Financial Keynesianism and Market Instability

Financial Keynesianism and Market Instability

The Economic Legacy of Hyman Minsky, Volume I

Edited by Riccardo Bellofiore and Piero Ferri

During his lifetime Hyman Minsky made a seminal contribution to the development of financial Keynesianism. In this book, leading academics celebrate his work and explore his economic legacy. Special attention is paid to his work on contemporary economic method, the Great Depression, the European single currency and the global financial system and recent banking and financial crises – in particular the crisis in Asia. An attempt is made to categorise Minsky’s brand of post Keynesianism and to compare his work with the Keynesian and Marxian traditions.

Chapter 9: Recent banking and the financial crises: Minsky versus the financial liberalizationists

Philip Arestis

Subjects: economics and finance, economic psychology, financial economics and regulation, history of economic thought, post-keynesian economics

Extract

9. Recent banking and financial crises: Minsky versus the financial liberalizationists Philip Arestis* INTRODUCTION The purpose of this chapter is to revisit the debate on the relationship between financial-sector developments and economic growth, in an attempt to throw some light and explanation on the origins of the recent banking and financial crises. I do so by concentrating on Minsky’s contributions to the debate and that of the financial liberalization proponents. I examine the experience of a number of countries which liberalized their financial systems only to find that banking and financial crises ensued. I begin with the theoretical positions of the two theses, followed by a short excursion into the recent banking and financial crises. I discuss briefly the experience of countries which experimented with financial liberalization policies and comment on their performance and implications. This leads me to suggest that Minsky’s contributions on banking and financial crises offer a better understanding of the workings of financial markets and their performance than those of the financial liberalizationists. Then I extend Minsky’s model to account for the external sector, which is a particularly important aspect of the recent financial and banking crises. THE THEORETICAL POSITIONS The Financial Liberalization Thesis The financial liberalization position is that financial markets left to their own devices are inherently stable and robust. They possess endogenous forces * The author is grateful to Murray Glickman, Malcolm Sawyer, Gary Dymski and to the participants of the conference for helpful comments. The usual disclaimer applies. 159 160 Money and...

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