Alternative Theories of Money and Finance
New Directions in Modern Economics series
Chapter 7: Faustian finance and the American dream
INTRODUCTION The problem of growing international payments imbalances has spilled over into the US domestic economy and has set in train successive phases of excess liquidity and the accumulation of historically high levels of household and corporate debt. These predatory features of US capitalism have been characterized by recurrent booms and busts, which have emanated from the growing financialization of the economy. In other words, the normal investment cycle has been superimposed by a layer of synthetic, speculative finance, which tends to amplify the fluctuations of the business cycle. At the same time, the US Federal Reserve has contributed to these pathological phases of debt-induced speculative booms by cushioning the effects of sudden asset price and equity slumps by enacting expansionary monetary policies and acting as a lender of last resort in the event of a major credit crunch. In this context, the recent subprime crisis represents the most recent and devastating culmination of these speculative episodes. Indeed, many commentators have described the most recent crash as a ‘Minsky moment’, which implies that the whole financial structure has entered a zone of chronic instability. This chapter examines the immediate causes of the financial meltdown and explores the complex web of financial instruments and derivatives, which amplified a seemingly local problem of mortgage insolvencies into a major global recession. FINANCIAL DEREGULATION AND SECURITIZATION The mechanism of credit recycling between the surplus countries and the USA created a close connection between the rapid growth of US 132 Faustian finance and the American...
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