+ All Categories
Home > Documents > When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks...

When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks...

Date post: 24-Aug-2020
Category:
Upload: others
View: 8 times
Download: 0 times
Share this document with a friend
41
When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica University –Economic Policy Department, Milan * personal capacity Bergamo 8.4.2019
Transcript
Page 1: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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

Page 2: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

2

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

Page 3: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica
Page 4: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

4

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)

Page 5: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

5

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

Page 6: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

6

Il ‘29…

in e oggi…

Page 7: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

7http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging

Page 8: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

8

Page 9: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica
Page 10: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

10

Page 11: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

11

Page 12: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

12

Page 13: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

Has economics failed?

It depends…

Page 14: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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

Page 15: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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?

Page 16: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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»

Page 17: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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)

Page 18: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

18

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)

Page 19: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

19

Page 20: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

20

Page 21: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

21

Therefore…

Systemic risk is increasing: diversification

is impossible, national peculiarities are

less and less significant

Page 22: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

22

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)

Page 23: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica
Page 24: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

24

Page 25: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

25

Page 26: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica
Page 27: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

27

Page 28: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

28

Page 29: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

29

Il ‘29…

in e oggi…

After Roosevelt

After Obama

Page 30: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

Yes, it already

has

30

Page 31: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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.

31

Page 32: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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.

32

Page 33: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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.

33

Page 34: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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

34

Page 35: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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

Page 36: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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

Page 37: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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

Page 38: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

What can we achieve with Minsky?

38

Page 39: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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

39

Page 40: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

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?

Page 41: When Minsky and Marx met at Basel: money, banks …When Minsky and Marx met at Basel: money, banks and crisis in the financialization era Lorenzo Esposito - Bank of Italy* and Cattolica

41


Recommended