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Em-powering economics: Some thoughts on policy and financial markets

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  • Josef Falkinger

Abstract

This paper addresses the discussion between economic power and the power of politics with particular focus on financial markets. After general reflections about the economic basis of power, the paper discusses in a general equilibrium framework how financial innovations can lead to risk creation and an inflation of financial products. This creates a fundamental disorder in the financial system which from an aggregate point of view can be described in a standard portfolio framework, in which higher rates of return go hand in hand with higher private risks but also with increasing externalized (social) risk and insurance illusion. Rate of return regulation is proposed as an appropriate regulatory measure. Alternatively the deficiency could be cured by admission regulations for financial products which put the burden of proof for no external (systemic) damages of a financial instrument to the issuer.

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Bibliographic Info

Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 093.

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Date of creation: Sep 2012
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Handle: RePEc:zur:econwp:093

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Keywords: Power; financial crisis; risk-creation; inflation of financial innovations; rate of return regulation;

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  1. Josef Falkinger, 2008. "Limited Attention as a Scarce Resource in Information-Rich Economies," Economic Journal, Royal Economic Society, vol. 118(532), pages 1596-1620, October.
  2. Kurt Rothschild & John King, 2009. "A Conversation with Kurt Rothschild," Review of Political Economy, Taylor & Francis Journals, vol. 21(1), pages 145-155.
  3. Josef Falkinger, 2003. "Attention Economies," CESifo Working Paper Series 1079, CESifo Group Munich.
  4. Franck Egon, 2011. "Ist es an der Zeit, die Aktionärsrechte zu stärken?," Working Papers 0156, University of Zurich, Institute for Strategy and Business Economics (ISU).
  5. James Crotty & Gerald Epstein, 2009. "Avoiding Another Meltdown," Challenge, M.E. Sharpe, Inc., vol. 52(1), pages 5-26, January.
  6. Binswanger, Johannes, 2007. "Risk management of pensions from the perspective of loss aversion," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 641-667, April.
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