Reasoning with the Future of Economics: Part 5

“Alternate perspectives are conveyed and assessed in Part 5. Along with offering a concise summary, coupled with final policy implications in response to the Global Financial Crisis…”

The likes of H. Minsky, and, A. Cukierman, agree with certain causes of the GFC explained throughout the five-part series on 1929 to 2007, however, ultimately allude to different policy solutions.

Equations.1

Government policy has outlandishly deviated over the last 23 years since (Minsky 1995, p. 206) (1). Based on Minsky’s economic intuition, the policy implication here, has to be to rein in government spending through forms of austerity.

Our conclusion to (Cukierman 2011) (2) is that central banks have taken on too many responsibilities from the period of the Great Depression to the GFC date. Monetary policy is inherently a double-edged sword, where financial stability is a trade-off for price stability. Furthermore, suggesting to:

  1. Remunerate regulators on-par with the market institutions they regulate
  2. Limit remunerations within the financial sector
  3. Extend regulation and supervision to all financial institutions

Makes the case for, the overreaching and gross microeconomic distortions spoken of in (Calomiris 2011) (3).

  • Firstly, taxpayer capital would go toward removing the salary differential, which in turn, causes the labour market to bid up their wage to be compensated for avoiding regulation, thus the policy comes to no effect.
  • Secondly, capping remuneration in the financial sector only pushes workers from the regulated to the unregulated sector.
  • Thirdly and finally, extending the scope of regulation to all financial institutions is in total contradiction to the proposed policy implications written in part 4, on regulatory arbitrage, and throughout the expose.

Conclusion

Throughout this five-part expose, the 2007-2009 GFC was analysed with respect to the 1929 Great Crash and the ensuing Great Depression. The findings expressed in and throughout, spell out how the GFC was not an unique event relative to history. Contracting money supply by a third, spelt disaster in prolonging the Great Depression, however, extended periods of ‘loose’ monetary policy were the key protagonist for prolonging the GFC.

This expose points out that policy decisions throughout the 1980s to the 1990s, played instrumental roles in inflating equity, housing and securitised debt markets. Regulation intended to curtail certain banking behaviours indeed had detrimental opposite effects on global markets. The implication for policy in market-based economies is to eliminate the pervasive government policies spoken of throughout, in order to restore and re-balance confidence in global financial markets.

← Part 4  

References:

(1) Minsky, H. 1995, ‘Financial Factors in the Economics of Capitalism’, Journal of Financial Services Research, vol. 9, no. 3-4, pp. 197-208.

(2) Cukierman, A. 2011, ‘Reflections on the crisis and on its lessons for regulatory reform and for central bank policies’, Journal of Financial Stability, vol. 7, pp. 26-37.

(3) Calomiris, C. 2011, ‘Origins of the Subprime Crisis’, Columbia Business School and National Bureau of Economic Research, pp. 73-91.