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Financial instability and the decline(?) of banking: public policy implications

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  • Hyman Minsky

Abstract

Banking plays two roles in a modern capitalist economy: It provides a means of payment and channels resources into capital development. These functions are being performed to a decreasing extent by banks and it appears that this trend will continue. Such developments suggest that the economic role of central banks needs to be reviewed because the role of banks is significant in the ability of the central bank to conduct monetary policy. This ability is changing due the transformation of the channels through which Federal Reserve operations affect the economy away from affecting the availability or cost of financing and toward affecting uncertainty, the evaluation by portfolio managers of the viability of enterprises, and the stability of markets. When central bank operations affect the uncertainty of financial market agents, market reactions will often be out of proportion to the size of the operation. The decline in the importance of banks in financing the capital development of the economy tends to increase the significance of other institutions, such as the Securities and Exchange Commission (SEC) relative to that of the Federal Reserve. The policy question that arises is whether the existing institutional structure of regulation and supervision of financial institutions needs to be changed in a serious way. In general the discourse on economic policy takes place on two plains. One is that of the day-to-day operations of the "authorities" and the rules if any which should guide them. This paper concentrates on the issues of the legislating and associated administrative decisions that affect the structure and operations of banking and financial markets and the government's involvement in setting rules which constrain and contain banking and financial markets.
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  • Hyman Minsky, 1994. "Financial instability and the decline(?) of banking: public policy implications," Proceedings 20, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhpr:20
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    2. Dimitri Papadimitriou & L. Randall Wray, 1998. "The Economic Contributions of Hyman Minsky: varieties of capitalism and institutional reform," Review of Political Economy, Taylor & Francis Journals, vol. 10(2), pages 199-225.
    3. Ronnie J. Phillips, "undated". "Narrow Banking Reconsidered, The Functional Approach to Financial Reform," Economics Public Policy Brief Archive ppb_17, Levy Economics Institute.
    4. Jackson, Tim & Victor, Peter A., 2015. "Does credit create a ‘growth imperative’? A quasi-stationary economy with interest-bearing debt," Ecological Economics, Elsevier, vol. 120(C), pages 32-48.
    5. Felipe Rezende, 2015. "Why does Brazil’s banking sector need public banks? What should BNDES do?," PSL Quarterly Review, Economia civile, vol. 68(274), pages 239-275.
    6. Tim Jackson & Ben Drake & Peter Victor & Kurt Kratena & Mark Sommer, 2014. "Foundations for an Ecological Macroeconomics. Literature Review and Model Development. WWWforEurope Working Paper No. 65," WIFO Studies, WIFO, number 47497.
    7. Sheila Dow, 2019. "Monetary Reform, Central Banks, and Digital Currencies," International Journal of Political Economy, Taylor & Francis Journals, vol. 48(2), pages 153-173, April.
    8. Marta de la Cuesta-González & Cristina Ruza & José M. Rodríguez-Fernández, 2020. "Rethinking the Income Inequality and Financial Development Nexus. A Study of Nine OECD Countries," Sustainability, MDPI, vol. 12(13), pages 1-18, July.
    9. Papadimitriu, Dimitri (Пападимитриу, Димитри) & Wray, Randall (Рэй, Рэндалл), 2016. "Hyman Minsky's "Stabilizing an unstable economy" - twenty years later [«Стабилизируя Нестабильную Экономику» Хаймана Мински — Двадцать Лет Спустя]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 2, pages 22-51, April.
    10. Mirakhor, Abbas & Krichene, Noureddine, 2009. "The Recent Crisis: Lessons for Islamic Finance," MPRA Paper 56022, University Library of Munich, Germany.
    11. Brett Fiebiger, 2014. "‘The Chicago Plan revisited’: a friendly critique," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(3), pages 227-249, December.
    12. Marco Missaglia & Alberto Botta, 2024. "Households’ Liquidity Preference, Banks’ Capitalization and the Macroeconomy: A Theoretical Investigation," Review of Political Economy, Taylor & Francis Journals, vol. 36(3), pages 1192-1215, July.
    13. Sabina Andreea Cazan, 2021. "The financial crisis: a history of the economic schools of thought," Journal of Financial Studies, Institute of Financial Studies, vol. 10(6), pages 48-57, May.
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