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Neoliberalism, financialization and globalization: an 
intrinsically instable institutional arrangement? 
Lessons f rom Mi...
Context: financialization and the 
economists… 
Financialization 
◦ Rooted in financial liberalization & neoliberalism, bu...
Minsky : some insights 
Minsky's mainly referred to regarding the "Financial Instability Hypothesis" (FIH) 
More recently ...
Financialization in the P-K perspective 
Generic definition 
"the increasing importance of financial markets, financial mo...
Financialization : some key features 
1/ Rising share of financial profit and decreasing wage share 
2/ Financialization o...
Financialization : some key features 
1/ Rising share of financial profit and decreasing wage share 
The "rentier share" o...
Labor income shares as % of GDP in 
selected OECD Countries (1960 - 2012) 
Source: (Hein 2013) 
C Sinapi IIPPE 2014 CONFER...
Labor income shares as % of GDP in 
selected OECD Countries (1960 - 2012) 
Source: (Hein 2013) 
C Sinapi IIPPE 2014 CONFER...
Labor income shares as % of GDP in 
selected OECD Countries (1960 - 2012) 
Source: (Hein 2013) 
C Sinapi IIPPE 2014 CONFER...
Financialization : some key features 
2/ Financialization of the non-financial sector 
Source: (Nersisyan and Wray 2010) 
...
Source : Sinapi (2012) 
C Sinapi IIPPE 2014 CONFERENCE 11
Source : Sinapi (2012) 
C Sinapi IIPPE 2014 CONFERENCE 12
Financialization : some key features 
3/ Securitization & Shadow Banking 
Hidden, invisible, complex, unregulated 
Notiona...
Minsky's FIH and financialization 
What can we still learn from Minsky's FIH (financial instability hypothesis)? 
Instabil...
Speculative & Ponzi : cash flows, not debt 
1st theorem (typology of balance sheet): 
◦ Wrongly limited to over-Indebtness...
Endogeneity of the FIH? 
Endogeneity of the reversal (Nasica, 1997) 
Endogeneity of financial fragility rise (2nd theorem)...
Minsky's FIH and financialization 
What can we still learn from Minsky's FIH (financial instability hypothesis)? 
Instabil...
Minsky's stages of capitalism 
- A late development in Minsky's work, largely unpublished or remaining as WP, but key to 
...
Minsky's stages of capitalism 
2 key mechanisms : "The hypothesis holds that business cycles of history are compounded out...
Minsky's stages of capitalism 
=> Current period to be considered as a 6th stage of capitalism : globalized, financialized...
Minsky's stages of capitalism 
Which perspectives ? 
2/ Need for Big Bank and Big Government redefined in the age of globa...
Leaving the conclusion to Minsky 
"[In] real world economies the simplistic propositions of laissez-faire no longer hold. ...
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Neoliberalism, Financialization, and Globalization: An Intrinsically Unstable Institutional Arrangement?

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Financialization and the Enterprise session at 12th International Conference

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Neoliberalism, Financialization, and Globalization: An Intrinsically Unstable Institutional Arrangement?

  1. 1. Neoliberalism, financialization and globalization: an intrinsically instable institutional arrangement? Lessons f rom Minsky's analyses of f inancial cr ises and capitalism history. Christ ine Sinapi As sociate Profes sor, Burgundy School of Bus ines s (Di jon, France) 12TH INTERNATIONAL POST KEYNESIAN CONFERENCE, KANSAS CITY, SEPT 25-27, 2014. C Sinapi IIPPE 2014 CONFERENCE 1
  2. 2. Context: financialization and the economists… Financialization ◦ Rooted in financial liberalization & neoliberalism, but an inversion of its initial postulate, also debated within the mainstream => Debates on financial liberalization needs a step further => financialization ◦ Start of the process in the 1980's, but : In the literature : ◦ Debated since the 1990's in political science, sociology, geography, anthropology ◦ … while economics almost blind to the phenomenon ◦ Really a matter of interest after 2009 (2000-2007 : 10 papers /y, 2012 & 213 : 50 papers/ y) ◦ An exception : Heterodox economists ◦ of special interest : HP Minsky (1990, 1992) "Money Manager Capitalism" C Sinapi IIPPE 2014 CONFERENCE 2
  3. 3. Minsky : some insights Minsky's mainly referred to regarding the "Financial Instability Hypothesis" (FIH) More recently quoted in Post Keynesian perspectives on financialization (Wray, 2009, 2012, Zalewski and Whalen, 2010, Palley, 2013, Whalen, 2013) Yet interrelation between those 2 components rarely debated Proposal : ◦ Institutional foundations to Minsky's HIF as a key to 'bridge the gap' ◦ Replaced in the context of globalization, neoliberalism (and financialization) ◦ Help addressing some of the limitations inherent to the FIH and renewing the analysis C Sinapi IIPPE 2014 CONFERENCE 3
