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What Do Banks Do? What Should Banks Do?

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  • L. Randall Wray

Abstract

Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled "Reconstituting the United States' Financial Structure." This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper). Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the "capital development" of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.

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  • L. Randall Wray, 2010. "What Do Banks Do? What Should Banks Do?," Economics Working Paper Archive wp_612, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_612
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    References listed on IDEAS

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    1. Hyman P. Minsky & Dimitri B. Papadimitriou & Ronnie J. Phillips & L. Randall Wray, "undated". "Community Development Banking, A Proposal to Establish a Nationwide System of Community Development Banks," Economics Public Policy Brief Archive 3, Levy Economics Institute.
    2. Hyman P. Minsky & Charles J. Whalen, 1996. "Economic Insecurity and the Institutional Prerequisites for Successful Capitalism," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 19(2), pages 155-170, December.
    3. Hyman P. Minsky, 1996. "Uncertainty and the Institutional Structure of Capitalist Economies," Journal of Economic Issues, Taylor & Francis Journals, vol. 30(2), pages 357-368, June.
    4. Jan Kregel, 2008. "Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market," Economics Public Policy Brief Archive ppb_93, Levy Economics Institute.
    5. Martin Mayer, 2010. "The Spectre of Banking," Economics One-Pager Archive op_3, Levy Economics Institute.
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    Cited by:

    1. Leonardo Burlamaqui, 2016. "Finance, Development And The Chinese Entrepreneurial State," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 072, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    2. Cyril Pitrou, 2015. "Graph representation of balance sheets: from exogenous to endogenous money," Papers 1504.03895, arXiv.org, revised Jan 2018.
    3. Hassan Bougrine & Mario Seccareccia, 2013. "Rethinking banking institutions in contemporary economies: are there alternatives to the status quo?," Chapters, in: Louis-Philippe Rochon & Mario Seccareccia (ed.), Monetary Economies of Production, chapter 10, pages 134-159, Edward Elgar Publishing.
    4. Yeva Nersisyan, 2015. "The repeal of the Glass–Steagall Act and the Federal Reserve’s extraordinary intervention during the global financial crisis," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(4), pages 545-567, May.
    5. Pitrou, Cyril, 2015. "Graph representation of balance sheets: from exogenous to endogenous money," MPRA Paper 63662, University Library of Munich, Germany.
    6. Cibils, Alan & Allami, Cecilia, 2013. "Financialisation vs. Development Finance: the Case of the Post-Crisis Argentine Banking System," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 13.
    7. Yeva Nersisyan, 2015. "The Repeal of the Glass-Steagall Act and the Federal Reserve's Extraordinary Intervention during the Global Financial Crisis," Economics Working Paper Archive wp_829, Levy Economics Institute.
    8. Elisabetta De Antoni, 2012. "The General Theory after the subprime crisis: a Minskyan perspective," Chapters, in: Jesper Jespersen & Mogens Ove Madsen (ed.), Keynes’s General Theory for Today, chapter 9, pages 151-166, Edward Elgar Publishing.

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    More about this item

    Keywords

    China; Hyman Minsky; Banks and Shadow Banks; Money Manager Capitalism; Finance Capital; Financial Instability Hypothesis; Global Financial Crisis; Debt Deflation Theory;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G2 - Financial Economics - - Financial Institutions and Services
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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