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When Minsky and Marx met
at Basel: money, banks
and crisis in the financialization
era Lorenzo Esposito - Bank of Italy* andCattolica University –Economic Policy Department, Milan* personal capacity
Bergamo 8.4.2019
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What is on the agenda
1. The meaning of 2008
2. Money and finance in the GEE world
3. Methodological detour: assumptions and predictions
4. Causes and consequences of financialization
5. Something on Marx and Minsky
6. What was wrong in the banking supervision framework and how to deal with it
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Redde rationem
«Much of the past 30 years of macroeconomics wasspectacularly useless at best and positively harmful atworst» (Krugman);
«The global financial crisis has dealt a severe blow,not only to the EMH but tot he whole discipline offinancial economics» (Moosa);
«I no longer believe in the market’s self-healingpower» (Ackerman),
«Nationalize to save the free market» (FT)
«We are all socialist now» (Newsweek)
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The meaning of 2008
2008: an historical turning point like 1914 or 1929
Indebted growth (in China as in the OECD
countries) leverage is rising
Economic policy framework flows from it
•Monetary policy: permanent low rates, permanent QE
•Fiscal policy: no taxes for the rich
•Industrial policy: privatization, deregulation
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Il ‘29…
in e oggi…
7http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging
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Has economics failed?
It depends…
What is missing in mainstream economics
• Production relationships (classes’ functions)
• Laws of motion (historical development doesn’ exist)
• Utility instead of values: goods not commodities
• Finance and banks: money does not exist
• Real competition and hence real rationality/efficiencyin the markets (not of the markets, neither«behavioral»)
• States and central banks are a neutral technicaldevice not institutions
A rapid methodological detour
• Methodological individualism: macro concepts arenot allowed (micro-foundations: RAH)
• Utilitarianism: we seek the maximum of pleasureas if we know what it is and how to find it (andmoney is irrelevant: C-M-C not M-C-M’)
• The need of an external foundation: equations(axiomatic anchor), biologism (hedonic,neuroscience)
• What a demonstration/prediction looks like?
• Why micro will never become macro?
What does it mean to «predict»?Friedman’s «as if» approach: we do not analyse the plausibility of assumptions as long
as they produce «good» models»
Historical trends or formalized models?
• As economists we can strive for a reconstruction of the
core dynamics of an epoch, and social, political and
economic ensuing consequences
• What is endogenous?
• If you believe in the invisible hand (Say’s Law), crises
are by construction impredictable shocks and history is
useless
• «Capital has no awareness whatever of the nature of its
process of realization, and has an interest in having an
awareness of it only in times of crisis» (Marx)
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Main trends in financial system
1. Globalization means financialization and vice versa
2. Financialization-globalization yielded: I) unprecedented
income, wealth and market share concentration, ii)
growing interconnections among operators iii) a
reduction in their diversity
3. Growing role of institutional investors determine
beauty contest and instability (“there are no long-term
stockholders anymore”)
4. Financialized welfare state (e.g. pension funds)
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Therefore…
Systemic risk is increasing: diversification
is impossible, national peculiarities are
less and less significant
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Banks and 2008
• Big banks rule the world: dimension, economic
connections, convergence with “big tech”
• Consequences on public policies: “the mind-set
was that there should be no regulation” (Alvarez):
financialization rewards unfairness and
recklessness (no bankers has been trialled because
ruining the world is not a crime)
• Markets are stronger than governments
(“Government Sachs”), unions are weak (Phillips
curve is flat)
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Il ‘29…
in e oggi…
After Roosevelt
After Obama
Yes, it already
has
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Marx and Minsky in pills I- Capitalism is based on profits hence on how
investment are funded (growth, cycles, uncertainty)
- There is a tendency of the general profit rate todecrease and of sectoral profit rate towards theaverage rate via competition
- The fall of profitability and a weak demand producefinancialization
- Ebb and flows of profits and of the profit rateexplain the trend and the cycle of capitalisteconomy including the prevailing economic policiesand regulation.
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Marx and Minsky in pills II
- It is rational for every investor to buy the new asset
as it yields an higher return. This means bubbles
and beauty contest.
- The financial leverage of investors grows with the
bubble as the credit flows to finance it: we all
become Ponzi malgré ourselves
- At a certain point, the bubble collapses because it
incorporates an impossible assumption: the idea
that an asset can yields for ever an higher than
average rate of profit, that would mean that profit
maximization does not work anymore.
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Marx and Minsky in pills III- Competition is the key to explain bubbles (not the
biological retrenchment of behavioral economics);competition explain low wages and uncertainty aswell as high financial leverage: firm’s aggressivnessis endogenous (“invest or die”);
- Finance allows capitalism for more flexibility butalso more fragility;
- Liquidity versus uncertainty: when investment isreversible, the accumulation of debt is reversible aswell.
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Marx and Minsky in pills IV- Central banks do not control money supply
especially during bubbles (Taylor rule?);
- Cash flows are the key to understand financialfragility: stability is destabilizing
- Deregulation and pro-business policies more ingeneral are needed: they increase profits in theshort run, worsening stagnationist tendencies in themedium run (shortsightedness? There is noalternative)
- Remedies: LLR, ELR, big government, break up bigbanks
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Was the 2008 a surprise?• Financialization, financial innovation and
deregulation are endogenous
• 2008 was only the last and strongest of a host of
financial crises
• Monetary policy too accommodative, regulation too
“market friendly”
• Systemic risk was not considered by banking
regulation (Basel 2)
• Did they understood the lesson?: all in all re-
regulation is not radically reshaping the system:
“Hyman Minsky would not be impressed” (Wray),
big banks still rule the world35
Banking supervision after 2008
Because of the spectacular failure of banking supervision
framework, initiatives to change course, at least on paper, have
been many:
Prudential supervision: regulatory capital has been raised in
quantity and quality. Other important aspects : i) the return of
non-risk-based requirements (the leverage ratio), ii) the
coming back of the liquidity risk, iii) specific measures for big
banks (so called SIFI or G-SIB).
Compliance and other measures: resolution mechanisms,
consumer protection measures, financial education, “skin in
the game incentives”.
Structural measures (Volcker rule, ring-fencing, “extreme”
proposals such as the Kotlikoff's limited purpose banking).36
How to rebuild the banking regulation
following Minsky
Financial instability hypothesis: I) objectives: the
fundamental role of banking supervision is to preserve
financial stability, other objectives should be aligned to it II)
Tools: macro-prudential supervision III) Institutional design:
monetary policy and banking supervision need coordination
(the end of two peaks model, banking regulation is
intrinsically connected to lending of last resort). What about
central bank independence? Coordination among monetary,
fiscal and supervisory policies.
Cash Flow Oriented Bank Examination: I) liquidity at the
centre-stage (it provides the link between micro and macro
supervision) II) profitability means leverage not efficiency III)
principle-based supervision to cope with innovation.37
What can we achieve with Minsky?
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What will happen with the next crisis
• Banking re-regulation is not changing thefinancial landscape: big banks still rule theworld
• Monetary policy is permanentlyexpansionary: “divorce is over” (Goodhart)
• Fiscal policy can go back to XXIVchapter? (old style Keynesianism)
• Is globalization coming to an end? Trumpand Xi
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The economists and the next crisis• The economic theory as the “master discourse” of
Lacan (marketing is the real macroeconomics wisdom)
• Do we stand for pluralism?
• How a theoretical Minsky moment can last?
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