Is This the Minsky Moment for Reform of Financial Regulation?
AbstractThe current financial crisis has been characterized as a “Minsky” moment, and as such provides the conditions required for a reregulation of the financial system similar to that of the New Deal banking reforms of the 1930s. However, Minsky’s theory was not one that dealt in moments but rather in systemic, structural changes in the operations of financial institutions. Therefore, the framework for reregulation must start with an understanding of the longer-term systemic changes that took place between the New Deal reforms and their formal repeal under the 1999 Financial Services Modernization Act. This paper attempts to identify some of those changes and their sources. In particular, it notes that the New Deal reforms were eroded by an internal process in which commercial banks that were given a monopoly position in deposit taking sought to remove those protections because unregulated banks were able to provide substitute instruments that were more efficient and unregulated but unavailable to regulated banks, since they involved securities market activities that would eventually be recognized as securitization. Regulators and the courts contributed to this process by progressively ruling that these activities were related to the regulated activities of the commercial banks, allowing them to reclaim securities market activities that had been precluded in the New Deal legislation. The 1999 Act simply made official the de facto repeal of the 1930s protections. Any attempt to provide reregulation of the system will thus require safeguards to ensure that this internal process of deregulation is not repeated.
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Bibliographic InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_586.
Date of creation: Feb 2010
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Financial Regulation; Financial Crisis; Subprime Crisis; Mortgage Affiliate Regulation; Financial Legislation; Supreme Court and Financial Deregulation;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-11 (All new papers)
- NEP-BAN-2010-06-11 (Banking)
- NEP-HIS-2010-06-11 (Business, Economic & Financial History)
- NEP-PKE-2010-06-11 (Post Keynesian Economics)
- NEP-REG-2010-06-11 (Regulation)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Is This the Minsky Moment for Reform of Financial Regulation?
by Miguel in Simoleon Sense on 2010-06-16 15:34:59
- Nina Shapiro, 2012. "Josef Steindl: An Economist of His Times," Moneta e Credito, Economia civile, Economia civile, vol. 65(260), pages 293-315.
- Xiaosheng Ju & Dic Lo, 2012. "The cost and benefit of banking regulations and controls, Chinese style," PSL Quarterly Review, Economia civile, Economia civile, vol. 65(263), pages 385-402.
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