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Financial Crises: Systemic or Idiosyncratic bY Hyman P. Minsky* Working Paper No. 51 April 1991 Prepared for presentation at “The Crisis in Finance,” a Conference of The Jerome Levy Economics Institute Bard College *The Jerome Levy Economics Institute of Bard College INTRODUCTION. I. The presentations at this conference are by economists from Academies and economists who professionally confront real world problems, either in private finance or in public As economists we accept that the remarks made by policy. Keynes of The in the closing passage General Theory are true: and political ideas of economists the philosophers, both when they are right and when they are wrong, are more powerful than is commonly Indeed the world is ruled by little understood. else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. ....I am sure the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. . . . Soon or late it is ideas, not vested interests, which are dangerous for good or evil."l II We like . . . this assertion not only because it makes us important but also because it makes good sense. The ideas that Keynes refers to are theories. of system behavior is a prior for rational A theory action. A proposed action, whether by individual agents in households or firms, a bank, a government agency or a legislative body is appropriate action only as a theory connects the action 1 J. M. Keynes, The General Theorv of Emlslovment Interest and Money, 1936 pp. 383, 384. 3 to the desired deposit number well insurance, during the savings private first and banks, two loan that industry, served generations such as and a the economy after the great seem to have broken down, the need to reform and reconstitute legislative Because some institutions, the of the great depression, to result.2 the financial structure is now on the agenda. As we try to fix the financial system three questions should be asked of the pushers of a policy proposal: 1. "What is it that is taken to be broke?", 2. "What theory about how our economy works underlies the proposal?11 3. What are the dire consequences of not fixing that which you assert is broke? In what follows I will take up three points 1. Two views of the results of the economic process 2. Systemic and idiosyncratic 3. Some ideas about the sources of financial crises scope for policy in the present "crisistl. II. TWO VIEWS OF THE RESULTS OF MARKET PROCESSES 2. The essence of the rational expectation revolution in economic theory can be summed up in the proposition that the actions economic agents take reflects their understanding, i.e. theory, of how the economy functions. 4 There results are two fundamentally that a market economy different achieves. views about One, as stated the by Adam Smith, is "As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value: every individual necessarily labours to render the annual revenues of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it . . . and by directing that industry in such a manner as its produce may be of the greatest value, he. intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." The second, as stated by John Maynard Keynes, is: #IIf I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market and enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over As the organization of investment enterprise. markets improves, the risk of the predominance of however, speculation does, increase. . . . Speculators may do no harm as bubbles on a steady But the position is serious stream of enterprise. when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activit'es of a casino, the job is likely to be ill-done.tli When practical theory public designing men that and advocating alike markets welfare, and have always the to policies choose lead to Keynesian between the economists the promotion theory that and Smithian of the market 3 A. Smith. 1776, An Incuirv into the Nature and Causes of the Wealth of Nations, book 4, chapter 2. italics added 4. Keynes, op tit p. 158-9 italics re casino added 5 processes being may lead to the capital development ill-done, other than the promotion intervention or regulation can only do mischief. the theory that takes the capital development . regulation then if Furthermore, the poorly development to and intervention are create serious, and apply doing then works is can be beneficial. of consequences If of the country may be ill done as a guide to the way the economy necessary the as a guide to the way the economy. works is valid, conjecture valid, of If the theory that takes the invisible hand public welfare. then to i.e. of the economy it the' capital is appropriate politically regulations and interventions. Smithian The financial non-essential market intervention scoundrels economy. from the natural the its proposition arise that from one of the flaws wonders, 5 which the prevent system of contains openings which allow some dirty rotten to operate or Thus the current Keynesian external both shocks crisis is reduced of deposit restrictions, lines of business, The to institutional working of the exploitation to leads crises and deep depressions following: the view insurance geographic dislodge to the problem by managements and the with respect and to imposed on banks. view leads laws of development to the proposition of capitalist 5. Henry Simons, Rules versus Authorities Policy. JPE, 1935? economies that the leads to in Monetary 6 the emergence of conditions instability. Law institutional evolution