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Financial Instability and the Decline (?

) of Banking: Public Policy Implications

Hyman P. Minsky*

Working Paper No. 127

October 1994

*The Jerome Levy Economics Institute of Bard College

I.

Definition

of the Problem

Banking supplies capital functions organizations paribus, that

plays

two

roles

in a modern and

capitalist

economy: into extent

it the by

the means development are

of payments

it channels On both to a

resources scores these

of the economy. performed chartered will

banking

being that are

decreasing and

as banks

it seems,

caeter:ls

the trend

continue. that the Banks, banks; those to role in the economy (of

These government supervise, of bank

developments organizations regulate, and to the

suggest

(Central examine

broadly "control" bank are

defined)--to the growth that

money; as part

and of

assure

that

liabilities always role

function

payments The

mechanism

available has The

at par --needs significance channels may no by

to be for the which be

reviewed. efficacy

"declining" policy

of banks

of monetary

operations. the or

Federal by by

Reserve

operations the

affect

economy cost of the

longer but

changing affecting managers markets.

availability by

financing, evaluation and the

rather

uncertainty: of the When by viability Central financial

affecting

by portfolio stability evaluation of

of enterprises Bank operations agents,

affect

the

of uncertainty

market

market

reactions operations. 1 The decrease

will

often

be

out

of line

with

the

size

of the

in the weight economy Exchange tends

of banks

in financing the

the

capital of the are

development the

of the and

to increase

significance to that of

Securities Reserve

Commission some major

relative

Federal chartered

System.

That banks firms

organizations like even

that

as commercial bond rating

operate are frozen decline banks

more

investment as our The

banks policy

is an issue structure problem of

facing, and

regulatory

for that

banks emerges

remains from the

unchanging. relative the

in the is

importance existing of

institutions

chartered structure

as of

whether and

institutional financial

regulation to be changed on economic

supervision way. place of

institutions the One

needs

in a serious policy takes

In general, two "planes."

discourse is that rules, of the

on the The

of the

day-to-day should

operations guide

"authorities" second plane

and the is that

if any, that the

them.

legislation and

(and

administrative of banking

decisions) and

that

affects

structure

operations involvement and financial second

financial that paper

markets,

and the and

government banking on

in setting markets.

rules This

constrain

contain on

concentrates and usages"

policy

the

"legislating

institutions

plane.

II. Theoretical

Background

Every economic economic especially significantly of the day.

economic

policy

argument anyone who

reflects analyzes from" of

a and

maintained advocates This is is

theory. policy true

It behooves to make if the "where

he is coming theory

clear. the

maintained from the

analyst

different

conventional

or orthodox

theory

This financial Theory Theory business capitalist determine demand, time

comment instability

is

written hypothesis

from

the

perspective of The

of

the

interpretation holds that

General General

of Keynes. Keynes set

This

interpretation foundations financial

in The

out the and a

cycles

of an investment theory of for investment theory of among processes that

economies. investment

Interactions demand, financing

conditions,

aggregate through the to of an

and the distribution

of income

determine quite theory, static

the path

of the economy. This Keynesian view differs economic radically which from leads

orthodox propositions abstract utility One

"neo-classical" about

the properties is fully "real

of the

equilibrium

economy functions

that over of

specified

by production and maximizing theory is that

functions, behavior. money is

variables",

proposition Keynes General

the

neo-classical the effort a process Theory,

neutral. of The

described Theory as

that

went

into ".
.

the
.

creation from the 112 me. financial

of escaping which once upon

confusions In

of the Quantity theory Keynes

entangled which the are and

the

developed, money

instability not neutral.

hypothesis

is built,

and finance in monetary the but the the

in general financial

In particular, will affect of as the money rigid

changes path is wages, into and of

institutions This

non-neutrality such

not

economy through time. special result of the rather because money of the

circumstances enters money in

quite of

different current

ways

determination money price of

prices assets. 3 In the as a the

outputs

capital

financial set path The of of

instability interacting, the

hypothesis, interdependent economic

the

economy

is that

viewed generate real

processes variables

pertinent of

through are most

time.

results

multi-market

interactions

often the as

tranquil,

but

from

time

to

time

the

cumulative conditions that outcome flows

effect

of

interacting incoherent

processes behavior.

generates This as of

turbulent holds

as well of the to in

theory a

periods of due

incoherent interactions financial markets. of a

behavior between

occur flows

natural

income,

payment

commitments These

and the prices reflect that it

of assets the essential

as determined characteristic an

interactions economy,

capitalist system

is

simultaneously

income

generating

and a financial

system.' are associated they lead with to both

Economic deep

turbulence and

and incoherence severe inflations:

depressions deviations theory the of

serious the to the

systemic orthodox optimums, outcomes flawed. and long In mainly which

of output that

from potential

output.

