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The Financial Sector and the Future of Capitalism

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  • Richard Pomfret

    (School of Economics, University of Adelaide)

Abstract

Financial sector innovation and development has been an integral part of the rise of capitalism over the last half millennium. The innovations of the last three decades of the twentieth century were a continuation of the trend; they contributed to an era of global prosperity, but also increased the probability of bank failures as bankers and policymakers inexperienced in the new instruments made mistaken decisions. The likelihood of crises was increased by public policies which increased moral hazard. Governments regulate the financial sector due to asymmetric information between depositors and deposit-taking institutions; restricting entry or the lending activity of financial institutions is inefficient, so the weight is now placed on deposit insurance with moral hazard consequences. The policy challenge is to reduce moral hazard without repressing the financial sector and creating adverse selection in lending practices. Since the mid-1980s cheap money policies have exacerbated moral hazard associated with inadequate financial sector regulation by encouraging highly leveraged investments. The post-2007 financial crisis was one of many crises with idiosyncratic catalysts but with common underlying causes: cheap money available to participants in the integrated but imperfectly regulated global financial market eventually led to loan defaults and bank failures. This is not the end of capitalism, but a reminder of the difficult balancing acts involved in policing the financial sector which is at the heart of capitalist economies.

Suggested Citation

  • Richard Pomfret, 2009. "The Financial Sector and the Future of Capitalism," School of Economics and Public Policy Working Papers 2009-05, University of Adelaide, School of Economics and Public Policy.
  • Handle: RePEc:adl:wpaper:2009-05
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    References listed on IDEAS

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    Cited by:

    1. Mathonnat, Clément & Williams, Benjamin, 2020. "Does more finance mean more inequality in times of crisis?," Economic Systems, Elsevier, vol. 44(4).
    2. Besancenot, Damien & Vranceanu, Radu, 2011. "Banks' risk race: A signaling explanation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 784-791, October.
    3. Pomfret, Richard, 2014. "European crises and the Asian economies," Journal of Asian Economics, Elsevier, vol. 31, pages 71-81.
    4. Richard Pomfret, 2009. "The Post‐2007 Financial Crisis and Policy Challenges facing Australia," Economic Papers, The Economic Society of Australia, vol. 28(3), pages 255-263, September.
    5. Richard Pomfret, 2012. "The Post-2007 Crises and Europe's Place in the Global Economy," CASE Network Studies and Analyses 439, CASE-Center for Social and Economic Research.
    6. Richard Pomfret, 2011. "Global Crises, Fiscal Imbalances and Global Instability: Interests and Reactions of Asian Economies," School of Economics and Public Policy Working Papers 2011-33, University of Adelaide, School of Economics and Public Policy.

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    More about this item

    Keywords

    financial development; Moral hazard;

    JEL classification:

    • G0 - Financial Economics - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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