  4. 4. Financialization in the P-K perspective Generic definition "the increasing importance of financial markets, financial motives and financial institutions in the operation of the domestic and international economies" (Epstein, 2005, p 3). Post-Keynesian insights "financialization is a particular form of neoliberalism", characterized by the "domination of the macro economy and economic policy by the financial sector interest" (Palley, 2013) "Financialization involves the replacement of industrial or production capitalism by a more predatory form of financial capitalism" […] "new form of capitalism which has not only transformed the way markets work, but carries with it important political, cultural and economic consequences" (Rochon, 2012) C Sinapi IIPPE 2014 CONFERENCE 4
  5. 5. Financialization : some key features 1/ Rising share of financial profit and decreasing wage share 2/ Financialization of the non-financial sector 3/ Securitization & Shadow Banking 4/ Macroeconomic impacts, including increase in inequalities and poverty C Sinapi IIPPE 2014 CONFERENCE 5
  6. 6. Financialization : some key features 1/ Rising share of financial profit and decreasing wage share The "rentier share" of the national income : financial institutions' profits compared to non-financial corporations' profits increased in countries like the United States and France and, more generally, among OECD countries (Epstein, 2005). in the US: in recent years, the financial sector has contributed to 20% of the GDP, but obtained 40 % of corporate profits (Nersisyan and Wray 2010) Significantly correlated to the fall in the labor share (OECD countries, long run) Hein (2013) ; Shift in the sectorial composition of the economy, claims on management wages and rentier's share are more significant factors C Sinapi IIPPE 2014 CONFERENCE 6
  7. 7. Labor income shares as % of GDP in selected OECD Countries (1960 - 2012) Source: (Hein 2013) C Sinapi IIPPE 2014 CONFERENCE 7
  8. 8. Labor income shares as % of GDP in selected OECD Countries (1960 - 2012) Source: (Hein 2013) C Sinapi IIPPE 2014 CONFERENCE 8
  9. 9. Labor income shares as % of GDP in selected OECD Countries (1960 - 2012) Source: (Hein 2013) C Sinapi IIPPE 2014 CONFERENCE 9
  10. 10. Financialization : some key features 2/ Financialization of the non-financial sector Source: (Nersisyan and Wray 2010) C Sinapi IIPPE 2014 CONFERENCE 10
  11. 11. Source : Sinapi (2012) C Sinapi IIPPE 2014 CONFERENCE 11
  12. 12. Source : Sinapi (2012) C Sinapi IIPPE 2014 CONFERENCE 12
  13. 13. Financialization : some key features 3/ Securitization & Shadow Banking Hidden, invisible, complex, unregulated Notional in US largest banks as a % of assets : 0 in 1990's, 2000% to 6000% in 2007 (Wray, 2010) Incorporates "debt" by construction => potentially infinite leverage, as already pointed by Minsky in 1987 "Securitization implies that there is no limit to bank initiative in creating credits for there is no recourse to bank capital" (Minsky 1987), p 3). 4/ Macroeconomic impacts : depressive effects on productive investment , negative impact on consumption and demand, inequality widening C Sinapi IIPPE 2014 CONFERENCE 13
  14. 14. Minsky's FIH and financialization What can we still learn from Minsky's FIH (financial instability hypothesis)? Instability is endogenous to capitalist economies ◦ 1st theorem : fragility criteria (hedge, speculative, Ponzi finance) ◦ 2nd theorem : fragility rises in the business cycle (prosperity is destabilizing) (liability and assets ) ◦ End of the cycle is endogenous ◦ Spill-over effects Addressing some of the FIH limitations, by re-reading Minsky and considering its institutionalist foundations C Sinapi IIPPE 2014 CONFERENCE 14
  15. 15. Speculative & Ponzi : cash flows, not debt 1st theorem (typology of balance sheet): ◦ Wrongly limited to over-Indebtness ◦ Minsky's definition focuses on cash flow incured both from the financial structure and the investment (Minsky, 1986, 1992a) ◦ => ex post & ex ante speculative finance (Arestis & Glickman, 1996) ◦ "quality of assets" => productive investment Within the financialization process : ◦ Household Debt and subprime : un unsufficient explanation ◦ Infinite leverage in derivatives, CDO's, CDS' … squared, remic's ◦ Unproductive assets via financialization of non-financial corporations, reinforced by international accounting standards C Sinapi IIPPE 2014 CONFERENCE 15
