The Global Financial Crisis and the Shift to Shadow Banking

Levy Economics Institute Working Paper No. 587

30 Pages Posted: 1 Mar 2010

See all articles by Yeva Nersisyan

Yeva Nersisyan

affiliation not provided to SSRN

L. Randall Wray

University of Missouri at Kansas City; Bard College - The Levy Economics Institute

Date Written: February 25, 2010

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.

Keywords: Institutional Investors, Financial Crisis, Financialization, Money Managers, Financial Concentration, Shadow Banking, Subprime Mortgages, Securitized Mortgages

JEL Classification: G21, G23, G28

Suggested Citation

Nersisyan, Yeva and Wray, L. Randall, The Global Financial Crisis and the Shift to Shadow Banking (February 25, 2010). Levy Economics Institute Working Paper No. 587. Available at SSRN: https://ssrn.com/abstract=1559383 or http://dx.doi.org/10.2139/ssrn.1559383

Yeva Nersisyan (Contact Author)

affiliation not provided to SSRN

L. Randall Wray

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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