Chapter 7: International Finance and Instability in the EU
Jan Toporowski INTRODUCTION 7.1 Within the financial sector itself, financial instability tends to be defined in a very narrow way. The mainstream view of the International Monetary Fund, central banks and commercial financial institutions associates financial instability with excessive volatility in asset prices, unstable equilibrium in an otherwise stable general equilibrium, or the discontinuities that may arise in the financial system with the failure of a significant bank or financial institution. Instability outside the financial system (failure of non-financial firms, or volatility in markets for current production) tends therefore to be treated as a kind of Schumpeterian ‘creative destruction’, a natural condition in which markets are continually adapting to changes in competition, tastes, or technology, changes which are best left for markets to deal with. This narrowing of the scope, if not the effects, of financial instability reflects in part the regulatory capture of central banking institutions by commercial banking and financial interests. As central banks have been made increasingly independent of governments they have been more and more exposed to pressures from the financial corporations they are supposed to be regulating. Commercial banking and financial institutions have an interest in ensuring that the financial authorities do not allow those institutions to become subject to the ‘natural’ disciplines that markets impose on non-financial firms. More critical economists (for example, Minsky, 2004; Wolfson, 1994) have traditionally taken a much broader view that financial crises are features of a particular kind of capitalism that emerges with the development of the financial system....
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