RMF Discussion Papers publish high quality research on a wide range of topics principally around money and finance that adopt a political economy, heterodox economics, economic sociology or similar approach. Our aim is to accumulate a body of work that provides insight into the development of contemporary capitalism.

17. The Role of Banks in the Korean Financial Crisis of 1997: An Interpretation Based on the Financial Instability Hypothesis

This paper shows the fundamental role of Korean banks in the bursting of South Korea’s financial crisis in 1997. It argues that Minsky’s financial instability hypothesis can
be used as an analytical tool to explain the unfolding of the Korean financial crisis. However, some changes in the original Financial Instability Hypothesis (FIH) are necessary to account for the institutional and structural changes of the last decades.

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16. Financialisation and Capitalist Accumulation: Structural Accounts of the Crisis of 2007-9

The crisis of 2007-9 resulted from a financial bubble marked by weak production, expanding bank assets, and growing household indebtedness. For these reasons the crisis casts light on the financialisation of capitalist economies. The literature on financialisation generally links weak production with booming finance; according to some, causation runs from weak production to booming finance, while for others it runs in the opposite direction. This article argues that there is no direct causation between booming finance and weak production. Rather, financialisation represents systemic transformation of capitalist production and finance, which ultimately accounts for the crisis of 2007-9, and has three main features. First, less reliance of large corporations on banks; second, banks shifting their activities toward mediating in open markets and transacting with individuals; third, increasing implication of individuals in the operations of finance.

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15. New Forms of External Vulnerability: Brazil in the Global Financial Crisis

This paper argues that Brazil has become subject to new forms of external vulnerability, which led to one of the largest exchange rate depreciations among emerging markets in the recent global financial crisis. Going beyond traditional external vulnerabilities in the form of creditor-debtor relations and stressing the dialectic relationship between capital flows and domestic financial conditions, it is argued that any exposure to (short-term) foreign investment creates vulnerabilities in the domestic economy, making price dynamics increasingly dependent on conditions in international financial markets. In the case of Brazil this vulnerability manifested itself particularly in a rising share of foreign participation in the domestic stock and derivative markets. The rising liquidity of the Brazilian financial system, characterised by a very short-term nature of financial assets and the willingness of the central bank to provide liquidity to the market at any time, fuelled the share of foreign investment in Brazilian assets. The large stock of accumulated foreign investment in Brazilian assets and the liquidity with which these were traded significantly exacerbated exchange rate volatility in the crisis, as – despite sound fundamentals - the country’s assets were among the first and with the largest volume to be sold. It is further shown that Brazil’s rising external vulnerability was not unrelated to domestic economic conditions. Through its operations in the foreign exchange market and providing liquidity to the market - both before and during the crisis - the central bank significantly contributed to Brazil’s increased vulnerability to international market conditions.

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14. Financialisation Embroils Developing Countries

Financialisation of developed countries includes increased lending to individuals as well as adoption of investment banking by commercial banks, thus contributing directly to the crisis of 2007-9. Financialisation has acquired an international aspect since the 1990s, primarily throught liberalised capital flows. In the 2000s international financialisation has resulted in net capital flows from developing to developed countries, thus imposing substantial costs on the former, while subsidising the USA as leading issuer of quasi-world-money. International financialisation has also spurred domestic financialisation in developing countries through development of bond markets and foreign bank entry. Developing countries have been drawn into the crisis as current accounts declined and short-term capital flows were reversed.

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13. Systemic Failure of Private Banking: A Case for Public Banks

The current crisis represents systemic failure of private banking. The private nature of banks has created opacity, and exacerbated problems of liquidity, bad assets and capital shortage. Furthermore, private banks have failed in information gathering and risk management, as well as in mediating the acquisition of vital goods by households. It is paradoxical that, confronted with such systemic failure, post‐Keynesian and other heterodox economists have generally made non‐systemic reform proposals. This paper draws on Marxist theory to argue that systemic change is necessary, including conversion of failed private into public banks run transparently and with democratic accountability. Public banks could more easily confront the problems of liquidity and solvency; they could also play a long‐term role by providing stable flows of social credit to households as well as to small and medium enterprises. Finally, public banks could provide long‐term credit redirecting mature economies toward new economic activities.

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12. A Minsky Perspective on the Global Recession of 2009

As the U.S. credit crunch of 2007 evolved into a global recession in late 2008 and early 2009, the economic ideas of the late Hyman Minsky received increasing attention on both sides of the Atlantic Ocean. However, few observers seem to appreciate that about the last dozen years of Minsky’s life were devoted largely to synthesizing his financialinstability hypothesis (the influence of Keynes) and his understanding of long‐term capitalist development (the influence of Schumpeter). To fill that gap, this essay offers a Minsky perspective on the global recession of 2009 by drawing on the insights Minsky gained from Keynes and Schumpeter. While the Keynesian and Schumpeterian dimensions of Minsky’s viewpoint are intertwined in the real world, this presentation highlights the cyclical and structural aspects of the current crisis separately. After examining the nature and causes of the global downturn through those two lenses, Minsky’s policy proposals are compared with steps taken by the U.S. government through April 2009.

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11. At the Heart of the Matter: Household Debt in Contemporary Banking and the International Crisis

This paper considers the nature and role of household indebtedness in contemporary banking and the current financial and economic crises. It offers a concise empirical exposition of the centrality of household lending and related financial services to leading banking institutions and to the credit systems of a number of advanced and middle‐income economies. It also offers socioeconomic characterizations of this debt and its macroeconomic significance from the standpoint of Marxist political economy, affording two distinctive insights. First, the concrete social content of household debt over the past two decades has helped ensure this lending remained highly profitable to lenders, making it a natural vehicle for destabilizing capital‐market competition. Second, a crisis characterized by record levels of over‐indebted wage‐earning households is likely to pose distinctive difficulties to a process of market‐based recovery. While the destruction of capital values during a crisis lays the basis for the eventual restoration of profitability and solvency for some enterprises, over‐indebted wage‐earning households face no analogous opportunity. Without new speculative asset‐price bubbles, the restoration of their financial stability hinges on reductions in consumption or increases in wages, both of which present obstacles to a market‐based process of economic recovery.