Whereas lead that

finds

decentralized instability market

market

processes holds often such

financial capitalist the

hypothesis are

processes of these

seriously as deep policies. 5 cycles

However,

full

effect

flaws,

depressions, the result financial from

can be contained instability interactions

by apt economic

hypothesis, between

business

payment

commitments, and positions incomes, which

arise

in the process assets, by and the the

of financing flows

investments capital

in capital are

of gross of

determined are can

structure in

aggregate economies. sufficient,

demand: Gross

business capital or prior

cycles incomes

endogenous be to In the either fulfill the cash

capitalist more than

sufficient, made during

insufficient financings. determines paid for

payment

commitments case, for

simple flows

skeletal available financial in finance

investment the as

spending prices well as

validating

capital

assets

and

instruments,

fulfilling were entered

commitments into in

embodied order to

liability

structures and

which

investments

positions

in assets.

In foreign

our

complex

world, and

households, have

government outstanding

units, debts,

and and They,

governments some

enterprises

debt-finance too, need

of

their debts

activities inherited for

internationally. from the past, and even

to validate some current

as they new

finance debts.6

demands

goods

services

with

III Debt

Deflations

The Keynes

financial with

instability

hypothesis

as an interpretation

of

starts

two observations:

The

General

Theory

was

written

during

and

shortly that

after

the in the

great the

contraction collapse of

of the American the 7 with


8

Economy

culminated system in

United

States'

banking

winter Keynes

of 1932-33 familiar

was

Irving

Fisher's

Debt

Deflation

Theory

of Great

Depressions.

In condition in the

Fisher's for way

argument, deflation. and enjoys in the

overindebtedness This arises in out

is

an

initial changes are

a debt

of the

investment economy changes, and market over

positions

capital period

assets

financed

as the

an extended form of are

of good

times. new way In

Institutional instruments, financing addition, practices and access Fisher is now clear

new one of these

institutions, aspect good days, of the

innovations, extended

changes as adjust is

periods

times.

especially

evident

financial computing,

to new technologies

of communicating,

to files. did not explain how overindebtedness period of good developed. times, It

that

over

an extended

during

which

the

use of of

of the the of

debt use

leads of

to

well-advertised attenuates. failure structures cash flows

gains, The

prior

wariness evaluation as the

debt

subjective even as by

likelihood safety in of

of project liability expected

diminishes diminishes, are pledged views the to fund not

margin

ever-larger outstanding uncertainty articulation payments fulfilled.

proportions contracts being of debt the

to service carried payments objective

debts.

Subjective even income of as

of the closer these being

decrease and the

increases

chances

contracts

Impact

of the Great 1933,

Depression when the had pieces left behind by the great the

After contraction current weaknesses the

of 1929-33

to be picked the great

up and put depression running all

together,

interpretation in the

of

emphasized the way from and

financial

structure,

information

that

corporations

provided

to their

investors

potential Reserve The the panic

investors System. Federal of

to the organization

and powers

of the Federal

Reserve One

System motive

was

created its

in the founding Federal

aftermath was to

of make was the the was

1907.

for

future unable 1929-33

financial

crashes

impossible. of insolvency developed the than

As the of banks that and

Reserve over of

to stem the wave period, a

and firms a retooling

consensus with other

Government's needed: window some

interface device

banking the

financial Reserve's

system

Federal

discount

had to be put banking and had

in place

to contain

solvency of

crises. the era of the

The Great

financial two phases: of study

legislation first came

Depression after

emergency reform: phase

provisions the setting place

and then, in place

a period

and debate,

of a "permanent"

structure.