contain the and potential deflationary characteristic, serious disruptions makers and for disruptions. system instruments policy conducive to of to be surges instability instability investment aware instruments ,inflationary Potential and as need develop both financial to may and of to and is a basic well lead to profit . flows, to support profit flows and asset prices need to be developed. In the Keynesian Loans and the banking over protracted indebtedness validate view the system periods crisis of the is the result good times, of Savings and of a tendency, for sectoral to outrun the ability of sectoral cash flows to the contracts. bail out the deposit The current institutions problem is not how to but how to sustain asset values and profit flows so that investment does not collapse and usher in a deep and long depression. a program is to prevent the dumping of assets by the failing institutions, will play for such a dumping, havoc Congress makes institutions deposits One aspect of such new investment. available for Thus asset values, the off paying funds that deposits in with negative net worth are not only validating but to attempt with by lowering are also preventing to make position would be disastrous the need by selling to asset values. for institutions out position, which -7 The there sophisticated is performing a need to Keynesian intervene in a satisfactory to is a keep a that market especially value Furthermore to while economy when they are not by a theory which helps us understand positive harm. accepts manner or to prevent disasters, actual systems of intervention, enlightened view intenrention, can do why there substantial the Keynesian view recognizes-that agents . learn and adapt, apt under so that a system of intervention one set of circumstances can become that was inept as the economy evolves. Theoretical economists and practical service to the invisible hand proposition world, where Central banks are taken comes to shove intenrention poorlylV proposition monetarist is is a that markets of this view. the the view that forthcoming regulation, behavior 6. bank savings crisis including are the when push "Markets One long money is can do standing poorly: the Bank should see to it that of money grows at an appropriate is a reflection lip Actual behavior in which manage rule that the Central the quantity for granted, proposition. pay but, in the modern takes place. guided by an often implicit theory persons The Smithian and loan results of regulations of the learned professions constant view leads debacle and a down break that rate guide to the of the of law and accounting,6 Martin Mayer "The World's Greatest Bank Robbery" rather than as a consequence of the dynamics of successful capitalism. The dominant 1950's the - associated hand is so even though equilibrium theory rather a like premisesgl. are under the in economic general conjecture conform from policy. modern Smith's they to contemporary proofs conclusions a guide to which the I the are dictum draw my Even so all that has been proven, and the proofs tight that conforms conditions, is that a general to the Smith rule exists: stability of equilibrium Beyond as validate brief: theory - -is used to support Smith the since the early equilibrium sophisticated which lawyer's are "These of that recognizes thinking that and Debreau conjecture theory general mathematical with Arrow invisible This strain in economic this equilibrium the uniqueness and are not proven.7 it is acknowledged that this theory does not allow any room for money.8 Keynes "..capital . . . is likely to be ill-done." proposition implies that markets can get the as measured the investment development decisions wrong of a country by both 7. B. Ingrao and G Israel, The Invisible Hand, Economic Ecuilibrium in the Historv of Science, 1990 8. "The most serious challenge that the existence of money poses to the theorist is this: the best developed model of the economy cannot find room for it." F.H. Hahn, Money and Inflation, Cambridge Mass. MIT Press 1985, p. 1. 9 amount, too little or too much, or by the distribution types of investments. among As Keynes remarked "The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be regarded as one of the outs anding triumphs of laissez faire capitalism 8 . . . II Keynes stock of pointed assets, cash payment of the out both that real constraints holders of the and prices of financial, capital assets, leads excessively financing of excessive high investment demand and and inflation results are liability structures cash price flows collapse. then the A sharp break the institutional failures in volume the aggregate activities cycles, identified including the rather than equilibrium as well with to ratio and in are likely to occur: an assets, debt then if the that cannot be serviced of assets follow will Wall occasional by likely of assets to and lead to a fall Speculation, Street, deep is level investment. seeking structure positions in the price of the If speculation investment level that as lead may amount or type of investment. an existing imposed by the liability inappropriate to the make depression and sustaining the business cycles, behavior the normal result of economic pr0cesses.l' 9. Keynes op. tit pp159 10. H.P. Minsky, John Maynard Kevnes, New York, Columbia University Press, 1975 interpreted Keynes as putting forth an investment theory of business cycles and a financial theory of investment. 