Money & Banking (220:301:06) Spring 2010 Final Exam
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Finance Without Financiers*
3 Finance without Financiers* Robert C. Hockett, Cornell Law School * Thanks to Dan Alpert, Fadhel Kaboub, Stephanie Kelton, Paul McCulley, Zoltan Polszar, Nouriel Roubini and particularly my alter ego Saule Omarova. Special thanks to Fred Block and Erik Olin Wright, who have been part of this project since its inception in 2014 – as well as to the “September Group,” where it proved necessary that same year to formulate arguments whose full elaboration has issued in this Chapter. Hockett, Finance without Financiers 4 I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work…Thus [we] might aim in practice… at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financiers… (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.1 INTRODUCTION: MYTHS OF SCARCITY AND INTERMEDIATION A familiar belief about banks and other financial institutions is that they function primarily as “intermediaries,” managing flows of scarce funds from private sector “savers” or “surplus units” who have accumulated them to “dissevers” or “deficit units” who have need of them and can pay for their use. This view is routinely stated in treatises,2 textbooks,3 learned journals,4 and the popular media.5 It also lurks in the background each time we hear theoretical references to “loanable funds,” practical warnings about public “crowd-out” of private investment, or the like.6 This, what I shall call “intermediated scarce private capital” view of finance bears two interesting properties. -
Levy Economics Institute of Bard College
Levy Economics Institute of Bard College Levy Economics Institute of Bard College Policy Note 2018 / 1 DOES THE UNITED STATES FACE ANOTHER MINSKY MOMENT? l. randall wray Outgoing governor of the People’s Bank of China, Zhou Xiaochuan, recently sounded an alarm about the fragility of China’s financial sector, referring to the possibility of a “Minsky moment.” Paul McCulley coined the term and applied it first to the serial bursting of the Asian Tiger and Russian bubbles in the late 1990s, and later to our own real estate crash in 2007 that reverberated around the world as the global financial crisis (GFC). We are still mopping up after the excesses in the markets for mortgage-backed securities, collateralized debt obligations (squared and cubed), and credit default swaps. Governor Zhou’s public warning was unusual and garnered the attention he presumably intended. With the 19th Communist Party Congress in full swing in Beijing, there is little doubt that recent rapid growth of Chinese debt (which increased from 162 percent to 260 percent of GDP between 2008 and 2016) was a topic of discussion, if not deep concern. Western commentators have weighed in on both sides of the debate about the likelihood of China’s debt bubble heading for a crash. And yet there has been little discussion of the far more probable visitation of another Minsky moment on America. In this policy note, I make the case that it is beginning to look a lot like déjà vu in the United States. Senior Scholar l. randall wray is a professor of economics at Bard College. -
New Tech V. New Deal: Fintech As a Systemic Phenomenon
New Tech v. New Deal: Fintech as a Systemic Phenomenon Saule T. Omarova† Fintech is the hottest topic in finance today. Recent advances in cryptography, data analytics, and machine learning are visibly “disrupting” traditional methods of delivering financial services and conducting financial transactions. Less visibly, fintech is also changing the way we think about finance: it is gradually recasting our collective understanding of the financial system in normatively neutral terms of applied information science. By making financial transactions easier, faster, and cheaper, fintech seems to promise a micro-level “win-win” solution to the financial system’s many ills. This Article challenges such narratives and presents an alternative account of fintech as a systemic, macro-level phenomenon. Grounding the analysis of evolving fintech trends in a broader institutional context, the Article exposes the normative and political significance of fintech as the catalyst for a potentially decisive shift in the underlying public-private balance of powers, competencies, and roles in the financial system. In developing this argument, the Article makes three principal scholarly contributions. First, it introduces the concept of the New Deal settlement in finance: a fundamental political arrangement, in force for nearly a century, pursuant to which profit-seeking private actors retain control over allocating capital and generating financial risks, while the sovereign public bears responsibility for maintaining systemic financial stability. Second, the Article advances a novel conceptual framework for understanding the deep-seated dynamics that have eroded the New Deal settlement in recent decades. It offers a taxonomy of core mechanisms that both (a) enable private actors to continuously synthesize tradable financial assets and scale up trading activities, and (b) undermine the public’s ability to manage the resulting system-wide risks. -
