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Financial Stability and Proposals to Restore It

In: Financial Stability in the Aftermath of the ‘Great Recession’

Author

Listed:
  • Philip Arestis

    (University of Cambridge)

  • Elias Karakitsos

    (Global Economic Research LLC)

Abstract

It is true that in recent decades financial stability has not been at the forefront of monetary policy. The belief in the efficiency of financial markets prevented the adoption of a realistic and necessary approach to financial stability (IMF, 2010c). As a result, both the supporters of the New Consensus Macroeconomics framework and policy makers have ignored ‘the implications for systemic stability of financial market imperfections, including those stemming from international frictions, moral hazard and other distortions to incentives, such as externalities and herding’ (IMF, op. cit., p. 7). As a result, potential systemic risk was ignored and financial regulation and supervision ‘were increasingly light-touch and reliant on self-correcting market forces’ (IMF, op. cit., p. 7); and, indeed, in the case of the ‘shadow banking’ system it was completely absent.

Suggested Citation

  • Philip Arestis & Elias Karakitsos, 2013. "Financial Stability and Proposals to Restore It," Palgrave Macmillan Books, in: Financial Stability in the Aftermath of the ‘Great Recession’, chapter 9, pages 193-226, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-33396-4_9
    DOI: 10.1057/9781137333964_9
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