10 In the Keynes credit therefor and between interaction .of a view better introduced term, at the monetary to the where This some the can transform to call beginning asymmetry order activity. we in the contrast the in the an of production of system equilibrium when some is seeking system of money, and the pricing of capital assets Keynes History the United crisis, crises shows that every States has been although that have The potential be great all that in not followed deep and associated history led to a deep loss to society if it leads redistribution recent from the Smithian we and long have a credit theory is theory. depression with in into The centrality the Keynesian theory introduced system.ll what differentiates the assumed cycle generating in the is are "on the Smithian perceptions monetary The for want argument, to the to system and investment programs is in sharp change of system and what, the exogenous financing is tied the financial financing of enterprises table". mechanism in a financial had financial long depression.12 crisis will into a deep and long depression. If from of the wealth a from a financial financial or a shift crisis is some of production from 11. Robert E. Lucas Jr. "Expectations and the Neutrality Money" reprinted in Robert E. Lucas "Studies in Business Cycle Theory I1MIT Press 1981. of 12. The deep depression cycles in M. Friedman and A. Schwartz, A Monetarv Historv of the United States, 18671960, Princeton, National Bureau of Economic Research, 1963 are all associated with episodes of financial instability if not financial crises. See also M. Friedman and A Schwartz, "Money and Business Cycles," Review of Economics and Statistics Sunnlement, February, 1963. 11 investment to goods consumption within a full employment economy, then some concerns about equity and the impact upon the losers in this process may arise. would not lead to the same willingness possible efficiency is motivated by the possibility guide free market concerns to intervene and take follows once policy that the history, are associated with financial. to the consequences Intenrention our time. such losses as that which serious depressions a good But resolution crises, is of a financial is ordained in which crises if it is believed of a financial crisis in that a requires doing time in a deep depression. III. SYSTEMIC CONDITIONS A capitalist interrelated liabilities payments economy sheets balance of the either balance dates. Assets financial or and is fulfilled, generates balance real incomes, sheet economy results balance sheet committed, - or and described income are by on a commitments balance yield a sheet receipts productive as they sold or pledged. way of statement to make or at are either of The occurs as some underlying are set statements. when a contingency they income either as the process looking This at an in a need to focus on how the prices on the and the all measured the economy, be sheet on demand, specified contract can cash flows that are in a common denominator are determined. Capital assets generated and the money of generate cash 12 for their as compensation process, financial assets generate financial assets, For pledging pledged. in the production cash as the maker is able In addition to fulfill commitments. as participation capital assets, as well by being can. yield cash or selling to be an option sold or either a broker or a dealer market in assets needs to exist.13 . A fundamental the existence upon various cash flows of property a system margins over the of borrowing ownership flows cash or the pledge value the market lending is based of anticipated in income committed liability by of assets the The excess of over the value of of safety. which can require the payment liabilities economies or participation is one class of margins structure and The excess of safety. from asset production of all capitalist of some principle amount is another class of margins of safety. A debt be made equity instrument on account liability has payments, dividends declared, and principle. of both only interest a contingent need to is no be paid and for payments to principle. An commitment only contractual to make if earned need to For any given cash flow, from operations the fulfillment equity there or a lease provides financing of owned contracts, in a balance and repay or from the greater the share of sheet the greater the margin Financial Crisis, Financial Systems 13. See H. P. Minsky and the Performance of the Economy, in Private Canital Markets, Commission of Money and Credit Research Study, Prentice Hall, 1964, Englewood Cliffs New Jersey ~~173-380 . 13 of safety that protects the owners of the non-equity liabilities. In addition of the economy, and issue to the basic household there are a variety financial the fulfillment terms on the sale of liabilities, or organizations having have longer in organizations various markets, the usual "too" expensive. refinancing The assets the flow is contracts, or the the pledging llplaclnglU of new assets: cash flow out. These each type Among these are those which have assets that are than need their to depend liabilities: refinance upon the including dependable refinancing chanels their normal positions. functioning fall-back break these of markets down or in become fall-back market. operation If for some of the economy results by a firm yielding reason a cash an organization in the flow to needs more by its assets would then it needs to be able to force a cash flow in its either by borrowing ability of an organization by the liabilities, cash than the normal cash flow generated