The Demise of Finance-dominated Capitalism

The Demise of Finance-dominated Capitalism

Explaining the Financial and Economic Crises

New Directions in Modern Economics series

Edited by Eckhard Hein, Daniel Detzer and Nina Dodig

This book provides an overview of different theoretical perspectives on the long-run transition towards finance-dominated capitalism, on the implications for macroeconomic and financial stability, and ultimately on the recent global financial and economic crisis. In the first part, the macroeconomics of finance-dominated capitalism, the theories of financial crisis and important past crises are reviewed. The second part deals with the 2007-09 financial and economic crisis in particular. The special focus is on the long-run problems and inconsistencies of finance-dominated capitalism which played a key role in the crisis and its level of severity.

Chapter 10: Risk management, the subprime crisis and finance-dominated capitalism: what went wrong? A systematic literature review

Sérgio Lagoa, Emanuel Leão and Ricardo Barradas

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

Extract

In most developed countries, the financial sector has seen a growth in employment, value added, visibility and power. Some authors call this phenomenon financialization (Epstein 2005) or financed-dominated capitalism, which is characterized by features such as: 1) enormous growth of financial markets; 2) deregulation of the financial system and of the economy in general; (3) the emergence of new financial institutions and markets; and 4) the appearance of a culture oriented to the individual, the market and rationality. Some authors see the growth of finance and financial deregulation as essentially beneficial, believing that a well-developed financial sector stimulates economic growth and financial markets guide the efficient allocation of resources (e.g. IMF 2006, p. 51). Securitization, for example, allows risk to be spread to institutions that are better equipped to deal with it.

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