  16. 16. Endogeneity of the FIH? Endogeneity of the reversal (Nasica, 1997) Endogeneity of financial fragility rise (2nd theorem)? => incorporating institutional mechanisms C Sinapi IIPPE 2014 CONFERENCE 16
  17. 17. Minsky's FIH and financialization What can we still learn from Minsky's FIH (financial instability hypothesis)? Instability is endogenous to capitalist economies ◦ 1st theorem : fragility criteria (hedge, speculative, Ponzi finance) ◦ 2nd theorem : fragility rises in the business cycle (prosperity is destabilizing) ◦ End of the cycle is endogenous ◦ Spill-over effects 2007-2009 : a case study? - hidden financial fragility in derivatives' hidden leverage, OTC trading, shadow banking - Spill-over effects : but worldwide via new institutional arrangements of financial globalization - Productive investment deterioration : financialization of non financial sector C Sinapi IIPPE 2014 CONFERENCE 17
  18. 18. Minsky's stages of capitalism - A late development in Minsky's work, largely unpublished or remaining as WP, but key to understand the FIH - Rooted in Commons and in historical institutionalism (Sinapi, 2012) "Minsky found the most effective way to obtain this 'deeper look' was to focus on long-term capitalist development rather than business cycles" "In this period [1994}, Minsky thought it was essential to combat the dominant trend with an analysis grounded in history and institutional reality." (Whalen 1999) C Sinapi IIPPE 2014 CONFERENCE 18
  19. 19. Minsky's stages of capitalism 2 key mechanisms : "The hypothesis holds that business cycles of history are compounded out of (i) the internal dynamics of capitalist economies, and (ii) the system of interventions and regulations that are designed to keep the economy operating within reasonable bounds". (Minsky, 1992 p 9) 1/ five stages in the development of capitalism: merchant capitalism (1607-1813), industrial capitalism (1813-1890), banker capitalism (1890-1933), managerial capitalism (1933-1982), and money manager capitalism (1982 - …) 2/ Business cycle – led institutional mechanisms : ◦ procyclicity of risk taking ◦ Institutional "fragility" arising from majors shifts in forms of capitalism (stages) C Sinapi IIPPE 2014 CONFERENCE 19
  20. 20. Minsky's stages of capitalism => Current period to be considered as a 6th stage of capitalism : globalized, financialized, and neoliberal-driven institutional context => the "global financialized capitalism" => its emergence = institutional fragility => financial fragility => self-cumulated crisis Which perspectives ? 1/ Following Minsky's predictions : in the absence of adequate intervention =>"a continuation of current economic miasmas"?, self cumulative crisis via debt deflation (?) 2/ the unsuitability of the system of interventions and regulations consists in the failure of the intentional mechanisms. The formal regulatory institutions have become inoperative under the effect of the evolution of the financial system and of financial innovation. C Sinapi IIPPE 2014 CONFERENCE 20
  21. 21. Minsky's stages of capitalism Which perspectives ? 2/ Need for Big Bank and Big Government redefined in the age of globalization and financialization ◦ BB : also prudential regulation on OTC, non banks, non financial involved in financialization, BG : socialization of investment to restart the economy, employer of last resort ◦ + Cf forms of institutions (Commons) : authority = dominant paradigm ◦ => in the context of financialization : ◦ dominant neoliberalism views at decision making level (press, business, political decision makers) ◦ ex IFRS – financial assets valuation (hedge/specu) insufficient and inapplicable => pushing financialization in non financial assets (ex PSA : 5 Billion loss 2012, of which 4.7 B depreciation of Aulnay and other factories ; 2.3 Billion 2013, of which 1.1 depreciation) C Sinapi IIPPE 2014 CONFERENCE 21
  22. 22. Leaving the conclusion to Minsky "[In] real world economies the simplistic propositions of laissez-faire no longer hold. Economies with the financial system of modern capitalism can implode, as happened between 1929-33. […]There is need for rethinking the system of intervention into capitalist economies that has evolved out of the New Deal structure which was mainly put in place before World War II." (Minsky and Whalen 1996) A prescient economist, worth revisiting today … C Sinapi IIPPE 2014 CONFERENCE 22

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