Ireland’s middle class and the financialisation of our economy

In Politics, the Greek philosopher Aristotle describes the importance of a middle class in a functioning democracy and warns against allowing a gulf to grow between those who have and those who have not.

“Great then is the good fortune of a state in which the citizens have a moderate and sufficient property; for where some possess much, and the others nothing… a tyranny may grow out of either extreme. That the middle [constitution] is best is evident, for it is the freest from faction: where the middle class is numerous, there least occur factions and divisions among citizens.”

For those who possess the goods of fortune in moderation find it “easiest to obey the rule of reason” and are “accordingly less apt than the rich or poor to act unjustly toward their fellow citizens.”

Thus, a democracy which benefits the middle class is one that protects against tyranny and is the mean between the extremes of oligarchy – rule by the rich – and democracy – rule by the poor.

A functioning, healthy and stable middle class is essential for the benefit of democracy. And Ireland’s middle class seems to be shrinking.

A report by German insurance company Allianz found that Ireland’s middle class is receding faster than many other developed countries. More people have fallen out of the middle class since 2000 than in most other developed countries.

The annual global wealth report found that more people have been elevated to the middle and upper classes in the last 15 years. However, this trend is primarily evident in Asia where millions of people have been lifted into the lower reaches of the middle class. In Europe, the picture is more complicated.

The rapid growth of the global middle class is not a one-sided tale of advancement, however.

“Almost one-fifth of this growth can be traced back to natural population growth during this period – and around one-eighth of the new members of the middle class are people who have been demoted, i.e. households that have been “relegated” from the high wealth class. This trend largely affects the US and Japan, but also European countries like France, Italy, Ireland or Greece. This can be seen as the first indication that the distribution of wealth in the world’s traditional advanced economies has developed somewhat less favorably than in the emerging markets in the aftermath of the recent financial crises.”

Oliver Bate, Allianz’s Chairman of the board of Management, says there “is a flip side to the success story of rampant financial asset growth in recent years, especially in the developed countries that also have extremely low interest rates to contend with: the trend comes hand-in-hand with increasing inequality in wealth distribution.

“This is reflected less, however, in the erosion of the middle class or in more widespread poverty among the population at large, and more in the concentration of more and more wealth in the hands of a (very) select few.”

Mr Bate warns financial institutions are continuing to saturate the market with capital.

“It does not take long to pinpoint who is responsible for this exceptional development: the world’s central banks have been continually flooding the markets with new liquidity ever since the financial crisis, driving asset prices up to ever new highs.”

While in Belgium, Germany and the Netherlands, the distribution of wealth improved from a eurozone perspective, this

does not apply to the other countries; in Greece, Ireland and Italy, there has even been a marked deterioration.

In europe, the report found that “wealth would appear to be increasingly concentrated in the hands of a small wealthy elite: the (very) rich are becoming richer and richer and distancing themselves further and further from the average.”

Ireland’s deepening financialisation, and the global order

The slow, subtle dismantling of financial regulations in the United States since the 1970s gave rise to the financialisation of the economy – enter Wall Street and the advent of callous bankers with enormous salaries. Similar financialisation occurred here in Europe. Crises have become regular occurrences as financial organisations explored increasingly reckless activities.

In the previous installation we explored the possible consequences for the increasing financialisation of the economy. It can have enormous widespread implications for short and long-term growth, and in itself can be corrosive to the development and prosperity of domestic and global economies.

The term financialisation is defined by Gerald Epstein as, “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.”

According to the Transnational Institute, financialisation involves changes to our economy and society at three basic levels: within the financial sector itself, within productive industry and its relation to finance, and within the ‘average’ household.

“The expansion of financial markets is not only about the volume of financial trading, but also the increasing diversity of transactions and market players”, TNI says. “In short, financialisation must be understood as radical transformation within the financial sector that has altered entire economies – from the household and the firm to the functioning of monetary systems and commodity markets.”

Since the late 1990s our economy has become more financialised than it ever has been in our short history.

irelands-ifsc-international-financial-services-centre-in-dublins-docklands-dublin-city-centre-joe-fox

During the late 90s to the mid-2000s bank lending in Ireland grew over 450%, a snapshot of the growing amount of capital pumped into our economy. Much of this lending went to the construction industry; relatively little went to productive industries such as agriculture or technological.

Within this period of growth financial organisations were benefiting from a distinct lack of regulation regarding what would be deemed reckless.

According to research by Sean O’Riain, “Ireland shared with the US features such as “irrational exuberance” among market actors, a “capital bonanza” (easy access to cheap capital for banks – in the Irish case through international borrowing), and failures of regulation and “moral hazard”.

O’Riain adds the “various crises of the current period are linked through increasingly close financial integration, with the US crisis in 2008 the tipping point for Irish banks’ collapse as inter-bank liquidity dried up very rapidly.”

“Ireland’s economic crisis”, he says, “is most fundamentally a financial crisis, originating in a credit and asset bubble that toppled the banking system and brought with it fiscal, economic and social crisis.”

Ireland’s financial expansion was, however, only one leg of a “triple financialisation”, also including Anglo- American financial systems and the financialisation associated with European integration and the euro in the 2000s. While the US was always more financialised than the European core, that gap widened significantly over the 1990s, and financialisation is most closely associated with “liberal market economies” such as the US, UK and Ireland.

Neoliberal policy, in particular, has bolstered financialisation and emboldened those working within the industry. Since the 1970s, financial institutions have benefited hugely by the free market principles championed by neoliberalism. Companies like Goldman Sachs have become enormously profitable by simply making money from money. The focus in the last few decades on maintaining low inflation, as opposed to the post-war Keynesian era macroeconomic goal of maintaining full employment, has particularly benefited the financial sector because inflation erodes the value of financial assets, the Transnational Institute says.

Since the financialisation of the economy in the United States and Europe,, we have seen the emergence of a ‘shadow banking system’ (SBS) – new types of financial institutions and practices that are not subject to the same regulations as traditional commercial banks.

The SBS, the Transnational Institute says, represents “more than a quarter of the entire financial system” and, as of 2011, was “bigger than it was before the financial crisis, despite growing efforts by regulators to rein it in.”

Liberalising financial markets was initially seen in the US as a political strategy that could discipline inflation and socio-political demands. However, policymakers soon discovered that financial deregulation and low interest rates resulted in the opposite – a significant loosening of economic discipline and reckless speculation by financial institutions.

In the previous installment of this trilogy we discussed the impact the financialisation of an economy can have when left unregulated, or even not adequately regulated.  

Numerous studies have shown that a prolonged period of higher inequality in advanced economies is associated with the global financial crisis. By intensifying leverage, overextension of credit, and a relaxation in mortgage-underwriting standards the global economy was brought to its knees. Less than ten years later we are in the process of repeating the failures that drove us into the bosom of stagnation, the fallout of which is still occurring.

Moving forward, Ireland faces challenges. Most of our trade is done with the United States and Britain. Recent political occurrences such as Brexit and Trump, along with the disintegration of the European Union, have economic consequences for us here.

However, if our political parties attempt to offset the almost inevitable downturn we’ll experience by luring financial companies we will be inviting further crises.

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