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10. Financialisation, or the Search for Profits in the Sphere of Circulation

Financialisation of advanced capitalist economies during the last three decades represents expansion of the sphere of circulation, while the sphere of production has continued to face difficulties of profitability and productivity growth. In the course of financialisation, relations between industrial/commercial capital, banks and workers have been put on a different footing. The financial sector has become capable of extracting profit directly out of wages and salaries, a process called financial expropriation. Financial institutions have also become adept at profit‐making through mediating transactions in open financial markets, that is, investment banking. The combination of financial expropriation and investment banking catalysed the crisis that began in 2007.

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9. Emerging Market Bank Rescues in an Era of Finance-Led Neoliberalism: A Comparison of Mexico and Turkey

In the current conjuncture, the international community is gripped by the problem of how to mitigate the impact of financial crisis on emerging markets while curbing the drift towards protectionism. The historical experiences of Mexico and Turkey in this regard are instructive. Both banking sectors have suffered harsh crises since the mid 1990s, were rescued, and then restructured without closing off their economies. To date, liberal and institutional political economic analyses of emerging market have mostly framed the problem with principal reference to crisis and the formal market‐enhancing institutions of banking. The debates have then revolved around how either greater or lesser exposure to financial imperatives can improve stability and resolve developmental challenges. By and large, these debates have not addressed the problem of bank rescues and the underlying social relations of power that shape changes to the institutions of banking. The following, by contrast, compares Mexico’s 1995 and Turkey’s 2001 bank rescues from a historical materialist framework. Therein, the rescues are interpreted as historical processes that have revamped preexisting institutionalized sets of social power relations. Above all else, the impact of banking crisis‐driven rescues has meant the historicalstructural deepening of financial imperatives in Mexican and Turkish society. This has had the socio‐political consequence of reinforcing the power of finance and further eroding once legitimate channels of popular influence over national development. The experiences of Mexico and Turkey have implications for the international community’s response to the current world financial crisis.

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7. On the Historical Significance and the Social Costs of the Sub-prime Financial Crisis: Drawing on the Japanese Experience

The financial turmoil that started in the USA in August 2007 has become a global financial crisis, battering the real economy of developed countries, and fast becoming a world economic crisis. The term ‘sub‐prime financial crisis’ is used in this paper to capture this entire process. Its historical significance is examined below in three separate but related ways. Section 1 considers the specific features of the subprime crisis particularly in comparison with the Japanese bubble of the 1980s and the ensuing crisis of the 1990s. Section 2 pursues the comparison further by discussing briefly the great depression that followed after 1929, and suggests reasons why the current crisis might not be equally severe. Finally, section 3 probes into the social costs of the crisis.

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5. Central Banking in Contemporary Capitalism: Inflation Targeting and Financial Crises

This paper examines central banking in contemporary capitalism, particularly the role of inflation targeting and central bank independence. Emphasis is laid on the consequences of financial instability in light of the various episodes of the 1990s as well as the current sub‐prime mortgage market crisis. A Marxist political economy framework of monetary policy and financial instability is employed to show the limits of contemporary monetary policy. The paper stresses the importance of the various social and political aspects of central banking and their relation to class interests. It is established that the recent financial crisis shows the class dimension of inflation targeting, particularly its defence of financial interests. Central banks have used their power to protect financial profits while socialising financial losses at the expense of the vast majority of society.

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4. Developing Countries in the Era of Financialisation: From Deficit Accumulation to Reserve Accumulation

This paper examines the effects of financialisation on developing countries by considering international capital flows and reserve accumulation. Analytical focus lies on the international financial transactions of developing countries since 2000, especially in relation to the US economy. The paper shows that international capital flows have grown substantially, while at the same time developing countries have accumulated huge international reserves. The outcome has been net flows of capital from developing to developed countries. These phenomena are analysed within a Marxist framework that stresses the role of world money as well as the tendency of capitalist finance toward crisis. It is shown that the strategy of reserve accumulation, adopted by developing countries after the financial crises of the late 1990s, was a response to speculative and unstable capital flows. The strategy has resulted in substantial social costs for developing countries because it has facilitated net international transfer of capital from the poor to the rich, instead of promoting investment for purposes of economic development. The USA was the main beneficiary of these trends, thus revealing the problematic and exploitative character of the dollar as contemporary world money.

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3. On the Content of Banking in Contemporary Capitalism

This paper considers the character and social content of banking in contemporary capitalism. Based on a survey of the operations of nine leading international banks, it documents the marked differences between contemporary banking and the traditional business of taking, making loans to enterprises, and making profits from the difference in interest rates between them. Notably, the operations of the world’s top banking organisations are shown to centre on various forms of credit to individual wage earners and on mediating access to financial markets by corporations and, increasingly, individuals. In order to characterise the social content of such activities the paper seeks to apply, and where necessary extend, existing Marxist analyses of banking, capital markets, and their relationship to capitalist accumulation. This includes advancing a number of elements of a distinctive Marxist interpretation of capital‐market operations to theorise financial market mediation relations between banks, corporations, and the mass of retail savers. The analysis pursued helps identify the distinctive and exploitative content of the relations banks maintain with ordinary wage earners through consumer and mortgage lending, as well as through the provision of pension‐related saving services.

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