The Global Financial Crisis and the Shift to Shadow Banking
AbstractWhile most economists agree that the world is facing the worst economic crisis since the Great Depression, there is little agreement as to what caused it. Some have argued that the financial instability we are witnessing is due to irrational exuberance of market participants, fraud, greed, too much regulation, et cetera. However, some Post Keynesian economists following Hyman P. Minsky have argued that this is a systemic problem, a result of internal market processes that allowed fragility to build over time. In this paper we focus on the shift to the "shadow banking system" and the creation of what Minsky called the money manager phase of capitalism. In this system, rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income—what is sometimes called "financialization"—as the financial system evolved from hedge to speculative and, finally, to a Ponzi scheme. The policy response to the financial crisis in the United States and elsewhere has largely been an attempt to rescue money manager capitalism. Moreover, in the case of the United States. the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail—and that alternative policies should be adopted. The effective solution should come in the way of downsizing the financial sector by two-thirds or more, and effecting fundamental modifications.
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Bibliographic InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_587.
Date of creation: Feb 2010
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Institutional Investors; Financial Crisis; Financialization; Money Managers; Financial Concentration; Shadow Banking; Subprime Mortgages; Securitized Mortgages;
Other versions of this item:
- Yeva Nersisyan & L. Randall Wray, 2010. "The global financial crisis and the shift to shadow banking," European Journal of Economics and Economic Policies: Intervention, Edward Elgar, vol. 7(2), pages 377-400.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- 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-FMK-2010-06-11 (Financial Markets)
- NEP-PKE-2010-06-11 (Post Keynesian Economics)
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- Mario Sarcinelli, 2010. "Past and future regulation to prevent a systemic financial crisis," PSL Quarterly Review, Economia civile, vol. 63(253), pages 103-129.
- Corneil, Bruce L. & McNamara, Sue, 2010. "Lessons and consequences of the evolving 2007-? Credit Crunch," MPRA Paper 35912, University Library of Munich, Germany.
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