The second

took

mainly place

in

1935

and

1936.

The

object

of

reform

was

to

set

in

a structure could

so that

a financial again.'

collapse

leading

to a great

depression

not happen

IV. The Reforms

of the

1930's

Much written particular either place. by

of the in terms

economic of

history to

of the get

United money

States right. had

could After

be a

attempts banking,

monetary,

and financing a new

structure structure

failed, put in

economically This history round

or of

politically, reform and

was

subsequent the the medium

failure, two not and

followed completely banking and to of

another

of

reform, placed and

reflects upon sound

compatible system: furnish to

requirements provide

monetary of

a safe

exchange,

channels

for the

financing

of the

capital

development

the economy.

Compartmentalization Two be said principles, to have

and Transparency compartmentalization the legislation banking, structure. is still means and transparency, mid-1930's systems can that and set

governed

in the

reformed the

the private

monetary,

and financial The basic

government's

regulatory

structure

in place

in the mid-1930's

largely the which

in place. financial industry is or in

Compartmentalization divided into

that

compartments, institutions of

within have

special-purpose market positions of

limited-domain particular industries, other

protected in the

types

financing,

financing types

particular for the is

or in the provision One aspect

of particular of

of assets is what

units. of referred

compartmentalization investment act. banking, In addition,

separation commonly

commercial

from

to as Glass-Steagall

special

financing agricultural

arrangements credit, Finance the and

were

put

in and

place rural

for

home

ownership, The bank, other of

exports,

electrification. investment and

Reconstruction supervised industries, government In the was

Corporation, of

a government banks,

refinancing acted as the

railroads, backstop for

financing programs.

a myriad

resource-development same spate The

of legislation real the bills currency

the

Federal was and debt

Reserve

System the

reorganized. that

doctrine supply

removed access to

from

rules Reserve

determined

Federal as

credit. to offset

Furthermore, Federal a

government

became

eligible

an asset

Reserve new set

currency of

liabilities. were created to

Deposit take were over the

insurers,

agencies.

responsibilities at par funds

for from

assuring the

that

bank

deposits The

always

available

Federal an

Reserve.

various

deposit

insurance

carried

implicit up to

Government limits which set was

endorsement by Congress. not were, honored and The that the

or guarantee

of their of the

commitments, initial

One principle in our recent

legislation, that small

experience, not,

was

deposits

large

deposits of

were

so guaranteed. really reflects economy a recognition in which the The on in in the

doctrine United form

transparency is a

States of

capitalist business truthful and

corporate transparency financial markets "second in

organizing holds of that

dominates. information, of activity place and

principle condition which

corporations underwriting are sold, was

those which

initial

takes

hand"

securities the markets

to be publicly instruments either

available. were by sold

In addition, and bought

in which free of

financial

were

to

be

manipulation, parties.

market

makers,

corporate

management, principle an

or third

The transparency a marketrather

is necessary

for the

operation

of

than

institution-based

financial

system.

Revelations losses crash

of scandals

in investment Dow by Jones


1933

banking, fell

combined

with

the

of investors value, of meant

as the that

to some

15% of its pre in the in and

public's and of in

confidence the

integrity participating saving

investment was low. was The

markets revival

wisdom in banks

confidence

institutions

facilitated

by Federal

government

deposit

insurance. There intervention confidence some was no possibility the value of a similar assets. financing government Revival of

to guarantee in market-based of the

of other equity

debt

and of Deal

required and the

guaranty

integrity The New

corporate legislation

management founding for that the

financial Securities reporting accompany (and the

markets. and and Exchange

Commission for the

set

standards

corporate needs to of for

governance, security

information and for

a public flow of

offering, from) between a division is in the

operations markets

information difference with

second-hand economies between public with what

securities. banking" and what

One

"universal finance in the

and economies markets of

banks

finance and

confidence The most

integrity and

markets

corporate may well be

governance. one of the it,

securities successful market

exchange efforts

legislation of the

reform oriented

New

Deal would

era:

