulting in substantial losses for investors.

But because no Canadian bank went out of business, Ottawa didn’t see fit to introduce financial or market reforms in response to the financial crash.

“We didn’t learn anything,” said Bruce Livesey, a Toronto journalist who is writing a book about the crash called Thieves of Bay Street, due out next spring.

“The Canadian banking industry got a pass. The system is pretty much the same as it was five years ago.”

Livesey embarked on his book to investigate the common belief that Canada’s financial system is overseen better than that of the U.S.

“It’s totally untrue. In many respects, we’re worse,” he said.

“Canada is the place in the Western world to rip off investors,” he writes in his book.

He unearthed a 2006 U.S. study that compared records at the leading securities watchdogs in both countries – the Ontario Securities Commission and the U.S. Securities and Exchange Commission.

The study found that the SEC prosecutes 10 times more cases for securities violations and 20 times more insider-trading violations than the OSC when adjusted for the size of the stock market.

The SEC’s insider trading fines are also 17 times higher. The OSC didn’t file one insider trading case between 1997 and 2000, while the SEC filed 110.

“The current regime is generally disastrous. It’s run by and for the industry to a great extent,” Livesey said.

A big reason, he said, is that regulators are too close to the firms they oversee, partly because of a revolving door of personnel between the two sides.

That kind of coziness has helped fuel the Occupy protests, he said. “There is a sense that the financial industry is part of the problem of inequality. The banking industry has become symbolic of the enormous shift of income from the middle class and poor to the wealthy,” he said.

Pascutto agreed that Canada’s regulation of financial markets is poor.

“Our system for preventing and prosecuting fraud is hopeless. It doesn’t work. The system is completely dysfunctional,” he said.

The U.S., in contrast, passed a sweeping financial reform last year in an effort to reign in some higherrisk financial activities.

But those reform efforts have run into withering opposition from a $1.3-billion lobbying campaign of legal and political challenges, paid for in large part by the very financial institutions that received billions in bailout cash.

Despite all this, Yalnizyan remains excited. She finally sees some hope for reversing the rich-poor gap.

She advocates measures such as an industrial strategy to create value-added jobs, rebuilding the social safety net, taxing stock transactions and raising tax rates on higher-end income (which would help claw back some of those multimillion-dollar banker bonuses).

And it certainly wouldn’t hurt to improve oversight of financial markets and institutions.

“What triggers it, I don’t know,” Yalnizyan said.

“There might need to be more crisis for there to be change. It’s up to the richest one per cent – it’s their call.”

Alex Roslin is president of the board of the Canadian Centre for Investigative Reporting. The centre provided a grant to journalist Bruce Livesey for his book, which is mentioned in this story.

 

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