The Global Financial Crisis

The Global Financial Crisis

What Have We Learnt?

Edited by Steven Kates

The Global Financial Crisis is a unique investigation into the causes of the most savage economic downturn experienced since the Great Depression. Employing wide and divergent perspectives – which are themselves critically examined – this study analyses the measures that have been taken to restore our economies to acceptable rates of unemployment and growth.

Chapter 13: What Should a Financial System Do? Minskian Lessons from the Global Financial Crisis

L. Randall Wray

Subjects: economics and finance, financial economics and regulation, money and banking, post-keynesian economics


L. Randall Wray Before we can reform the financial system, we need to understand what it should do. The global financial collapse makes it clear that the system has gone seriously astray. This chapter will examine the approach taken by Hyman Minsky, who was arguably the most prescient observer of the evolution of the financial system in the post-war world. Indeed, the global financial crisis has frequently been called a ‘Minsky crisis’ (Cassidy, 2008; Kregel, 2008; Whalen, 2007). More specifically, Minsky argued that a new form of capitalism had emerged in the last quarter of the twentieth century – money manager capitalism (Minsky, 1992a; 1992b; 1992c; 1992d; Minsky and Whalen, 1996; Wray, 2009). This evolution was promoted by policy changes, what might be called a move toward self-regulation that replaced New Deal regulation and supervision. This was accompanied by an increasing financial dominance over the economy – what some call ‘financialization’. We could point to a transition away from traditional ‘banking’ and toward ‘market-based’ provision of finance. That, in turn, was encouraged by the development of new economic theories about the operation of the financial system. The most important of these was the ‘efficient markets hypothesis’. In this chapter I will not present and critique the orthodox approach – interested readers are directed to an excellent overview by John Cassidy (2010). Instead I will first look at what the financial system has been doing, and then will look at what it ought to be doing. That will lead to general policy recommendations for...

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