l. randall wray university of missouri-kansas city, umkc [email protected]

A Minsky-Schumpeter Approach to Reconstituting Financial Institutions for the Capital Development

of the Economy

L. RANDALL WRAYUniversity of Missouri-Kansas City, UMKC

[email protected]

http://neweconomicperspectives.blogspot.com/

mailto:[email protected]

http://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– Innovationtransformative 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

Shares of Financial Institutions (% of Total Assets)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

life insurance companies

Managed Money

Funding Corporations

Security Brokers and Dealers

Real Estate Investment Trusts

Finance Companies

Issuers of Asset-Backed Securities

Agency and GSE-backed MortgagePoolsGovernment-Sponsored Enterprises

State and Local Government RetirementFundsCredit Unions

Saving Institutions

Bank Holding Companies

Commercial BankingSource: Federal Reserve Flow of Funds Accounts

Managed Money

Commercial Banking

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

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Households and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitHouseholds and nonprofitNoncorporate and farm Noncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farm

Noncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farmNoncorporate and farm

Nonfinancial nonfarm corporate

Nonfinancial nonfarm corporateNonfinancial nonfarm corporate

Nonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporate

Nonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporate



Nonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporate


Nonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporateNonfinancial nonfarm corporate

Private finance

Private finance

Private financePrivate financePrivate finance

Private financePrivate financePrivate financePrivate financePrivate financePrivate finance

Private financePrivate financePrivate financePrivate finance

Private finance

Private financePrivate finance


Private financePrivate financePrivate financePrivate financePrivate finance

Private finance


Private financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate finance

Private financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate financePrivate finance


Private financePrivate financePrivate financePrivate financePrivate financePrivate finance


GSE

GSEGSE

GSEGSE

GSEGSEGSEGSEGSEGSE

GSEGSEGSE

GSEGSE

GSEGSE

GSEGSE

GSEGSEGSEGSEGSE

GSE

GSEGSEGSEGSE

GSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSE

GSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSEGSE

GSEGSE

GSEGSEGSEGSE

GSEGSE

GSEGSEGSE

GovernmentGovernmentGovernment

GovernmentGovernment

GovernmentGovernmentGovernmentGovernmentGovernmentGovernment


Government

Government





GovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernment

GovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernment

GovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernmentGovernment



GovernmentGovernmentGovernmentGovernment


Total Financial Liabilities Relative to GDP

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: Colo-nial 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

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

19

55

19

58

19

61

19

64

19

67

19

70

19

73

19

76

19

79

19

82

19

85

1988

19

91

19

94

19

97

20

00

20

03

20

06

2009

Q1

Profits

ValueAdded

Source: Bureau of Economic Administration

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 debtrobust 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 re-

supervising– 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

l. randall wray university of missouri-kansas city, umkc [email protected]

Documents