PDF Ebook Systemic Failure of Private Banking : A Case for Public Banks
The current crisis represents systemic failure of private banking. The private nature of banks has created opacity, and exacerbated problems of liquidity, bad assets and capital shortage. Furthermore, private banks have failed in information gathering and risk management, as well as in mediating the acquisition of vital goods by households. It is paradoxical that, confronted with such systemic failure, post?Keynesian and other heterodox economists have generally made non?systemic reform proposals. This paper draws on Marxist theory to argue that systemic change is necessary, including conversion of failed private into public banks run transparently and with democratic accountability. Public banks could more easily confront the problems of liquidity and solvency; they could also play a long?term role by providing stable flows of social credit to households as well as to small and medium enterprises. Finally, public banks could provide long?term credit redirecting mature economies toward new economic activities.
At the core of the current crisis lies systemic failure of private banking both commercial and investment. The failure is systemic because the crisis has been caused by the interaction of several components of the financial system, above all, banks. No single element of finance is uniquely at fault, and nor has the turbulence been caused by malpractice in a small number of institutions. The failure is also systemic because several large commercial banks in the USA, the UK and elsewhere have been effectively bankrupt during 2008?9. Had governments allowed these to fail, it is probable that there would have been general banking collapse. On the other hand, mere prevention of bankruptcy through extraordinary measures has not resolved the underlying systemic banking problems. As a result, there has been persistent disruption of the supply of credit, exacerbating the global recession. It is unlikely that sustained accumulation will be restored without confronting the failure of banking.
The systemic nature of the crisis has been highlighted by heterodox economists, particularly post?Keynesians. For a brief period in 2007?8, talk of a ‘Minsky moment’ even attained global prominence (Whalen 2007). The content of this ‘Minsky moment’ has never been entirely clear, but the term drew on Minsky’s theory of endogenous financial instability (1986, 1992, 1996; and Minsky and Whalen 1996). Minsky claimed that ‘money manager capitalism’ had emerged in the USA after the Second World War, pivoting on pension and mutual funds, and favouring short?termism. Thus, ‘money manager capitalism’ encouraged the systematic migration of capitalist enterprises from ‘hedge’ to ‘speculative’ to ‘Ponzi’ finance. Consequently, financial fragility has increased steadily during the last several decades.
Minsky’s theory certainly posits financial instability as a systemic aspect of contemporary capitalism. Yet, despite appearances, it does not immediately fit the current turmoil. This, after all, is a crisis induced by mortgage loans to poor households that were subsequently securitised, thus ruining banks and other financial institutions. It has little to do with industrial or commercial enterprises migrating toward Ponzi finance. Indeed, the productive sector has not suffered from excessive leverage throughout the period.
This difficulty has been clear to some post?Keynesians, including Kregel (2008), who has suggested a compromise. For Kregel, the crisis is Minskyan because adjustable rate subprime borrowers acted as Ponzi units that relied on remortgaging and house price increases to finance past loans. More significantly, the crisis is also Minskyan because, during the bubble, banks exhausted their liquidity cushions, rendering themselves vulnerable to subprime default. Along similar lines, Nesvetailova (2008) claimed that the systemic disappearance of liquidity is a Minskyan process characteristic of the crisis.
Other heterodox economists have used Minsky in a more generic sense, but similarly to stress the systemic aspects of the crisis. Thus, Wray (2007, 2008) put forth detailed analytical descriptions of the US housing market as well as of the process of securitisation. The analytical link with Minsky appears to be the Ponzi nature of adjustable rate subprime borrowing as well as the spread of fragility as money?manager capitalism took hold in the USA. More complexly, and relying on a far broader range of analytical and institutional arguments, Crotty (2008, 2009) has claimed that the crisis is due to the New Financial Architecture that has emerged during the last three to four decades. A globally integrated system comprising giant banks and ‘shadow banks’ gradually took shape encouraging excessive risk taking. For Crotty, relevant insight into risk, and therefore into the inherent instability of this system, are offered by Minsky but also Keynes and Marx.
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PDF Ebook Systemic Failure of Private Banking : A Case for Public Banks
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