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on Post Keynesian Economics |
| By: | L. Randall Wray |
| Abstract: | This paper applies Hyman Minsky's approach to provide an analysis of the causes of the global financial crisis. Rather than finding the origins in recent developments, this paper links the crisis to the long-term transformation of the economy from a robust financial structure in the 1950s to the fragile one that existed at the beginning of this crisis in 2007. As Minsky said, "Stability is destabilizing": the relative stability of the economy in the early postwar period encouraged this transformation of the economy. Today's crisis is rooted in what he called "money manager capitalism," the current stage of capitalism dominated by highly leveraged funds seeking maximum returns in an environment that systematically under-prices risk. With little regulation or supervision of financial institutions, money managers have concocted increasingly esoteric instruments that quickly spread around the world. Those playing along are rewarded with high returns because highly leveraged funding drives up prices for the underlying assets. Since each subsequent bust wipes out only a portion of the managed money, a new boom inevitably rises. Perhaps this will prove to be the end of this stage of capitalism--the money manager phase. Of course, it is too early even to speculate on the form capitalism will take. I will only briefly outline some policy implications. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_578&r=pke |
| By: | Ronald Jean Degen (International School of Management Paris) |
| Abstract: | This paper examines the financial crisis in 2007-9 that was more severe than previous crashes, including the dot-com crash of 2001 and the market crash of 1987 (with the exception of the Great Depression of 1929). This severity was due to excessively risky speculative bets taken by the executives of financial institutions. When the ?housing bubble? burst, these speculative bets, which were based on the U.S. housing market and the subprime mortgages, triggered the financial systemic failures of the U.S. in June 2007 (the subprime mortgage crisis) and September 2008 (the shadow-banking crisis). The systemic financial failure of September 2008 (the shadow-banking crisis) was greatly amplified by excessively risky speculations and this led to a rapid deterioration of the entire global economy. This paper examines the potential for moral hazard in the financial system leading up to this crisis, and attempts to determine if this was a motivating factor in these risky bets. |
| Keywords: | moral hazard, financial crisis of 2007-9, burst of the housing bubble, subprime mortgages crisis, shadow-banking crisis |
| JEL: | L0 M0 M1 |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pil:wpaper:46&r=pke |
| By: | Tullio Jappelli (University of Napoli "Federico II", CSEF and CEPR) |
| Abstract: | Many studies show that most people are not financially literate and are unfamiliar with even the most basic economic concepts. However, the evidence on the determinants of economic literacy is scant. This paper uses international panel data on 55 countries, merging indicators of economic literacy with a large set of macroeconomic and institutional variables. Results show that there is substantial heterogeneity of financial and economic competence across countries, and that human capital indicators (PISA test scores and college attendance) are positively correlated with economic literacy. Furthermore, inhabitants of countries with more generous social security systems are generally less literate, lending support to the hypothesis that the incentives to acquire economic literacy are related to the amount of resources available for private accumulation. |
| Keywords: | Economic Literacy, Human Capital, Social Security |
| JEL: | E2 D8 G1 |
| Date: | 2009–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:238&r=pke |