without

today's

financial officers of about units

system of

not be feasible. professionals, and often skilled in the

Loan evaluation information government to the like, to

banks

are

privately the that

submitted

confidential and joke, not

operations require

of businesses, The

households, officer

financing. seen loan views into a pro officer of

loan

effect

that

he has never the

forma

that

he did which

accurately the

reflects

process,

seeks put which

transform by

optimistic borrowers

profit

expectations expectations

forth

potential

realistic

10

can be submitted the bank. The

to and endorsed underwriting plays a

by loan oversight combined role for with

committees the input

of of

process, similar

security

analysts, securities. 10 The remark loan

publicly

traded

about

pro

formas chain

cited of

earlier financing:

identifies loan

the

role

of

officers

in the

officers make

are the designated their based to living

skeptics

of the economy, risks that and that borrower with they

who nevertheless understand. analysts but the

by accepting

In marketare assumed

financing, roles to

underwriting similar both the to

security of banker, and the

play

continuing that often is

commitment characterize in general

lender and

a bank's lacking

relations

borrowers

depositors

in market-based

financing

arrangements.

The

1930s When

reorganization the belief Federal was was an Reserve that put the was created of the an after the crisis of was of the not

1907

the

problem As in

the

instability Reserve bankrupt

banking able the the to

system take

to rest. position unable climaxed an

Federal otherwise the The of

equity was that

bank, of

Federal banking of

Reserve system 1933

to contain in 1933. infusion into

solvency

crisis

resolution equity that were

of the by the

crisis

involved

Reconstruction

Finance

Corporation

banks

bankrupt

on a mark-to-market The commercial unions natural standards regulation, creation banks, the

basis. of federal deposit and of loan the insurance institutions and for

savings authority result

organizations, Federal insurance mechanism Reserve is the of

credit A of

diluted and

System. setting

normal for and

of deposit and a

coverage examination,

supervision, that the

which

assures

the

insurer

11

insured

conforms

to set

standards. functions

Regulation, of an insuring act of based

supervision, authority. the reserves paper Reserve activity at

and

examination The member discount

are natural original on

Federal bank of not

Reserve

of the

banks

rediscounting the a the district

eligible

window was

Federal

Banks. reserved

Rediscounting for a crisis, base through of

lender-of-last-resort mechanism brought by which

it was of banks which

part

of By

the

normal the

reserve channel creation banks Federal The

was

into

being.

being

the demand the

for reserves window

by banks made the

led to the ability of

reserves, responsive

discount needs

to lend Reserve

to the reserves of

of trade. endogenously act needs

In the

original

act bank

were the

determined. was that the (made

underlying

theory

original to the banks of

responsiveness possible determined district Reserve's result secure, economy. Bank were in by by

of the banking the reserve the

system base of

of trade

being

endogenously paper the system, was at the

rediscounting Banks) of

eligible with

Federal

Reserve

combined the

Federal would and

generalized a banking also in place the

oversight and financing

banking that

structure the capital rediscount

safe

and which Changes to take

facilitated the posted

development rate at a

of the District of gold, internal

only

as the Bank exchanges actions were

suffered or

a loss an try

either drain. projected

through Federal

foreign

through to

Reserve

not

to

fight

inflation original

or otherwise structure, lenders, prudence use member of

manage the the of the banks

the economy. Banks Banks member were lenders to

In the to member information regular source

District

banks. about

As the

District their

had banks

a right who

were

borrowers. of financing

The by

discount

window the

as

a normal

legitimated

regulation,

12

supervision, Reserve. The decade basis the

and

examination

of

member

banks

by

the

Federal

Federal

Reserve

had

been

created debt

because was too

in small

the

first

of the century of a currency needs of

the government

to be the to

supply

and a banking i.e., that Making

system

that

responded the

trade,

facilitated government of the debt

capital as

development an asset was for

of the the

economy. issuing an

eligible

note as the

department

Federal it

Reserve first in the the still

Banks

viewed during

emergency

provision and not

when

was

introduced normal Federal expected The Banking deposited policy of bank were

crisis

of 1932, Aside

as a change of

operating Reserve

procedure. System's

from with

periods the

crisis, was

interaction

economy

to be based bank Act

on the discount of the United the of

window. States under debt the National banks fiscal

currency was based

upon

Government the

that The

with

the

Comptroller States which, after in

Currency. War that the

of the United debt the

the Civil meant

led to a shortage the creation of

government money not and

turn,

financing

available

from

banking

system

responsive

to the needs

of trade.11 allowed the did use not of government abolish the was once the

Legislation debt as asset

of 1932-35, offsets for

which

currency,

rediscount that again after make

facilities recovery

at the District a resumption debt of

Banks. fiscal

The expectation orthodoxy would as the would enable source

government to resume response

scarce.

