Banking, Monetary Policy and the Political Economy of Financial Regulation Essays in the Tradition of Jane D'Arista
Essays in the Tradition of Jane D'Arista
Edited by Gerald A. Epstein, Tom Schlesinger and Matías Vernengo
The role played by investment banks in creating the conditions that led to the global financial crisis that broke out in 2007 is well chronicled. These banks took excessive risks and used excessive leverage to support their immensely profitable proprietary trading; they were a major source of credit to other financial institutions, such as hedge funds, that were also major speculators; and they created, perfected and distributed the innovations in financial products at the center of the financial collapse. The proprietary character of the banks’ trading was often hidden within the banks’ inventories, in their role as market-makers who buy and sell securities to help create and sustain “liquid” security markets. It was thus easy to disguise holdings of securities purchased with the intention to sell at some future date for the bank’s profit – proprietary trading – as securities being kept in inventory for the bank’s market-making activity. To prevent the recurrence of excessive risk-taking with excessive leverage in institutions that are considered too big to fail and therefore potential wards of the state in a serious financial crisis, the U.S. government enacted the Volcker Rule, intended to prohibit proprietary trading as part of the Dodd–Frank financial reform legislation. Not surprisingly, the politically powerful giant investment banks and banking conglomerates that dominate the industry and had successfully lobbied on behalf of radical financial market deregulation for decades have fought tooth and nail against the effective implementation of the Volcker Rule.
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