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The Global Financial Crisis and the Shift to Shadow Banking

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  • Yeva Nersisyan
  • L. Randall Wray

Abstract

While most economists agree that the world is facing the worst economic crisis since the Great Depression, there is little agreement as to what caused it. Some have argued that the financial instability we are witnessing is due to irrational exuberance of market participants, fraud, greed, too much regulation, et cetera. However, some Post Keynesian economists following Hyman P. Minsky have argued that this is a systemic problem, a result of internal market processes that allowed fragility to build over time. In this paper we focus on the shift to the "shadow banking system" and the creation of what Minsky called the money manager phase of capitalism. In this system, rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income—what is sometimes called "financialization"—as the financial system evolved from hedge to speculative and, finally, to a Ponzi scheme. The policy response to the financial crisis in the United States and elsewhere has largely been an attempt to rescue money manager capitalism. Moreover, in the case of the United States. the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail—and that alternative policies should be adopted. The effective solution should come in the way of downsizing the financial sector by two-thirds or more, and effecting fundamental modifications.

Suggested Citation

  • Yeva Nersisyan & L. Randall Wray, 2010. "The Global Financial Crisis and the Shift to Shadow Banking," Economics Working Paper Archive wp_587, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_587
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    Cited by:

    1. Ashwani Saith, 2011. "Forum 2011," Development and Change, International Institute of Social Studies, vol. 42(1), pages 70-86, January.
    2. Botta, Alberto & Caverzasi, Eugenio & Tori, Daniele, 2020. "The Macroeconomics Of Shadow Banking," Macroeconomic Dynamics, Cambridge University Press, vol. 24(1), pages 161-190, January.
    3. Irma Setyawati & Sugeng Suroso & Tulus Suryanto & Dini Siti Nurjannah, 2017. "Does Financial Performance of Islamic Banking is better? Panel Data Estimation," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 592-606.
    4. Zora Kovacic & Marcello Spanò & Samuele Lo Piano & Alevgul H. Sorman, 2018. "Finance, energy and the decoupling: an empirical study," Journal of Evolutionary Economics, Springer, vol. 28(3), pages 565-590, August.
    5. Tropeano, D., 2013. "Financial Fragility in the Current European crisis," CITYPERC Working Paper Series 2013-09, Department of International Politics, City University London.
    6. Daniela M. Prates & Maryse Farhi, 2015. "The shadow banking system and the new phase of the money manager capitalism," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(4), pages 568-589, May.
    7. Paraschiv, Florentina & Qin, Minzi, 2013. "Extreme Spillover Between Shadow Banking and Regular Banking," Working Papers on Finance 1312, University of St. Gallen, School of Finance.
    8. Mario Sarcinelli, 2010. "Past and future regulation to prevent a systemic financial crisis," PSL Quarterly Review, Economia civile, vol. 63(253), pages 103-129.
    9. Dalla Pellegrina Lucia & Saraceno Margherita, 2011. "Securities Class Actions: A Helping Hand for Bank Regulators in Trouble?," Review of Law & Economics, De Gruyter, vol. 7(1), pages 214-242, July.
    10. Andrea Mazzocchetti & Marco Raberto & Andrea Teglio & Silvano Cincotti, 2018. "Securitization and business cycle: an agent-based perspective," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 27(6), pages 1091-1121.
    11. L. Randall Wray, 2011. "Minsky crisis," The New Palgrave Dictionary of Economics,, Palgrave Macmillan.
    12. Gökçer Özgür, 2021. "Shadow banking and financial intermediation," Metroeconomica, Wiley Blackwell, vol. 72(4), pages 731-757, November.
    13. Eckhard Hein, 2012. "The Macroeconomics of Finance-Dominated Capitalism – and its Crisis," Books, Edward Elgar Publishing, number 14931.
    14. Oumniya Amrani & Amal Najab, 2022. "The Impact of Multi-Layer Corporate Governance on Banks’ Performance under the GFC and the COVID-19: A Cross-Country Panel Analysis Approach," JRFM, MDPI, vol. 16(1), pages 1-25, December.
    15. Hsu, Sara, 2012. "The US financial system, the great recession, and the “speculative spread”," MPRA Paper 38478, University Library of Munich, Germany.
    16. Corneil, Bruce L. & McNamara, Sue, 2010. "Lessons and consequences of the evolving 2007-? Credit Crunch," MPRA Paper 35912, University Library of Munich, Germany.
    17. Zarei , Mehran & esfandiari , marziyeh & Mirjalili , Seyed Hossein, 2021. "The Impact of Shadow Banking on the Financial Stability: Evidence from G20 Countries," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 16(2), pages 237-252, June.
    18. Victor Ekpu & Alberto Paloni, 2015. "Financialisation, Business Lending And Profitability In The Uk," Working Papers 2015_18, Business School - Economics, University of Glasgow.

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    More about this item

    Keywords

    Institutional Investors; Financial Crisis; Financialization; Money Managers; Financial Concentration; Shadow Banking; Subprime Mortgages; Securitized Mortgages;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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