Transcript roundtable on banks

A Minsky-Schumpeter Approach to Reconstituting
Financial Institutions for the Capital Development
of the Economy
L. RANDALL WRAY
University of Missouri-Kansas City, UMKC
[email protected]
WWW.LEVY.ORG
http://neweconomicperspectives.blogspot.com/
Keynes-Minsky-Schumpeter
• Keynes-Minsky: 3 outstanding faults
– Unemployment, Inequality, Instability
• Minsky-Schumpeter: Innovation and finance
– Schumpeter: banks finance innovation, creative
destruction
– Minsky: financial innovations
• Integration: Evolution and Transformation
– Financial instability hypothesis
– Stages or Epochs: Money manager capitalism
Keynes-Minsky: Instability
• Theory of Effective Demand
– No tendency to full emp
• Investment theory of growth and the cycle
– Steady growth unlikely
• Financial theory of investment
– Stability is destabilizing
• Role for Big Government and Big Bank
– Constrain instability
Minsky-Schumpeter: Innovation
and Economic Development
• Banker as Ephor
– Established firm uses retained profit
– Innovator requires finance
• Innovation drives growth
– Growth within circular flow slow and steady
– Innovationtransformative growth: Econ Development
• Banks innovate, too
– Profit-seeking; circumvent constraints; stretch liquidity
• But financial innovation need not be directed to economic
development
Reconstituting the Financial System
• Minsky Project: Reconstituting Finance to
Promote Capital Development of the Economy
• Requires Proper Framework
– 1. a capitalist economy is a financial system;
– 2. neoclassical economics is not useful because it denies that the
financial system matters;
– 3. the financial structure has become much more fragile;
– 4. this fragility makes it likely that stagnation or even a deep depression
is possible;
– 5.a stagnant capitalist economy will not promote capital development;
– 6.however, this can be avoided by apt reform of the financial structure
in conjunction with apt use of fiscal powers of the government.
Reform requires understanding:
What do banks do?
• Like all econ units, take positions in assets by issuing liabilities
– Make payments for customers
– Anyone can create money
• Banks are highly leveraged (93-95%), must continually refinance
positions
– Liquidity and insolvency; govt backstop
– If not, make position by selling out position; debt deflation
• Types: commercial banking, investment banking, universal
banking, public holding company
– Skeptical banker; profits come over time; success of lender requires
success of borrower
– CB: how do I get repaid; IB: how can I sell this IOU
A Minsky Moment or a Minsky
Half-Century?
• Stages Approach 1980s-90s
–
–
–
–
Commercial capitalism
Finance capitalism
Paternalistic (Managerial-Welfare State) capitalism
Money Manager capitalism (predator state,
financialization, ownership society, neoliberalism,
neoconservativism, shadow banking)
•
•
•
•
•
Stability bred instability
Accumulation of financial assets/liabilities
Globalization
Securitization
Self-supervision
Boom and Bust
• 1980s Thrift & Bank Crises
– Thrifts and Commercial real estate
– Banks and LDC debt
• 1980s Leverage Buy-outs
– Michael Milken and Junk Bonds
• 1990s New Economy and Nasdaq
– “Irrational Exuberance”
• 2000s Residential Real Estate
– Subprimes; foreclosures
• 2000s Commodity Markets
– Quadrupled oil prices; food riots; starvation
Each crisis worse than the previous
US: Decreasing Weight of the Banking Sector
life insurance companies
Shares of Financial Institutions (% of Total Assets)
120.00
Managed Money
Funding Corporations
Security Brokers and Dealers
100.00
Real Estate Investment Trusts
Managed Money
80.00
Finance Companies
60.00
Issuers of Asset-Backed Securities
40.00
Agency and GSE-backed Mortgage
Pools
Government-Sponsored Enterprises
20.00
Commercial Banking
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
0.00
Source: Federal Reserve Flow of Funds Accounts
State and Local Government Retirement
Funds
Credit Unions
Saving Institutions
Bank Holding Companies
Commercial Banking
Total Financial Liabilities Relative to GDP
5
4.5
4
3.5
GSE
3
2.5
2
Private finance
1.5
Government
Nonfinancial nonfarm
corporate
1
0.5
Noncorporate and farm
Households and nonprofit
1916
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
0
Sources: Historical Statistics of the United States: Millennium Edition (Tables Cj870-889, Ca9-19, Ce42-68, Cj787-796, Cj748-750, Cj389-397, Cj437-447, and Cj362-374), Historical Statistics of the United States:
Colonial Times to 1970 (Series X 689-697), NIPA, Flow of Funds (from 1945).
Note: The government sector excludes all financial activities of the government (retirement funds, GNMA, etc.). GSE sector includes government-sponsored enterprises and agency- and GSE-backed mortgage pools
(includes, among others, GNMA and FHA pools). "Private finance" excludes the GSE sector and monetary authorities (which are both part of the financial sector in the Flow of Funds accounts). Before 1945, data for
financial institutions is computed from data of the Census Bureau by taking all the liabilities (excluding equity) of commercial banks, credit unions, savings institutions, life insurance stock companies, and property and
life insurance companies, and by removing private banks notes, all deposits, and life insurance reserves. From 1945, the total financial liabilities of the financial sector excludes, net interbank liabilities of commercial
banks, liabilities of monetary authorities, private and public pension fund reserves, money market mutual funds shares, mutual funds shares and the items previously cited. The liabilities of monetary authorities are not
included anywhere. Data for the households and noncorporate sectors is deduced from Census Bureau data about net increase in liabilities and by computing backward from the 1945 level.
Financialization of the US Economy
Share of the Financial Sector in Corporate Profits and Value
Added
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
2
20 006
09
Q
1
5.00
0.00
Source: Bureau of Economic Administration
Profits
Value
Added
GFC: What went wrong?
• Widespread “failures” in regulation and
supervision
– Treasury, Fed, esp NYFed (Greenspan, Geithner,
Rubin, Summers, Bernanke, Dodd, Gramm)
• Dramatic failures of corporate governance and
risk management
– Traders like Hank Paulson and Rubin rise to the top
– Fannie’s Franklin Raines max’s CEO salary
• Excessive borrowing, risky investments, lack of
transparency
• Systemic breakdown in accountability and ethics
– Goldman’s teams
Next time: Let the Market Work
• $29 Trillion to restore money mngr capitalism
• Radical euthansia: all major banks will fail
• All managed funds will fail: pensions, sovereign
wealth funds, mutuals, insurers, hedge funds
– That is a good thing!
– Minsky’s “simplification” of the financial system
• Will emerge with less private debt, more govt
debtrobust financial system
– Constrained with new laws, supervision
– Return to underwriting, hold to maturity
• Financialization replaced with new New Deal to
resolve 3 faults
What Should Financial System Do?: Key
Elements to Promote Capital Development
• 1. safe and sound payments system;
• 2. short term loans to households and firms, and, possibly, to
state and local government;
• 3. safe and sound housing finance system;
• 4. a range of financial services including insurance, brokerage,
and retirement savings services; and
• 5. long term funding of positions in expensive capital assets.
NB: there is no reason why these should be consolidated, nor
why all should be privately supplied
Conclusions for Reform: Gov’t Role
• Reducing concentration plus retaining risk can
reorient banks back to relationship banking
• Promote Public/Private Partnership for capital
development
• Role for gov’t to play in re-regulating and resupervising
– There are no magic formulas (capital ratios, living wills,
skin in the game)
• Role for gov’t in direct provision of financial services
– Payments system
– Direct lending to serve public purpose
– Guarantees for public-private partnerships