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Banking, Monetary Policy and the Political Economy of Financial Regulation

Banking, Monetary Policy and the Political Economy of Financial Regulation

Essays in the Tradition of Jane D'Arista

Edited by Gerald A. Epstein, Tom Schlesinger and Matías Vernengo

The many forces that led to the economic crisis of 2008 were in fact identified, analyzed and warned against for many years before the crisis by economist Jane D’Arista, among others. Now, writing in the tradition of D’Arista's extensive work, the internationally renowned contributors to this thought-provoking book discuss research carried out on various indicators of the crisis and illustrate how these perspectives can contribute to productive thinking on monetary and financial policies.

Chapter 8: The financial trilemma and the future of American banking

Gary A. Dymski

Subjects: economics and finance, financial economics and regulation, political economy, politics and public policy, political economy


While banking crises have provided front-page drama for the past five years, when one takes a historical perspective it quickly emerges that banking systems have been in crisis in one part of the world or another during much of the last 30 years. Focusing only on the Americas, our central concern here gives a lengthy list: the disintermediation crisis and massive deregulation of US banks in 1980; the 1982 Latin American debt crisis; the US savings and loan crisis; the 1994–95 Tequila crisis; the 1998 Long-Term Capital Management (LTCM) crisis and its fallout; the Argentine crisis of 2001; the “sudden stop” of foreign financial inflows to Latin America in 2002; then the 2007–08 subprime crisis; and the still-unfolding impacts on American banks of the Eurozone crisis. The impact of these successive crises in the US and Mexico include reduced financial-sector employment, bank closures, banks’ failure to meet legitimate business and household credit demand, and financial institutions’ continuing experimentation with predatory loan products. Beyond this, however, the evolution of financial systems in much of the Americas, including these systems’ crises and the reactions thereto, has created a huge, unresolved regulatory problem, which is termed here the “financial trilemma.” In Mexico and in the remainder of Latin America, this trilemma involves a regulatory policy quandary similar to the macroeconomic-policy trilemma that smaller nations confront in the global economy.

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