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Finance as an (ever more fragile) ‘perpetual mania’: have they all lost their collective minds?

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  • José Gabriel Palma

Abstract

This paper analyses events in financial markets since the 2008 financial crisis in both the developed and the developing worlds, giving especial attention to the processes of ‘financialisation’. Its main conclusion is that we are paying the price (a huge one) for two related phenomena. The first relates to the failure of economic theory since the 1970s, especially (although not only) of the mainstream type, to really take on board those developments in the world of international finance that ‘did not fit in their models’ (such as the 1970s stagflation; Volker’s subsequent radical monetarist recession; the ‘savings and loan’ debacle following Reagan’s financial liberalisation and deregulation―policies reinforced in the 1990s; the inability of both monetarists, and traditional Keynesian policies to revert Japan’s ‘lost decade’; and the ‘endogenous’ nature of the 2008 financial crisis). Basically, economic theory has failed to reinvent itself when needed as it did after the 1930s crash. The second, in turn, relates to the fact that rocketing the net worth of a few individuals was a rather odd way to reactivate fragile economies after the 2008 crisis and the 2020 pandemic. But when rentier agents were allowed to become ‘too-large-to-be-challenged’, it was likely that these newly (and artificially) created ‘whales’ would capture policy-making and take it in this direction―leaving the politicians and central bankers to tell stories explaining why the very rich should become the biggest welfare recipients of all time. As one group of Native Americans used to say, ‘Those who are better at storytelling will dominate the world’.

Suggested Citation

  • José Gabriel Palma, 2022. "Finance as an (ever more fragile) ‘perpetual mania’: have they all lost their collective minds?," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 46(4), pages 773-825.
  • Handle: RePEc:oup:cambje:v:46:y:2022:i:4:p:773-825.
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    References listed on IDEAS

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    1. Richard Lipsey, 2007. "Reflections on the general theory of second best at its golden jubilee," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 349-364, August.
    2. Palma, J. G., 2012. "How the full opening of the capital account to highly liquid financial markets led Latin America to two and a half cycles of ‘mania, panic and crash’," Cambridge Working Papers in Economics 1201, Faculty of Economics, University of Cambridge.
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