This place

discount banking

window system's

its rightful to the needs falsified Second wars,

of the

of trade. by the War. the enormous In growth of of the

This government Korean, government

expectation debt Vietnam, debt during and as a

was the Cold

World over of

spite

1946-1980

period the

percentage

GDP

fell,

ratifying

13

expectations the federal

of

the

1930s.

As

a result

of

the

destruction of

of

fiscal debt

system to

following GNP

the

election

1980, Today,

government and of for the

relative

increased policy

dramatically. with the

foreseeable

future,

dealing

structure of a

government

supervision, has money

regulation, to supply of the reflect will

and

examination that

financial

institutions

expectations rule.12

government-debt-based Whether created create the

be the

structure Reserve

Federal

Reserve eligible

System paper is

that and an to apt

district thereby for has between in

Banks base

to process for

the

reserve Bank been

commercial

banks

structure operations mismatch the

a Central never the which bank

that faced.

operates There

by way may

of open well

market be a and

very

structure it

of the

Federal the an

Reserve economy: market

System a

manner

interacts

with than

discount

window central

central bank.

is different

open

operations

V. Today's

Capitalism

The financial since the

financial systems end of

systems of 1907 War

of or II

today's of 1936.

capitalisms Over not the been

are

not

the

half-century a traumatic during had One upon in in bank for be

World

there such

has

collapse the

of financial prior beginning this debt. to

markets, 1940.

as had

often such

occurred

century the for

Historically, and the

collapses

marked reason

of a deep is that means no

long-lasting reserves a decline be

depression. are in now based

change This

government the supply

that longer

reserves of

and

of money activity

need

a result the

a decline for available will

business

which

lowers with base

demand debt

accommodations. bank portfolios

Furthermore, the reserve

government and bank

deposits

14

sustained decreases. An of a

even

if

bank

lending

to

business

and

households

additional

and

equally is that not

important in

reason

for

the

absence a

deep in

depression

a big-government that capital in a

capitalism collapse,

fall which

investment is what

does normally is

mean

incomes

happened because in

deep

recession are

or the

depression. equivalent incomes. 13 of

This

so

government sustaining

deficits aggregate

investment

capital

Stabilization

policy policy is effective of as it stabilizes aggregate in the 1930's values asset (current, because recent, and

Stabilization profits. occurred expected) factor The

great

collapse

primarily had

because

capital

incomes

fallen

and only The

secondarily increased rate

the discounting for liquidity

had

risen.14

preference assets

decreases when

the

capitalization traumas as that

for capital but in in

and equities

financial such

occur, which

the 1929-33, asset

small-government the numerators relation) investment increased for the

capitalism,

ruled

in the present-value first tapered liquidity the fall fell off slightly, and then

formula and

(the capital then

pricing as of

precipitously, The double whammy was than the

collapsed. and values and decreased being in an

preference in price asset

profits greater

responsible the fall of in

consumer workers. In prevented 1990's deficit. monies

level

index

of

wages

employed

our

recent

experience

the

main of the

stabilizing late was is the funds. 1980's the growth

device and

that early

the from

financial turning

fiascos a

into

depression

government's of managed funds are

One new in the form

aspect

of the economy and mutual

of pension

These

15

contingent funds A run

value upon

instruments. a daily will

The

day-to-day to market

value

of

these

depends from

marking lower

of the for

portfolios. the need to the

these assets

funds to

asset

values, is

liquidate market In were frozen assets

satisfy

redemptions

likely

to

force

price an

of securities earlier asset epoch, of

down. when bank "fixed-dollar" failure partial liabilities would payments though equity, that those lead to

a main

households, would be

a bank receive

assets.

Depositors bank

as the there for the who

in a failed

would such

liquidated.