favor of of result expected owned or operated permit, financial The Central bank is the ultimate normal firm. to such of duration always For variety organizations organizations case a its distinctive financial Such cash structure of firms that both own assets. intermediaries and firm borrowing or selling or by selling assets. But the to force a cash flow in its favor assets requires that there be a 14 market in which lending or buying of such assets takes to meet their place. The ability commitments refinance of financial to make payments or refinancing to sell out or selling transaction doesn't commitments. often out positions yield the ability the But may enough be to organization for that the such fulfill payment assets. can become commitments. have low to Central yield Bank enough Limited prior work I and Ponzi price funds interventions some set of financial institutions speculative a As a result the market too in a or selling out is necessary: may have the capacity to of the assets to meet protect payment at least from this contingency. distinguished financial to terms This would occur if there are many units refinancing In requires positions. situation where refinancing absorb organizations postures. between Hedge hedge, financing has the normal cash flow large enough to meet both principle and interest has the interest that income but are due of the on debts, debtor not the principle speculative large payments takes place when not enough is earned due finance on debts debts. and Ponzi Specualtive finance enough involves and to meet involves the to financing meet Ponzi the the finance interest rolling capitalization over of interest.14 14. H.P. Minsky, "Finance and Profits, the Changing Nature of Business Cyclestl, The Business Cvcle and Public Policv 1929-1980, Joint Economic Committee, Congress of the United 15 A fundamental conjecture of a model of the economy that supports the Keynes view is that when hedge financing dominant the to increase inducements proportion rate structure indebtedness and offers increase the of short term financing that requires the rolling over of outstanding short interest posture is the term debts debts. Once there is a large volume outstanding, which finance -longer of term , and positions, debts are regularly a shortfall rates, cash can flows financing of to the where then or an optimism emergence Ponzi dominates, of financing, investment involves all investment the margins increasing to acquire except projects interest profits finance, when decrease in equity, future financing there the for is a normal even where the folding of interest on the project. of involves is capitalized, enhanced it is not construction for debts about Ponzi long by gestation the erosion The payment commitments is not term in ,interest projects, financing Ponzi financing of safety. as the short out that on early on costs into the indebtedness In such a rise also be pointed of long gestation financing over, of earnings lead type respectable exist rolled It should relations. hedge institutions of on debts are even as the ability investment. Ponzi financing, increase without implies a any increase in assets. States, United States Government Printing Office, Washington D.C. 1980. Reprinted in Hyman P. Minsky, Can IIIttlHannen Acrain?", M.E. Sharpe & Co, Armonk N.Y. 1982. 16 As a result of the erosion of equity in the ratio of cash finance also leads flow in to payment to rating so that a unit's rates available commitments relations a deterioration interest rates rise relative to the credits. faster situation in Ponzi credit rise in a Ponzi commitments, a unit's to the best on debt and the decrease As than a result debts. tend to make The payment internal the conditions , that led to Ponzi financing in the first place worse, not better.15 There therefor satisfied for structure needs a are systemic conditions financial to be crisis heavily to that need to be occur: indebted, the involving element of either Ponzi finance or speculative can become Ponzi. which is We can characterize predominantly hedge a financial financing The instability evolves fundamental hypothesis is assertion as that the of a large finance which structure robust financial structure that is heavily speculative fragile. financial and a and Ponzi as the financial financial structure from being robust to being fragile over a period which the economy does we11.16 15. Some leveraged buy outs include Payment in Kind provisions for some of the indebtedness. Payment in kind financing is Ponzi financing. 16. In a number of papers Mauro Galligatti and Dominic0 Dela Gatti have shown that once the IS-LM structure is recast in terms of the price of assets and the profit cash flow. configurations in which the economy is stable and others in which the system is unstable can be identified. Further, under reasonable assumptions, the system migrates from financial relations which imply system stability to others which imply system instability. See in 17 The systemic element underlying evolution being of the fragile, finance to financial from having finance increase. structure being the financial mainly weight from being robust characterized of This structural crises is the speculative to by hedge and Ponzi change occurs because the market sets the prices of capital assets in the context of a specific to the institutional likelihood of Successful operation in no which depression The defined crisis to way known: as an interval that no serious the current is less crisis and depression of