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The Financial Alchemy that Failed

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  • Miller, Marcus

    (University of Warwick and CAGE)

Abstract

With his conception of successive ‘Ages of Capitalism’, Anatole Kaletsky provides a canvas broad enough to encompass the banking crisis of 2008 and much more. After briefly outlining the Four Ages he identifies, we focus on the period of the Great Moderation when Inflation Targeting seemed to have solved the problem macroeconomic management – until it ended in spectacular failure. The rapid growth of cross-border banking – with securitized assets funded by wholesale money – evidently posed threats to financial stability that had been ignored by a regime targeting consumer prices. We look at three: the pecuniary externalities exerted by asset price changes on investment banking; information failures leading to an exaggerated banking boom; and the risk of insolvency in the subsequent ‘bank run’. The financial system pre-crash was, it seems, flawed by two Fallacies of Composition: by regulation that reckoned making individual banks safe guaranteed systemic stability; and a business model that reckoned securitization ensured liquidity whenever necessary. Finally, we discuss how, in different countries, the law has variously been invoked to handle reckless banking.

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  • Miller, Marcus, 2019. "The Financial Alchemy that Failed," CAGE Online Working Paper Series 398, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:398
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/398-2019_miller.pdf
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    References listed on IDEAS

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    1. repec:bla:scandj:v:78:y:1976:i:2:p:200-224 is not listed on IDEAS
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    5. Shin, Hyun Song, 2010. "Risk and Liquidity," OUP Catalogue, Oxford University Press, number 9780199546367.
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    Cited by:

    1. Marcus Miller, 2021. "Choosing the Narrative: the Shadow Banking Crisis in Light of Covid," Open Economies Review, Springer, vol. 32(2), pages 291-310, April.

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