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Global Finance and Financial Instability

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

The Marker Union Square San Francisco, Bogart
Hosted By: Union for Radical Political Economics
  • Chair: Emanuele Citera, Bard College

Institutional and Structural Evolution of the U.S. Financial System 1945-2023: The Long-Wave Financial Cycle and the Role of Thwarting Mechanisms

Shaun Brog
,
University of Denver
Yeohyub Yoon
,
University of Denver

Abstract

This paper develops an alternative theoretical and empirical discussion regarding the dynamic interactions between financial intermediaries and thwarting institutions that lead to the structural weaknesses of the U.S. financial system that produced the Global Financial Crisis. Building on Minsky’s Financial Instability Hypothesis and Ferri and Minsky’s ideas regarding the construction and erosion of thwarting institutions, we propose that excessive financial fragility is the result of a long-wave cycle in financial relations characterized by significant institutional and structural evolution within the U.S. financial system. The paper suggests that, as thwarting systems erode, they become asymmetric: (1) by applying more strictly to depository institutions than non-bank financial intermediaries; and (2) by continuing to establish floors under downturns without effective ceilings on risk-taking behavior. We particularly focus on how endogenous changes in expectation formation and risk-aversion in combination with asymmetries of thwarting mechanisms produce a cycle of institutional and structural change in the financial system by encouraging economic agents to engage in financial activity in less regulated sectors and preventing a reset to initial system conditions through interventions during business-cycle downturns and incipient financial panics. The special characteristics of financial intermediaries are such that the end of the long-wave financial cycle is characterized by a preponderance of financial activity undertaken outside the regulatory umbrella, severely eroded margins-of-safety, a proliferation of newly innovated financial assets, and strong interconnections between financial intermediaries.

The End of the Keynesian Consensus and U.S. Wage Growth: An Empirical Study

Michele Naples
,
The College of New Jersey

Abstract

The Keynesian Consensus postwar featured several institutional features that were abrogated in the neoliberal period. By the 1950s, historic union gains were accepted, while Taft-Hartley and red-baiting in unions limited further expansion. Automatic stabilizers like unemployment compensation became available, and a minority of families required more than one income earner to make ends meet. These conditions supported wage growth.
In the 1960s-70s, women’s labor-force participation crept up, and by 1978, most families had 2 or more income-earners. Whether the net impact on wages was positive, by reducing the impact of one unemployed family member on household income, or negative, by exacerbating job competition, is an empirical question. The Civil Rights and Black Power movements promoted the end of Jim Crow’s stranglehold, improved voting rights and facilitated Black access to jobs. And union militance increased.
Following accelerating wage growth in the late 1970s met by even faster price growth, the financial sector insisted on tight monetary policy to dampen price growth, effected by depression-level unemployment and declining wage growth. The political consensus shifted to less income replacement – declining unemployment recipiency and higher taxes on benefits; a politically-motivated War on Drugs that vastly expanded prison and jail populations and exacerbated income insecurity for low-wage workers; and runaway shops, fired striking PATCO workers, decertification elections and declining union density.
This study traces these developments empirically, and explores the evidence for their impact on wage growth of production and nonsupervisory workers, in both nominal and real terms.

Sovereign Debt and Financial Instability: How is Sovereign Debt Accumulation Linked to Global Finance?

Paula-Leone Samuda
,
Colorado State University

Abstract

In the post-Bretton Woods era, there has been an unprecedented rise in the volume of financial capital generated by advanced economies at the center of the global production system. Fueled by the growth of institutional investors, repo markets, and shadow banking, investors in advanced economies have increased their demand for external financial assets. Alongside this growing demand, there has been a surge in sovereign debt issued on international markets. External sovereign debt accumulation has become a burden for emerging and developing economies on the periphery of global finance, which are structurally subordinate to their advanced economy creditors due to relatively shallow capital markets and the low position of their currencies in the dollar-dominated international currency hierarchy. These nations are constantly drawn into global financial markets due to the ease of access to external capital; however, they face severe financial crises when their governments are unable to meet debt obligations to creditors in developed countries.
This paper employs the Minskyan framework to explore how sovereign debt crises can emerge as an endogenous cycle of financial accumulation resulting from excess credit creation and liquidity in advanced economies. The research aims to investigate the connection between the accumulation of sovereign debt on the periphery and the financial capital generated by advanced economies. A panel vector error correction (VEC) model is employed to compare the cointegration of gross external sovereign debt issues and global liquidity, global investor appetite, and effective exchange rates across 46 developing and advanced economies from 2000 to 2023, using quarterly data from the Bank of International Settlements database on External Debt.

Is the ECB Well-Equipped to Deal with Upcoming Financial Instability and Crises?

Emanuele Citera
,
Bard College
Lino Sau
,
University of Turin
Domenica Tropeano
,
University of Macerata

Abstract

The European Central Bank (ECB) took over the decision-making powers of national
central banks in 1999, the year the Eurozone was created. In this chapter, we investigate
the project’s main features while also looking for shortcomings that have become
particularly evident since the outbreak of the Eurozone crisis.
First, we investigate the ECB’s actions from its establishment to the implementation of
the most recent monetary policy measures. Then, we draw attention to the need to
strengthen the ECB’s Lender of Last Resort role in the event of banking and sovereign
debt crises. Finally, we examine how financial stability in the Eurozone can only be
ensured by a role for the ECB complementary to other policy measures and greater
integration and (fiscal) cooperation among countries (more symmetrical adjustments).
JEL Classifications
  • G2 - Financial Institutions and Services
  • F3 - International Finance