Shadow Banking and the Political Economy of Financial Innovation
Shadow Banking and the Political Economy of Financial Innovation Anastasia Nesvetailova Introduction This article examines the lessons the phenomenon of shadow banking poses to students of political economy today. I do this by focusing on the role of the shadow banking system in the global financial crisis, and inquiring into the role that financial innovation and securitisation in particular, play in the financialised capitalism of today. My major premise here is that in retrospect, the global financial meltdown was peculiar in its dynamics. Although it was quickly diagnosed as a credit crunch and a financial crisis, it was not triggered by a collapse of an overvalued market, like for instance, the dotcom crash of 2001. Similarly, while it quickly matured into an international banking crisis, it did not involve a classical bank run which remains an anachronism in the age of deposit insurance guaranteed by the state. Finally and perhaps most peculiarly, although chronologically the crisis signalled the end of the credit boom of 2002-07 and was even interpreted as the collapse of a super-bubble (Soros 2008), the global crisis was not driven by investor mania or irrational speculation by market participants. Instead, the crisis of 2007-09 was triggered by the inability to value assets and execute over-the-counter (OTC) transactions with highly complex, tailor-made financial instruments created by the financial industry through the practice of securitisation (transforming illiquid loans into financial securities). In 2007, the scale of this web of financial innovation was captured by Paul McCulley who argued that ‘the growth of the shadow banking system, which operated legally yet entirely outside the regulatory realm ‘drove one of the biggest lending booms in history, and collapsed into one of the most crushing financial crises we’ve ever seen’ (McCulley 2009). -
Minsky's Moment
Minsky’s moment July 30, 2016 – The Economist From the start of his academic career in the stockmarket bust or currency crash, but modern 1950s until 1996, when he died, Hyman Minsky economies had, it seemed, vanquished their laboured in relative obscurity. His research worst demons. about financial crises and their causes attracted Against those certitudes, Minsky, an owlish man a few devoted admirers but little mainstream with a shock of grey hair, developed his attention: this newspaper cited him only once “financial-instability hypothesis”. It is an while he was alive, and it was but a brief examination of how long stretches of prosperity mention. So it remained until 2007, when the sow the seeds of the next crisis, an important subprime-mortgage crisis erupted in America. lens for understanding the tumult of the past Suddenly, it seemed that everyone was turning decade. But the history of the hypothesis itself is to his writings as they tried to make sense of the just as important. Its trajectory from the margins mayhem. Brokers wrote notes to clients about of academia to a subject of mainstream debate the “Minsky moment” engulfing financial shows how the study of economics is adapting markets. Central bankers referred to his theories to a much-changed reality since the global in their speeches. And he became a posthumous financial crisis. media star, with just about every major outlet giving column space and airtime to his ideas. Minsky started with an explanation of The Economist has mentioned him in at least 30 investment. It is, in essence, an exchange of articles since 2007. -
Mortgage Crisis: Exploring Incentives Prevalent During the Boom and Bust of the 2001–2007 Mortgage Market
University of Denver Digital Commons @ DU Electronic Theses and Dissertations Graduate Studies 1-1-2015 Mortgage Crisis: Exploring Incentives Prevalent During the Boom and Bust of the 2001–2007 Mortgage Market Justin P. Nowicki University of Denver Follow this and additional works at: https://digitalcommons.du.edu/etd Part of the Finance Commons Recommended Citation Nowicki, Justin P., "Mortgage Crisis: Exploring Incentives Prevalent During the Boom and Bust of the 2001–2007 Mortgage Market" (2015). Electronic Theses and Dissertations. 