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The Global Financial Crisis and the Shift to Shadow Banking

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  • Yeva Nersisyan
  • L. Randall Wray

Abstract

While 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.

Suggested Citation

  • Yeva Nersisyan & L. Randall Wray, 2010. "The Global Financial Crisis and the Shift to Shadow Banking," Economics Working Paper Archive wp_587, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_587
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    References listed on IDEAS

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    1. Marc Lavoie, 1994. "A Post Keynesian Approach to Consumer Choice," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 16(4), pages 539-562, July.
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    5. Varian, Hal R, 1979. "Catastrophe Theory and the Business Cycle," Economic Inquiry, Western Economic Association International, vol. 17(1), pages 14-28, January.
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    Cited by:

    1. Mario Sarcinelli, 2010. "Past and future regulation to prevent a systemic financial crisis," PSL Quarterly Review, Economia civile, vol. 63(253), pages 103-129.
    2. Alberto Botta & Eugenio Caversazi & Daniele Tori, 2016. "The macroeconomics of shadow banking," Working Papers PKWP1611, Post Keynesian Economics Study Group (PKSG).
    3. Mazzocchetti, Andrea & Raberto, Marco & Teglio, Andrea & Cincotti, Silvano, 2017. "Securitisation and Business Cycle: An Agent-Based Perspective," MPRA Paper 76760, University Library of Munich, Germany.
    4. Eckhard Hein, 2012. "The Macroeconomics of Finance-Dominated Capitalism – and its Crisis," Books, Edward Elgar Publishing, number 14931, September.
    5. Corneil, Bruce L. & McNamara, Sue, 2010. "Lessons and consequences of the evolving 2007-? Credit Crunch," MPRA Paper 35912, University Library of Munich, Germany.

    More about this item

    Keywords

    Institutional Investors; Financial Crisis; Financialization; Money Managers; Financial Concentration; Shadow Banking; Subprime Mortgages; Securitized Mortgages;

    JEL classification:

    • 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

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