Why Don't the Bailouts Work? Design of a New Financial System Versus a Return to Normalcy

Posted: 15 Jul 2009

See all articles by Jan A. Kregel

Jan A. Kregel

Bard College - The Levy Economics Institute

Date Written: July 2009

Abstract

The innovative support measures introduced by the US Central Bank and Treasury in response to the current crisis to bolster bank balance sheets have had little success in restoring liquidity to financial markets. These policies mirror similar policies employed in the 1930s in the USA and the 1990s in Japan, in both cases with little impact. This paper identifies three policies impacting incomes rather than prices, the assessment of system failure, and proposals for system design that were employed in dealing with prior financial crises. That they have not been introduced in response to the present crisis may explain why current measures have not yet had their intended impact of restoring bank lending to the productive economy.

Keywords: Liquidity crisis, Debt deflation, Bank balance sheets, New Deal financial regulation, Zirp (zero interest rate policy), Quantitative easing

JEL Classification: E12, E32, E58, G21, G38, G19

Suggested Citation

Kregel, Jan A., Why Don't the Bailouts Work? Design of a New Financial System Versus a Return to Normalcy (July 2009). Cambridge Journal of Economics, Vol. 33, Issue 4, pp. 653-663, 2009. Available at SSRN: https://ssrn.com/abstract=1433954 or http://dx.doi.org/10.1093/cje/bep036

Jan A. Kregel (Contact Author)

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504
United States
845-758-7700 (Phone)
845-758-1149 (Fax)

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