Even by bank

is no margin the asset of

of safety, of mutual can

as is provided there
100%

value the

funds,

is also of

no danger but be

front are

line back

withdraw only

a deposit that

further

receive

the

value

can

achieved

through A deficits

the time-consuming stabilization to sustain surpluses requires the quality at normal

process that

of liquidation. relies mainly private prices, upon government and

policy profits

and stimulate profits,

investment, and

government investment, not allow

to constrain the discipline

exuberant that does This

of a fiscal debt

policy

of government times the

to be compromised. posture

implies leads debt to

that

fiscal rate

of the government of outstanding GDP falls the by a

a substantially of gross

smaller

of increase but when

than

domestic from the

product,

significant of increase that of GDP.

amount

"full-employment

level"

then

rate than

of government The tight acts

debt becomes rein that such

substantially

greater

an income-sensitive upon

fiscal

policy

imposes a

as a significant tight

constraint fiscal passive. only one It very

inflation. allows

Such monetary capitalism, constraining through

big-government to be

policy In arrow can

regime

policy

relatively policy has

big-government to fire in

monetary an

exuberant relatively

expansion. scarce and

make

financing i.e.,

banks

expensive;

16

monetary it

policy a

is effect ive with A policy crunches by

a s lack posture

fiscal that

posture at

only

as

induces

crunch. by creating

aims

portfolio deflations ratio of

conservatism will lower

and threats of the

of debt overall

economic

growth

lowering

attained

GDP to potential

GDP.15

VI. Policy

As my
1935

colleague believed One

Ronnie that

J. Phillips the agenda on the

recently of

pointed

out,

in was up

few

banking was the

reform to clean

completed.16 bank

unfinished by unifying the FDIC

item

agenda under Phillips

examination

examination FDIC. As

independent reports, guarantor the of had

government argument the was

corporation, that of the the

and the off

Treasury depositors

(as the

ability

FDIC

to pay

as necessary) value

resources deposits. out bank

at hazard This made

in the guarantee them the

of the nominal

of bank to carry

appropriate

organizations

examination.

Liquidity In occurred

and Solvency
1935

Crises "solvency" Reserve crisis, System was that of


1933,

only the

one

had

since

Federal

in place. unable

In that to prevent

experience, the the collapse

the Federal of the of the

Reserve and

System

had been

banking banks

financial the

system. holiday

Furthermore, was under which the was

reopening of

the

after

auspices able

Reconstruction funds. a second Reserve bank and

Finance

Corporation,

to supply We now

equity had

have the

experience was not

with a main and

a solvency player loan

crisis.

Once off

again and

Federal

in paying association

sustaining

savings

17

liabilities

at par.

The

major

placers

were

the

insurance

funds

and the Treasury. Whereas inducing not and and the and main the Federal Reserve liquidity has been the the main player Reserve of to in was

containing player The

crises the has

Federal crises able

in resolving Federal Reserve due

solvency not been

1929-33 contain

1988-92. offset

crises

that

were

to

a plethora

of non-performing

assets

on the books resolution

of banks of

and financial crises, an

institutions. which equity are characterized This equity

The by

solvency

non-performing that

assets,

requires

infusion. infuses a

requires into

either net puts so that

a government worth up the enough

investment

bank or funds

negative

institutions, "equity" or

government into failed are the

"liquidator" institutions paid

guaranteed

insured

liabilities

off at par. The "government operation investment of the are the the bank failed non and bank" bank, route and often assets the whose leads of the of the to

continued whose bank. often

debtors failed

liabilities For leads both

performing the debtor, debtor

equity

infusion are

to the

treatment

of the

liabilities the bank

not performing bank customer's

as a work-out side the

situation.

On both

and the leaves

government even

investment

bank

route

valuable

organizations

intact, assets

if the management

responsible

for the non-performing The closes to sell "government the failed of

is replaced. route pays off depositors, and proceeds customers as

liquidator" bank, the

down the

forecloses failed The bank

on debtors, and bank

assets

rapidly work-out that

as is deemed route may

feasible.