1072. https://digitalcommons.du.edu/etd/1072 This Thesis is brought to you for free and open access by the Graduate Studies at Digital Commons @ DU. It has been accepted for inclusion in Electronic Theses and Dissertations by an authorized administrator of Digital Commons @ DU. For more information, please contact [email protected],[email protected]. MORTGAGE CRISIS: EXPLORING INCENTIVES PREVALENT DURING THE BOOM AND BUST OF THE 2001-2007 MORTGAGE MARKET __________ A Thesis Presented to The Faculty of Social Sciences University of Denver __________ In Partial Fulfillment of the Requirements for the Degree Master of Arts __________ by Justin P. Nowicki November 2015 Advisor: Dr. Tracy Mott Author: Justin P. Nowicki Title: MORTGAGE CRISIS: EXPLORING INCENTIVES PREVELENT DURING THE BOOM AND BUST OF THE 2001-2007 MORTGAGE MARKET Advisor: Dr. Tracy Mott Degree Date: November 2015 ABSTRACT The purpose of this thesis is to explain the mortgage market’s behavior from 2001 through the first quarter of 2007 by discussing the economic incentives key market participants faced. By exploring incentives faced by key participants, a multifaceted yet logical explanation for the aggressive economic expansion and contraction appears. -
How to Take the Curves in Shifting Financial Markets and Keep Your Portfolio on Track
ffirs.qxd 5/17/07 3:53 PM Page i Your Financial Edge ffirs.qxd 5/17/07 3:53 PM Page ii ffirs.qxd 5/17/07 3:53 PM Page iii Your Financial Edge HOW TO TAKE THE CURVES IN SHIFTING FINANCIAL MARKETS AND KEEP YOUR PORTFOLIO ON TRACK Paul McCulley Jonathan Fuerbringer John Wiley & Sons, Inc. ffirs.qxd 5/17/07 3:53 PM Page iv Copyright © 2007 by Paul McCulley and Jonathan Fuerbringer. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. Wiley Bicentennial Logo: Richard J. Pacifico. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and authors have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. -
Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in A
Does Central Bank Independence Frustrate the Optimal Fiscal-Monetary Policy Mix in a Liquidity Trap? By Paul McCulley, Chair, GIC Global Society of Fellows and Zoltan Pozsar, Visiting Scholar, GIC Global Society of Fellows Paper to be presented at the Inaugural Meeting of the Global Interdependence Center’s Society of Fellows on March 26, 2012 at the Banque de France, Paris March 26, 2012 Abstract “[T]he role of an independent central bank is different in inflationary and deflationary environments. In the face of inflation, which is often associated with excessive [government borrowing and] monetization of government debt, the virtue of an independence central bank is its ability to say “no” to the government. [In a liquidity trap], however, excessive [government borrowing] and money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances [of a liquidity trap], greater cooperation for a time between the [monetary] and the fiscal authorities is in no way inconsistent with the independence of […] central bank[s], any more than cooperation between two independent nations in pursuit of a common objective [or, for that matter, cooperation between central banks and fiscal authorities to facilitate war finance] is consistent with the principle of national sovereignty.” Governor Ben S. Bernanke 1 Section I - Introduction The United States and much of the developed world are in a liquidity trap. However, policymakers still have not embraced this diagnosis which is a problem as solutions to a liquidity trap require specific sets of policies. -
Hyman Minsky Meets Secular Stagnation
Hyman Minsky Meets Secular Stagnation Steven M. Fazzari* February 23, 2020 *Departments of Economics and Sociology, Washington University in St. Louis. This chapter has been informed by many years of lectures at the Hyman Minsky summer workshop sponsored by the Levy Economics Institute at Bard College. Comments from the participants at these workshops are gratefully acknowledged. In the aftermath of the 2007-2009 Great Recession and global financial crisis, the U.S. recovery has been weak. Indeed, more than a decade after the trough of the recession one might question the extent to which there has been any “recovery” at all. While real GDP has grown and the labor market has certainly improved, output in 2019 has not returned to anything close to its pre-crisis trend and there is no indication whatsoever that this gap will be closed in the years to come.1 This outcome has been labeled “secular stagnation,” most prominently by Lawrence Summers (2014). Although Hyman Minsky’s contributions to macroeconomics are wide- ranging, he is best known for his theory of financial instability, explaining the cyclical nature of capitalism. This chapter argues that Minsky’s insights also help explain recent U.S. secular stagnation when coupled with the dramatic rise of income inequality. In brief summary form, the argument is as follows. A major reason for stagnation is that high-income households recycle a substantially smaller share of their pre-tax income back into spending. Therefore, as inequality rises and most of the growth of income goes to the top slivers of the income distribution demand growth stagnates, other things equal. -
Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation
Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation By Paul McCulley, Chair, GIC Global Society of Fellows and Zoltan Pozsar, Visiting Scholar, GIC Global Society of Fellows January 7, 2013 HELICOPTER MONEY: OR HOW I STOPPED WORRYING AND LOVE FISCAL-MONETARY COOPERATION ABSTRACT During private deleveraging cycles monetary policy will largely be ineffective if it is aimed at stimulating private credit demand. What matters is not monetary stimulus per se, but whether monetary stimulus is paired with fiscal stimulus (otherwise known as helicopter money) and whether monetary policy is communicated in a way that helps the fiscal authority maintain stimulus for as long as private deleveraging continues. Fiscal dominance and central bank independence come in secular cycles and mirror secular private leveraging and deleveraging cycles, respectively. As long as there will be secular debt cycles, central bank independence will be a station, not a final destination. Paul McCulley is Chair of the Global Interdependence Center’s (GIC) Global Society of Fellows. Zoltan Pozsar is a Visiting Scholar at GIC. Paul McCulley thanks Paul Krugman and Martin Wolf for intellectual camaraderie. The authors wish to thank Stijn Claessens, Mohamed El-Erian, Bill Gross, Julia Király, Elena Liapkova-Pozsar, Perry Mehrling, Krisztián Orbán, James Sweeney, Zsuzsa Delikát and Tamás Vojnits for very helpful discussions and comments. © McCulley and Pozsar 1 HELICOPTER MONEY: OR HOW I STOPPED WORRYING AND LOVE FISCAL-MONETARY COOPERATION 1. -
Pdfjean-Charles Rochet
Commentary: Rethinking Capital Regulation Jean-Charles Rochet It is a privilege to be here today to discuss this stimulating article of my distinguished colleagues Kashyap, Rajan and Stein, and to partic- ipate in this very interesting conference on how to maintain financial stability after the current credit crisis. Many influential commentators1 have advocated for fundamental reforms of financial regulatory/supervisory systems as a necessary re- sponse to the crisis. Capital regulations are clearly a crucial element of these systems, and the article by Kashyap, Rajan and Stein offers several important insights and a specific proposal on how to improve these regulations. This article is therefore particularly timely. I will organize my comments in three parts: 1. The objectives of capital regulation. 2. The regulatory treatment of capital insurance. 3. Reorganizing the financial infrastructure. 1. The objectives of capital regulation Capital regulation is a fundamental component of the financial safety net, together with deposit insurance, supervisory interven- tion, liquidity support by central banks and in some cases capital 473 08 Book.indb 473 2/13/09 3:58:56 PM 474 Jean-Charles Rochet injections by the Treasury. This financial safety net has officially two objectives: • To protect small depositors against the failure of their bank (micro- prudential objective), • And to protect the financial system as a whole against aggregate shocks (macro-prudential objective). As pointed out by Kashyap, Rajan and Stein, individual bank fail- ures and systemic crises cannot be eliminated altogether, which raises two questions: • What should be their “optimal” frequency? • How should we manage individual failures and, more impor- tantly, systemic crises when they occur? Existing capital regulations, notably Basel 2, have only offered a relatively precise answer to the first question, at least for individual bank failures. -
Working Paper No. 579 a Perspective on Minsky Moments: the Core Of
Working Paper No. 579 A Perspective on Minsky Moments: The Core of the Financial Instability Hypothesis in Light of the Subprime Crisis* by Alessandro Vercelli Department of Economic Policy, Finance, and Development (DEPFID), University of Siena October 2009 *I wish to thank Serena Sordi and Jan Toporowski for their valuable advice. I am also grateful to participants in seminars at the Universities of London (SOAS), Bergamo, Siena, Venezia (CEG), and Milano (Bicocca) for stimulating comments. The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. The Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. The Levy Economics Institute P.O. Box 5000 Annandale-on-Hudson, NY 12504-5000 http://www.levy.org Copyright © The Levy Economics Institute 2009 All rights reserved. ABSTRACT This paper aims to help bridge the gap between theory and fact regarding the so-called “Minsky moments” by revisiting the “financial instability hypothesis” (FIH). We limit the analysis to the core of FIH—that is, to its strictly financial part. Our contribution builds on a reexamination of Minsky’s contributions in light of the subprime financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy of financial units (hedge, speculative, and Ponzi) and suggest a different approach that allows a continuous measure of the unit’s financial conditions.