{"id":3468,"date":"2012-01-27T10:07:44","date_gmt":"2012-01-27T15:07:44","guid":{"rendered":"http:\/\/www.multiplier-effect.org\/?p=3468"},"modified":"2012-01-27T10:08:50","modified_gmt":"2012-01-27T15:08:50","slug":"the-fetish-for-liquidity-and-reform-of-the-financial-system","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/multiplier-effect\/the-fetish-for-liquidity-and-reform-of-the-financial-system\/","title":{"rendered":"The Fetish for Liquidity (and Reform of the Financial System)"},"content":{"rendered":"

In his General Theory<\/em>, J.M. Keynes argued that substandard growth, financial instability, and unemployment are caused by the fetish for liquidity. The desire for a liquid position is anti-social because there is no such thing as liquidity in the aggregate. The stock market makes ownership liquid for the individual \u201cinvestor\u201d but since all the equities must be held by someone, my decision to sell-out depends on your willingness to buy-in.<\/p>\n

I can recall about 15 years ago when the data on the financial sector\u2019s indebtedness began to show growth much faster than GDP, reading about 125% of national income by 2006\u2014on a scale similar to nonfinancial private sector indebtedness (households plus nonfinancial sector firms). I must admit I focused on the latter while dismissing the leveraging in the financial sector. After all, that all nets to zero: it is just one financial institution owing another. Who cares?<\/p>\n

Well, with the benefit of twenty-twenty hindsight, we all should have cared. Big time. There were many causes of the Global Financial Collapse that began in late 2007: rising inequality and stagnant wages, a real estate and commodities bubble, household indebtedness, and what Hyman Minsky called the rise of \u201cmoney manager capitalism\u201d. All of these matter\u2014and I think Minsky\u2019s analysis is by far the most cogent. Indeed, the financial layering and leveraging that helped to increase the financial sector\u2019s indebtedness, as well as its share of value added and of corporate profits, is one element of Minsky\u2019s focus on money managers. I don\u2019t want to go into all of that right now. What I want to do instead is to focus quite narrowly on liquidity in the financial sector.<\/p>\n

So here\u2019s the deal. What happened is that the financial sector taken as a whole moved into extremely short-term finance of positions in assets. This is a huge topic and is related to the transformation of investment banking partnerships that had a long-term interest in the well-being of their clients to publicly-held, pump-and-dump enterprises whose only interest was the well-being of top management.<\/p>\n

It also is related to the rise of shadow banks that appeared to offer deposit-like liabilities but without the protection of FDIC. And it is related to the Greenspan \u201cput\u201d and the Bernanke \u201cgreat moderation\u201d that appeared to guarantee that all financial practices\u2014no matter how crazily risky\u2014would be backstopped by Uncle Sam.<\/p>\n

And it is related to very low overnight interest rate targets by the Fed (through to 2004) that made short-term finance extremely cheap relative to longer-term finance.<\/p>\n

All of this encouraged financial institutions to rely on insanely short short-term finance.\u00a0 <\/em>Read the rest here<\/em><\/a><\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

In his General Theory, J.M. Keynes argued that substandard growth, financial instability, and unemployment are caused by the fetish for liquidity. The desire for a liquid position is anti-social because there is no such thing as liquidity in the aggregate. The stock market makes ownership liquid for the individual \u201cinvestor\u201d but since all the equities […]<\/p>\n","protected":false},"author":208,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8,111,40],"tags":[123,1129,1134,9,30],"class_list":["post-3468","post","type-post","status-publish","format-standard","hentry","category-financial-crisis","category-financial-reform","category-monetary-policy","tag-debt","tag-financial-crisis","tag-financial-reform","tag-financial-regulation","tag-minsky"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/3468","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/users\/208"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/comments?post=3468"}],"version-history":[{"count":7,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/3468\/revisions"}],"predecessor-version":[{"id":3474,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/3468\/revisions\/3474"}],"wp:attachment":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/media?parent=3468"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/categories?post=3468"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/tags?post=3468"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}