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Identifying Financial Fragility in the Financial Sector Bard College Bard Digital Commons Senior Projects Spring 2017 Bard Undergraduate Senior Projects Spring 2017 Before 'It' Happens Again: Identifying Financial Fragility in the Financial Sector John Henry Glascock III Bard College, [email protected] Follow this and additional works at: https://digitalcommons.bard.edu/senproj_s2017 Part of the Behavioral Economics Commons, Economic Theory Commons, and the Finance Commons This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License. Recommended Citation Glascock, John Henry III, "Before 'It' Happens Again: Identifying Financial Fragility in the Financial Sector" (2017). Senior Projects Spring 2017. 244. https://digitalcommons.bard.edu/senproj_s2017/244 This Open Access work is protected by copyright and/or related rights. It has been provided to you by Bard College's Stevenson Library with permission from the rights-holder(s). You are free to use this work in any way that is permitted by the copyright and related rights. For other uses you need to obtain permission from the rights- holder(s) directly, unless additional rights are indicated by a Creative Commons license in the record and/or on the work itself. For more information, please contact [email protected]. Before ‘It’ Happens Again: Identifying Financial Fragility in the Financial Sector Senior Project Submitted to The Division of Social Studies of Bard College by John Glascock Annandale-on-Hudson, New York May 2017 Plagiarism Statement I have written this project using in my own words and ideas, except otherwise indicated. I have subsequently attributed each word, idea, figure, and table which are not my own to their respective authors. I am aware that paraphrasing is plagiarism unless the source is duly acknowledged. I understand that the incorporation of material from other works without acknowledgment will be treated as plagiarism. I have read and understand the Bard statement on plagiarism and academic honesty as well as the relevant pages in the Student Handbook. John Glascock Acknowledgments I have many people to thank for what I have learned and accomplished during my time at Bard. To Dr. Pavlina Tcherneva, thank you for inspiring in me an unbridled passion for economics that I never thought I would have. Your mentorship and continued guidance have pushed me to question, learn, and grow as a student and as an adult. To Peter Rosenblum, thank you for entertaining my ideas and imparting your wisdom. Some of my most memorable and meaningful times at Bard formed in discussion with you. I will not forget your support and encouragement in my studies and broader endeavors. To Dr. L. Randall Wray, thank you for serving on my board and offering me guidance in the early stages of the research process. We are all indebted to you for your remarkable work on Minsky. To my family – Mom, Dad, and Tori – I will never be able to thank you for the love and support that you continue to show me. I would be truly lost without you. To Bre, you inspire me each and every day. Your thoughtfulness and love know no bounds. Thank you for believing in me at every step along the way. To my friends at Bard, thank you all for an incredible four years. The relationships I have formed here will last a lifetime. Finally, an earnest thanks to the faculty and staff at Bard for their commitment in facilitating the most fruitful learning experience that any student could hope to have. Abstract The project builds extensively on the theoretical foundations of Minsky’s financial instability hypothesis. A Minskian framework is integrated with both behavioral and human rights theory. The goal is to develop a more holistic view of market dynamics which includes psychological and human rights considerations. In developing this framework, we establish an indicator that can be used to track fragility at the sector and firm levels. This work can be applied to macroprudential policy to more adequately equip regulators whose responsibility it is to tame an unpredictable market. Contents Plagiarism Statement ............................................................................................................. iii Acknowledgments .................................................................................................................. iv Abstract .................................................................................................................................... v List of Figures ....................................................................................................................... viii 1. Introduction ......................................................................................................................... 1 2. Theoretical Framework ...................................................................................................... 4 2.1 Minsky ............................................................................................................................. 4 2.1.1 Minskian Approach .................................................................................................. 4 2.2 Phases of Capitalism and Institutional Change ............................................................... 6 2.2.1 Phases of Capitalism ................................................................................................. 6 2.2.2 Historical Analysis ................................................................................................... 9 2.2.3 Financial Innovation ............................................................................................... 11 2.3 Systemic Fragility ......................................................................................................... 14 2.3.1 Financing Positions................................................................................................. 14 2.3.2 Margins of Safety and Debt Deflation .................................................................... 14 2.4 The Task at Hand .......................................................................................................... 17 2.4.1 Previous Modeling .................................................................................................. 17 2.4.2 Linking Psychology ................................................................................................ 21 2.4.3 Incorporating Human Rights .................................................................................. 26 2.5 Conclusion ..................................................................................................................... 29 3. The Emotional-Minskian Framework ............................................................................ 30 3.1 Brief Survey of Existing Literature ............................................................................... 32 3.1.1 ‘Old’ vs. ‘New’ Behavioral Economics ................................................................. 32 3.1.2 Heuristics and biases .............................................................................................. 35 3.1.3 Rationality .............................................................................................................. 37 3.2 Emotional Finance......................................................................................................... 38 3.2.1 Theoretical Underpinnings ..................................................................................... 38 3.3 Connecting Mainstream Behavioral Insights to Emotional Finance ............................. 43 3.3.1 Emotional Corporate Finance: Setting the Stage for Minsky ................................. 45 3.3 Minsky and Emotional Finance .................................................................................... 47 3.3.1 Animal Spirits ......................................................................................................... 47 3.3.2 Explicit Minsky Connections ................................................................................. 48 3.4 Conclusion ..................................................................................................................... 51 4. Human Rights & Finance on the Macro Level .............................................................. 52 4.1 Framing the Finance-Rights Relationship ..................................................................... 52 4.2 History of Rights-Driven Economic Policy in US ........................................................ 54 4.2.1 Rights-based vs. Profits-based Frameworks ........................................................... 54 4.2.2 The US as a Proponent of Economic Rights .......................................................... 55 4.2.3 Financialization’s Role in Compromising Rights .................................................. 59 4.3 New Direction for Rights Literature ............................................................................. 62 4.3.1 Understanding the Existing Literature .................................................................... 62 4.3.2 Corporate Rights Framework ................................................................................. 64 4.3.3 Individual Rights Framework ................................................................................. 66 4.3.4 Integrating Minsky ................................................................................................. 70 4.4 Conclusion ...................................................................................................................
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