earlier times. that markets are prone The view develops conducive price propositions can be derived as probability to if it often treat uncertain is crises that and debt a with uncertainty becomes fundamentally once from expectations is likely to lead well can defined assets as if they were amenable to the manifest, in a world a can uncertain for controlling randomness the values this financing strategy become inappropriate. portfolios assets that what happens sample Strategies But financial that the unknowable about situations analysis. and by assuming distribution. probability capital an heroic assumption that viewed to adjust environments. and imply as are not likely to emerge. situations be taken structure often reflects be contingent financial is environments deflations * of the economy, occur, than the structure and a set of judgements alternative serious institutional those structure which to the does associated sustained by The necessity not collapse conform of to asset 18 values. IDIOSYNCRATIC IV. The crisis the extent occurs system of to has is commitments ELEMENTS which indebtedness changed not IN THE CURRENT SITUATION. through solely can time. determined rise The fragility by the on debts relative to cash receipts. increased indebtedness transformation depression of a downturn structure unique from depends cycle institutional has a upon and the before 'Each period recession The cycle details pattern of payment elements. the a and to of a the efficacy of interventions. Innovation, just a financial have to and capitalist development phenomena: product is not Financial and usages are also subject to innovation. institutions impact also key technique institutions an the upon an the and practices asset impact economy. Each financial fragility and upon period of has are introduced liability the rapid unique overall financial and and have structures. stability change often New They of and the of interesting characteristics. 17 It is tempting crop up evolution 17. to allow the colorful in financial affairs to dominate personalities the of the financial system and emergence Joseph Schumpeter. story who of the of financial 19 stress and possess One to do for our did for the 1920's Crash18. Today's good job introducing of whom finance would to try Galbraith Great crises. seem as fit their need present financial be added illustrious courage situation 30's and us to today's to more in his journalists than what J.K. classic are The doing cast of characters, to the rogue's predecessors I many gallery in our a of colorful financial history." I want to go beyond the heroic and pitiful individuals who form part the fabric of the current crisis special I want to emphasize features of the current crisis. several historical and institutional features in detailing that form the fabric of the current crisis and which will have to be taken into account anything todays and but and The crisis idiosyncratic include the legacy of policy refers the misspecifies to the current superficial. situation therefor action if the response to the question consequences the underlying of what if the elements war situation episodes crisis in depression of theory guiding the structure it different J.K. Galbraith, 19. Martin Mayer, theory tautness. of banking, of the from earlier post These three are the the legacy of the of the 1980's and the emergence 18. guides reality. that make financial in interventions I want to take up three special characteristics present is to be of money manager 20 capitalism IV A The crisis in the structure At least of bankina and finance in part the situation in banking in 1991 is a delayed response to the experiment monetarism and finance in practical that took place in 1979-1982. . Monetarist result of too theory much equally simplistic control inflation defined as currency holds money idea. that inflation chasing too Monetarism the growth few or goods, instructs of the money plus deposits is always us supply, subject to be controlled. This to which is to check is achieved by (Ml) or at a rate corresponding Monetarism economy. up any pretense the Federal of controlling the Reserve interest the call HPM, to the target rate of growth instructs (M2), setting growth rate of bank reserves, what the monetarists some that as currency plus total quickly available bank deposits needs the rate: of the to give whatever the market sets is to be accepted. The effect of monetarism credit through cost of credit purveyors financing. normal banking to borrowers of alternative was to constrain the supply of channels, and sources Profit opportunities non bank institutions which increased increased the price of credit could charge the that for in supplying credit through and through mark&s improved.20 This 20. H.P. Minsky Central Banking and Money Market Changes, QJE 1957 (Reprinted in Can It Hannen Again) 21 led to the development of new instruments institutions, financial as well as by banks and other new market based financing techniques. Banks loan which associations business Both position. relative portfolios and focused portfolios are both have The to cost meet of the savings their market position of banks a small and in the period of high interest financing thrill rise Given the highly loss lead to a large loss of equity. protracted ih liabilities to the income their assets earn. leveraged will with complex of lending for a longer term than the term of their liabilities. their have on total assets The implication of a rates is that banks will reach for yield, will