The power and instability of the financial system, fuelled by decades of deregulation
and liberalization, have been demonstrated impressively by the current financial
crisis. Some commentators see in this system a disembedding of society and markets, predicting a new Polanyian ‘double movement’ that returns power to the state. However, the idea of the ‘powerless state’ is not applicable, as states consciously embedded their citizens in the financial markets in order to shift social welfare responsibilities to individual asset-owners. This gave financial markets control over financial dynamics, which was used to create profits through innovation and disproportionate risk-taking. As a consequence, small changes in financial variables caused the international financial crisis, and governments felt compelled to bailout overleveraged financial institutions deemed ‘too big to fail’. Hyman Minsky described many of these developments in his ‘financial instability hypothesis’. As bailouts are only temporary measures to uphold the status quo, he calls for increased state control over the financial markets in order to prevent excessive speculation in the future. Many regulatory proposals created following the onset of the crisis echoed this demand, envisioning a paradigmatic shift that could reverse the trend of deregulation in pre-crisis years. However, the reliance of the state on the financial
sector to support the system of ‘asset-based welfare’ proved to be resilient enough to withstand the initial crisis. Now, signs of recovery create new priorities that displace demands for financial regulation. The financial markets thus retain their central position, albeit with a few self-regulatory obligations, and a change in state/market relations is unlikely to occur.
Table of Contents
1. Introduction
2. Deregulation, embedding and systemic risk
3. The financial crisis and the lender-of-last-resort
4. Towards a new paradigm?
5. ‘Business as usual’ and self-regulation
6. Conclusion
Research Objectives and Themes
This work examines the state's active role in shaping the current financial system and evaluates the likelihood of a paradigmatic shift in state/market relations following the financial crisis. It specifically challenges the notion of the "powerless state," arguing that governments consciously embedded society in financial markets to facilitate asset-based welfare, and assesses whether post-crisis regulatory proposals have successfully challenged this neoliberal setup.
- The political economy of neoliberal deregulation and its impact on financial stability.
- The concept of "asset-based welfare" and the state's role in embedding citizens in financial markets.
- Hyman Minsky’s "financial instability hypothesis" in the context of modern systemic crises.
- The tension between regulatory rhetoric and the preservation of the economic status quo.
- The resilience of neoliberal orthodoxies and the limitations of self-regulatory frameworks.
Excerpt from the Book
Deregulation, embedding and systemic risk
The magnitude of the financial crisis is an obvious consequence of the instability and power of global financial markets, the latter leading many commentators to emphasize the dominance of market forces over state and society in today’s neoliberal economy (e.g. Strange 1996). However, I argue that focussing narrowly on market power obscures the state’s active role in shaping current socio-economic relations. A conscious effort is made to create a ‘financial society’, whose individual members are deeply embedded in the financial markets. Nonetheless, deregulation and institutional complexity gave financial markets a disproportionate amount of control over financial dynamics. As a consequence, innovation led to the spread of risk throughout the system and weakened the financial foundations of banks and ordinary citizens.
‘Embedded liberalism’ is Ruggie’s (1982:392) famous term for the post-war Bretton Woods system, which came into being as a consequence of social counterforces reversing the rule-based austerity mechanism of the classic gold standard (Polanyi [1944] 2001:71,79). Consequently, capital controls granted the state a large amount of policy autonomy, used to increase social security and support employment via Keynesian demand-side economics (Keynes [1936] 2008:25-9). But the end of the Bretton Woods system and a subsequent inflationary crisis provided a historical moment for neoliberal policies to take hold and become orthodox thinking (Crouch 2009:388-9, Eichengreen 1998:134,141).
Summary of Chapters
1. Introduction: Outlines the scope of the current financial crisis, introduces the central argument regarding the "powerless state," and defines the analytical framework based on Hyman Minsky’s theories.
2. Deregulation, embedding and systemic risk: Analyzes the political efforts to create a "financial society" and explains how deregulation and institutional complexity granted financial markets disproportionate control over economic dynamics.
3. The financial crisis and the lender-of-last-resort: Examines how the financial system broke down under small economic shifts and details the state's subsequent intervention to rescue banks deemed "too big to fail."
4. Towards a new paradigm?: Discusses various microeconomic and macroeconomic regulatory proposals and evaluates their potential to create a fundamental "third order" change in economic policy.
5. ‘Business as usual’ and self-regulation: Argues that neoliberal structures remain resilient and that governments are prioritizing a return to the pre-crisis status quo over radical regulatory reform.
6. Conclusion: Summarizes the finding that the financial system remains resistant to change and suggests that the economy is entering a new cycle of boom and bust rather than a new regulatory paradigm.
Keywords
Financial Crisis, Financial Regulations, Bailouts, Banks, Market Liberalization, Financial Instability Hypothesis, Hyman Minsky, Asset-based Welfare, Neoliberalism, Deregulation, Systemic Risk, Lender-of-last-resort, Market Keynesianism, Proprietary Trading, Economic Policy.
Frequently Asked Questions
What is the primary focus of this work?
The work focuses on the political economy of the recent financial crisis, specifically examining the relationship between state policy and the expansion of global financial markets.
What is the core research question?
The research asks whether the financial crisis has caused a sufficient shift in interests and power to trigger a fundamental "paradigmatic shift" or "third order change" in state/market relations.
How does the author characterize the role of the state?
The author rejects the idea of a "powerless state," instead arguing that governments consciously designed policies to embed citizens in financial markets to shift welfare responsibilities.
Which scientific theory provides the analytical foundation?
The work heavily utilizes Hyman Minsky’s "financial instability hypothesis" to explain periodic financial breakdowns and the state's role as a lender-of-last-resort.
What are the thematic pillars of the analysis?
The main themes include neoliberal deregulation, the rise of "asset-based welfare," the systemic risks of financial innovation, and the persistent influence of the financial sector on policymaking.
Which keywords define this study?
Key terms include Financial Crisis, Bailouts, Financial Instability Hypothesis, Asset-based Welfare, Neoliberalism, and Market Keynesianism.
What does the author mean by "first," "second," and "third order" change?
These terms, derived from Peter Hall, categorize policy changes: first and second order refer to adjustments in settings or instruments within existing goals, while third order represents a wholesale change in goals and structures.
Why does the author conclude that a paradigm shift is unlikely?
The author argues that the institutional embedding of society in financial markets is too resilient, and that current trends favor "self-regulation" and a return to pre-crisis "business as usual."
How is the "Volcker Rule" addressed in the text?
The author views the Volcker Rule as an example of attempted regulatory reform that is being circumvented, allowing banks to return to risky behavior under different guises.
What is the significance of the "too big to fail" classification?
The "too big to fail" status is identified as a primary source of "moral hazard," where financial institutions are protected by the state, thereby incentivizing excessive risk-taking.
- Citar trabajo
- Matthias Baumgarten (Autor), 2011, Banks, Bailouts and Liberal Markets, Múnich, GRIN Verlag, https://www.grin.com/document/187924
