The financial counterrevolution in the american economy

Abstract

Four recent developments in the United States have made the American economy more fragile by markedly increasing its financial instability. They are : the Reagan tax “reforms” of 1981 and 1986 which sought to redistribute income from labor to capital ; the rapid financial innovations that have radically transformed the underlying financial structure of the economy ; the deregulation of the banking system by the Monetary Control Act of 1980 and the Garn-St Germain Act of 1982 which, in the name of efficiency via the restoration market competition, have resulted in a rash of bank failures that have bankrupted the deposit insurance systems of the Federal government ; and the amount of nonfinancial corporate debt in the United States which has ballooned to unprecedented heights from 1980 to 1988 via desecuritization and leveraged buyouts without adding to the tangible capital of the economy. During the 1980s the industrial sphere has been pushed into the background and the financial tail seems to be wagging the economic dog. A sharp downturn in the American economy could easily lead to a rash of widespread bankruptcies and financial panic. It remains to be seen if the United States and the dependent economies of its allies will be able to survive these times of “anything goes” without too much lasting damage.