accept greater risks, in an effort to improve earnings. When the market situation for yield Bank alert regulators examination functions during institutionalization Depression: in consequence practical funds flows of will deposit and the first fact they monetarism was and institutions. the fifty or rate pattern strip they had The situation so largely to positive their insurance were interest protection tighten insurance of deposit of the the implies that banks will reach net the been had easy years after during the Great the redundant. of the deposit from the worth of called supervision. One period insurance positive for tighter of the cash insured regulation, 22 however the regulation The Reagan administration was committed growth of the path alternatives to the constraining the competetive position The growth weakened. to bank of regulation opposite upon banks. did The money supply inflation of alternatives implied that markets to banks'was One standard was an out critique soon becomes an 'advocate In the case of Central banking and banks happened attempt to control in the monetarist period inflation by controlling for room financing in financing is that the regulator for the regulated. provided of of banks growth of the constraint the looser and the regulatory bodies followed the elections. not occur because of purely market forces. control to the growth and as the bank liabilities prosperity of non-bank institutions. IVB The Reaaan depression In mid nigh the 1982 simultaneously: crash Mexican also year of the collapse was a was of collapse was the portfolio the in not to just their the the a collapse of booming peso of . well Peso and City. of the banks, The peso, many of private by Mexicans came of The indebtedness Mexico and of some who took advantage from oil it whom internationally. north that occurred in Oklahoma position result shocks of the Mexican bank collapse diversification support financial Square wholesale some enterprises two the collapse Penn financed of the 1980's and its lesacv of revenues. 23 International forced the pressure Mexican and domestic political government considerations to nationalize the debts of the banks: de facto deposit insurance occurred. The Penn origination position Square of loans of these that is necessary quasi independent structure. by Continental and the banks: a financial be is to the usage local placements in a wide and variety in exploring 1982, and helped being of banks over the next several years, for down a including Bank in Chicago. Federal Reserve's practical administration had lowering taxes, to monetarism. entered upon not as a response disciplining this response the twin Meanwhile great collapses the Reagan experiment to the recession spending, radical the and expansionary raising fiscal collapsing banks and the Latin defense posture America of but as a adopted just as the economy received a sharp downside from the into dominant .~financial a piece of the action in mid the taking banks was to abandon spending: bank around of decentralized The Penn Square's wide variety of one centered if a system oil and gas collapsed means crisis loans by other of banks that wanted The Bank was thrust financial crisis. The fiscal posture the financial business: available collapse certainly the offset the recessionary by making military to the specialized profits build up firms that were thrust available made from to profits in a position 24 to take advantage of imports of a vast international meant that fiscal deficit in emerge in in the the the 1980's United However spending. array of consumer deficit deficit countries of the defense products States saw a huge 1980's. profits a burst This induced were earned trade by the in those that had a surplus in their trade account with the United States.21 the American In the competition firms lost to Japanese among firms- for profits and other firms in the 1980's. As a result of the siphoning deficit the off of profits spending to other economies, the massive 1980's did not lead to a commensurate profits and therefor did investment enough to prosperity in improvement not and trigger domestic reduce or domestic a sufficient profits eliminatet of the 1980's so the rested upon that In prior investment deficits, their sheets. levels without was which financial post war first sheets. deficit. The a fiscal recessions the enable businesses commitments and fall increasing and households clean up After a short interval of dependence It domestic rose by ahlting deficit, high deficits. by in income substantial offset of in domestic rise economy was never strong enough to generate employment deficits rise balance induced by the income and in private government to fulfill their balance of profits 21. This view of profits reflects what I now call the KLM or Dutch airline theory of profits. See Mica1 Kalicki, S jay and David Levy, and Hyman p. Minsky. on .._...._ _...____. --- .--- ..-A*----- .^I. _.___.__ ._.~ .__.. . -.. -.--.---a-- -- . _. 