In December 2007, when most analysts were confident that the subprime mortgage crisis would be “contained” without major impact on the financial system, a working paper issued by the Levy Institute concluded, “The stage is set for a typical Minsky debt deflation in which position has to be sold to make position—that is, the underlying assets have to be sold in order to repay investors. . . . Retrenchment of consumer spending may become a reality, buttressed by the continued decline in the dollar. . . . That, along with rising petroleum prices, will further reduce real incomes and make meeting mortgage debt service that much more difficult. The system thus seems poised for a Minsky-Fisher style debt deflation that further interest rate reductions will be powerless to stop.”
Clearly, Levy Institute scholars expected an alternative evolution of events, one that would threaten the very foundations of the financial system and confirm Hyman Minsky’s thesis that financial crises are the endogenous result of system operations. Events proved them right, and as the crisis evolved and the need for regulatory change became obvious, they built on Minsky’s financial instability hypothesis to begin developing viable proposals for systemic reform.
This ebook traces the roots of the 2008 financial meltdown to the structural and regulatory changes leading from the 1933 Glass-Steagall Act to the Financial Services Modernization Act of 1999, and on through to the subprime-triggered crash. It evaluates the regulatory reactions to the global financial crisis—most notably, the 2010 Dodd-Frank Act—and, with the help of Minsky’s work, sketches a way forward in terms of stabilizing the financial system and providing for the capital development of the economy.
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