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Dirk Schoenmaker

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Dirk Schoenmaker

Banks have a special position in the financial system. Their exclusive link to the central bank puts them at the top of the financial system and enables banks to offer liquidity to the wider economy. They also provide loans and payment services to firms and households. This multifaceted nature of banking makes the economics of banking exciting. This Research Review assembles the best ‘banking’ papers on all these dimensions and will be invaluable for banking scholars and practitioners.
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Dirk Schoenmaker

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Jan Toporowski

This timely book studies the economic theories of credit cycles and disturbances in the 20th century, presenting a nuanced view of the role of finance in the economy after the financial crash of 2008. Focusing on the work of economists from Marx onwards, Jan Toporowski moves beyond conventional monetary theory to offer an insightful critical alternative to current financial macroeconomics.
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Jan Toporowski

Minsky’s financial instability hypothesis is really a theory of how market capitalism works with a complex financial system. According to this theory, investment booms are accompanied by rising indebtedness that eventually causes the boom to break. For the firms involved this involves an expansion of balance sheets and, within them, a shift in ‘financing structures’ from risk-free ‘hedged’ financing, through speculative financing to Ponzi finance. Such credit cycles emerge with ‘money manager capitalism’, when governments withdraw from managing financial markets with fiscal and monetary policy. Minsky’s theory has become fashionable in the wake of the 2008 crisis, but at the cost of some loose interpretation of his ideas.

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Jan Toporowski

This chapter examines the influence on Minsky of his teacher in Chicago, Henry Simons. Simons was the author of the Chicago Plan for Banking Reform, designed to provide a new regulatory framework for US banks after the 1929 Crash. Simons argued that liberal capitalism could only work effectively and avoid instability if banks were strictly regulated and obliged to maintain 100% reserves. The Federal Reserve system should be abolished, allowing the government to regulate the money supply through its debt management. Milton Friedman confused this with the approach of the monetary business cycle of Hawtrey. However, Minsky recognised in Simons the possibility of unstable credit.

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Jan Toporowski

The book is partly a thoroughly revised and extended version of an earlier book, Theories of Financial Disturbance An Examination of Critical Theories of Finance from Adam Smith to the Present Day. That book put forward a threefold distinction between theories of finance in which finance merely reflects events in the real (non-financial) economy; theories in which finance is part of a general equilibrium (without any causative implications); and critical theories in which finance disturbs the economy. Since the publication of that earlier book, there has been a major crisis in the financial system, and further research has caused the author to revise his views, in particular on Marx, Kalecki and Minsky. The present book therefore represents a new, more nuanced view of the role of finance in the economy.

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Jan Toporowski

Irving Fisher argued that the way in which credit and finance disturb macroeconomic equilibrium is through the effect of debt on current production and exchange. Price adjustments in such production and exchange affect the real value of debt. Increases in investment are financed by debt. But if indebted units start to repay debts, the reduction in the value of credit money circulating in the economy causes prices to fall, and this increases the real value of debt. This problem of a ‘swelling dollar’ can only be overcome by fiscal policy.

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Jan Toporowski

In his early work, Keynes leaned towards a monetary credit cycle view, which he derived from the works of his teacher Alfred Marshall, but also Henry Emery and Frederick Lavington. Keynes’s view of the credit cycle combined an Austrian belief that business cycles were caused by over-investment, in turn caused by loose monetary policy. Associated with this was a Marshallian criticism of the gold standard which required monetary policy to be used to manage reserves, rather than the business cycle. By the Treatise on Money Keynes had adopted a Wicksellian business cycle, but argued that it was the long-term rate of interest that influenced the level of investment, and that long-term rate could be regulated by open market operations. However, the seemingly intractable economic depression raised doubts as to the effectiveness of such policies.