25 government private economy and investment deficits, increased, tended which in the eliminate the employment to deficit. era, and to date in the Bush Presidency, In the Reagan the buoyancy of the American to the reduce government may well as be impossible of the far now consider an as experience in the though international As a result as the United financial to sustain the well United trading a cannot necessary to upon flows and profit in the a numbers of enters reduced. the the profit partners Action flows may adjust United 1990's and the deficits outstanding shift in States. with to the it's contain that are needed not be effective their posture. The emercence profits dependent fundamental position greatly States increase States crises length profit of it is happening. as indebtedness independence potential IVC where era of the be is the employment era saw a vast debt government which maintenance do not indicate a depression The Reagan because It may past. performance the for lldepressionl'even unless the to have a depression 1929-33 economic government fiscal In deficits. spending is in excess of 25% of totallspending and depth fall for need Economy has not been sufficient of monev manaser canitalism international _.- .,_--.------ ___-_-. I . ..- __.. - 26 Over the the United widely take post States war the distributed the form beneficial of ownership in pension has but this various been in more ownership mutual These has funds and funds need to funds presumably operate funds. of these of the owners capitalism of property in positions The mangers interest of successful than henceforth, interest be managed. in the period or the beneficial interests, but they also have interests of their own. pension These stocks quality and for monies bond portfolio. They became a securitized They also play a key role in the emergence of leveraged for mortgages instruments specialized and the phenomena known known aspect of the leveraged out such and credit card receivables. buy outs funds that each of as junk bonds. for the equity position completely A little buy out game is the leveraged the main The source of the money controls. V. have as market buy funds The soon outgrew the orthodox on a regular basis. placement high mutual and players in in these pools the game available in the buy out is largely though not the various managed money pools. Policv urooosals In recent years we have seen that ideas, forcefully forward as propositions affected economic derived from economic analysis, policy even though, within economics, put have the 27 ideas had a limited sectarian standing was questionable. supply side economics framework the financial crises outcomes Monetarism is classical Within economics, must be the some system well be in systemic monetarism, the my in monetarist title, that that they of market economies, and the even -broader are is a neo financial crises, almost by'definition, result that Within proposition of the normal functioning non-starter. and their scientific is one such doctrine, another. implicit may following of shocks imposed is in an essential upon sense the economy outside by of the to address the economy. The main emerging thrust crisis programs to in address in the recommendations the banking the Savings system,as and Loan are due to specific weaknesses system flaw in market system with expected economies robust finance done, make reflect institutional than a fundamental the transition to one with the fragile from finance a an result of profit seeking activity. Within the framework process which rather as debacle, the view that the problems in the banking well of the Keynesian need not lead to the capital the structure development main policy in place which well. objective development is is conducive view that market to put to doing being well a financial the capital 28 A quick be needed and dirty if the list of some policies response anything but superficial Development 1. bonds when a major phenomena debts in change a protection refinancing part of the present a was for early in the financial is to be The junk bond takes place. transfer of outstanding value from or the initial: equity right to put bonds structure The ctrine in a refinancing. cricis follows. of to the new debts development to that may well otiners. whenever of the debtor of conveyance existing a The serious takes place has to made to conform to current practices. Need to question 2. policy induce a Should pensions shift the pension to defined be attenuated taxed except taxed, contribution by having withdrawals (No limit to contributions, all withdrawals fund system. interest and as they are spent.) Should schemes? an open ended without dividend Opening IRA's penalty but accruals not up the IRA's may well require a thorough overhaul of the income tax. Perhaps the income tax should be transformed tax. 3. The organization debts. government in that is it no into a spending different needs revenues This means that the government conditions balanced budget, recessions and depressions government that conducive spends to 16 to to the normal functioning any other validate its should have a normal allowing and major some than for wars. 20 % deficits inasmuch of GNP is in as a more of a market economy than 29 a government that spends dome 3 to 9% of GNP, the tax system must be such that it yields to full employment approximation 4. designed force. and 16 to 20 % of GNP when a close Furthermore the to be an automatic Indexing government is achieved. government macroeconomic as a mechanical pensions directed Government towards the creation of spending is sustain profit impact of conditions that government conducive in social should so to resource creation I be and the creation macroeconomic, should that increasingly can exploit. spending security abolished, flows. be anti inflationary of resources that enterprise conditions be should budget surplus. spending of opportunities government device should inflation leads to a substantial 5. budget The aim The main role to promote microeconomic to create and to enterprise.