Deregulation 1980s

1. Deregulation 1980s Cornel Ban

2. Abolition of capital controls • US in 1974 and then in UK in 1979 • NZ and Australia in 84-85 • 1990 all of EC

3. reaganomics • Deficit goes from 9 bn in 1981 to 207 bn inn1983 • Half of this is financed by foreign money attracted by high interest rates • While this helped deindustrialize the us, it helped finance the Reagan tax cuts and military spending • 1984: no more 30 percent tax on the interest payments of holders of US bonds, thus returning eurobond business to NY

4. The new consensus • For the first time since the 20s liberalization was mainstream • OECD code of liberalization of international capital movements in 1989 is extended to all transactions • Why? • US: finances my deficits • UK: helps me stay competitive as a financial sector relative to NY • Japan: emergence as the world’s first creditor • Competition for footloose capital increased after the US broke the ranks • The intellectual shift to neoliberal frames of thought

5. The crises of the 80s • MEXICO 1982: Herzog’s phone call • 1979: interest rates in US go from 0.8 to 11 percent • This triggers capital flight from LA, encouraged by US decision to sell bonds to anonymous buyers; the money of the LA wealthy ended up in NY, thus eroding their countries forex reserves • US banks extended loans to LA that were 100 percent over their capital; the Fed saw in this the roots of a new Great Depression • Fed makes it clear that restructuring depends on IMF austerity • BIS bridging loans, half of which were the Fed’s

6. The mexican crisis • Portillo threats with the nationalization of banks, capital controls and punitive measures against the rich who funneled their money out >even more capital flight • Trade sanctions and seizure of assets are attached to the possibility of default (fact: Mexico imported 30 percent of its food) • A new president throws his weight behind the IMF deal • Volker forced banks to extend loans to Mexico to roll over the debt; this prevented a Great Depression (Kindleberger’s one hegemon hypothesis) • If they defaulted, LA countries lost the short term debt that helped them rollover the big debt

7. Alternative? • Capital controls plus international cooperation for the forced repatriation of domestic capital that had been in flight (private assets from LA were bigger than external debt) • This is Strange’s biggest “non-decision moment” • The crisistriggered Basel 1 but also derivative trading (encouraged by currency volatility and Japanese preferences for these instruments)

8. 1987 stock market crash • High interest rates create a strong dollar • US economy financed with cheap foreign money imports more than it exports • To address its problem of competitiveness, at the 1985 Plaza Agreement G7 agreed to let the dollar devalue to reduce the current account deficit • Tax cuts and star wars mean higher deficits

9. 1987 crisis • Worried by the high deficits, the Japanese investors pull out • The resulting loss of confidence went global, evidence of the around the clock trading system newly created • BIS central banks intervene pumping liquidity into securities markets • Japanese banks buy BoA debt • Japanese min of finance tells the main securities firms to stop the collapse of the Tokyo market • The crisis underscored the importance of the state, in this case Japan

10. Take-home • The transition to neoliberalism inaugurates era of global instability • Financialization as the most important marker of neoliberalism • The dawn of neoliberalism does not mean fiscal virtue in the US • The US acts as stabilizer as well as as destabilizer