The cyclical evolution of financial regulation: a theoretical explanation

Drawing on Hyman Minsky's financial instability hypothesis and his work on stages of capitalism, this chapter provides a theoretical explanation for not only the endogenous nature of business cycles, but also the cyclical nature of financial regulation. At the heart of that explanation is Minsky's notion of an ever-evolving barrier of "financing orthodoxy," driven both by a systemic evolution traceable the psychological effects of (vivid or dim) memories of economic crises and by the less predictable outcome of power struggles between competing economic interests. Thus, the evolution of financial regulation - as demonstrated by an examination of three real-world crises - is a consequence of the combination of systemic tendencies and the unique characteristics of a particular time and place. In the end, our theoretical explanation is not merely an analysis of business cycles and institutional dynamics, but actually a broader analytical perspective on the political economy of financial regulation.