"government way

investment with

bank"

be a more

effective assets

to deal

a crisis route.

is due to non-performing

than

a "liquidator"

18

In Finance (l/Z of equity equity

the

aftermath

of

the

bank

holiday,

the

Reconstruction closed place, sale the banks the

Corporation the banks

placed that

equity

in some As

l/3 of the took

reopened).

recovery either

injection interest out

by the RFC was undone, in of the market or by a

by the of

of the RFC's the the the

repurchase On the funds

investment investments costs to

retained banks

earnings. yielded nil: because

whole, so that in

in failed the

sufficient no permanent of the

government debt

were

increase

government exercise. It

occurred

recapitalization

seems

as dead of

if

there weight and

will debt loan

be

a permanent due to the

increase costs and banks

in of in

the the the

government's bankruptcies 1988-1992 government Corporation, crises are

savings

associations

period.

It is worth bank,

investigating as the

whether

a permanent Finance solvency

investment

such feature

Reconstruction where

is a desirable likely to occur.17

for an economy

100% Money, The based issuing our

or The National Banking States

Banking Act

Act Redux for bonds of the bonds a currency the that was

National United

provided

upon

Government Office

that

currencyToday by the the

banks

deposited is based

at the upon

Comptroller. that are of by held

currency

Government The "great debts by the

Federal currency Reserve

Reserve supply System the

System. upon was

experiment" monetized combination

basing the

private

Federal Great

terminated war, and

of of

the

Depression, base

great

the

attenuation 1980's. is big and

the

revenue

of the Federal Furthermore,

Government the

in the debt

government

enough

so that could system

the be in

deposit offset

liabilities by government

of the bonds.

commercial

savings

banks

We can now

have

a banking

19

which Reserve and their a

the

banks

hold to

interest-bearing 100% of their hold

reserves deposits, government

at

the

Federal

Banks

equal

subject bonds This

to check, to are offset give us fully of

the

Federal

Reserve and bank in

Banks reserve which

currency

liabilities. currency they banks. and

would

monetary

system

deposits

equivalent commercial money

in the assets and Federal

by which Reserve

are offset The

on the books for

conditions

100%

are satisfied.18 We are rapidly forms. moving We not on various currency with credits towards only make an economy where money will

take

on new

purchases

by electronically cards, but we can form run to

setting expect form down

up debits eexpect the

credit

and payment soon

in our pockets an encoded

to take we

the will

of

smart

card

value,

which "cash

by transferring account. transfer

by way

of smart

registers"

the vendor's As they

purchasing

power

from

from use card costs system

the

account

of The was

one agent great

to that

of another, in the

payment and

systems credit

resources. revolution

innovation

payment

the vendor's system. 100% money One

discount way to

as the way to pay the pay the for the payments on the costs security would

of the payments in a world sebt But of

is to use system the

interest the

government's of the of system. that

owned this a

by the would

banking mean

to cover safety

that

and asset

goes

with

default-free to the general pay

income-yielding public. rate to

not be readily would

available to

The alternative on deposits for

be for the banks in place and the

a competetive system

and to put

a fee-foruse of the in an

services electronic the

pay

check-clearing There

payment except system,

system. that a

may be no issue

of principle can yield

choice,

fee-for-services would treat

system large and

open-access owners

which a

small the

asset in

equally.

Such

consideration

may

swing

choice

20

favor

of

combination costs

of

fees

for

services

and

the

vendor's

discount

to pay the

of the payments schemes

system. was that debt financing

One aspect of businesses systems default and and

of the

100% money

and households the provision have a

was to be divorced of instruments nominal value that

from are

the payments both This free can of be

always by

fixed

value. the

accomplished the indirect and

making holding

contingent by

assets of paper trends

households Current the

standard for finances that running by in

business favor of

household funds

debts. becoming

are vehicle

mutual own have This

principal and the

households liabilities portfolio. used

business values mutual that

equities based fund upon

debts. market

These value is now

which fund of a

financing

technique on the basis

mainly

for instruments information. through loans

are purchased

of generally

available

Banks, in making information, and As of on what

their

loan

officer of their

function, "hard

are

specialists of private whether client. province from there

on the they to

basis obtain

reading"

which terms

in the process a potential such loans the

of deciding borrowing can be the flow of

accommodate lending, that

a substitute special

for bank funds

mutual

break

down

funds that

business

and

household

financing with

into

tranches, value

such that the

is a fixed-income and and a

portion

a market that

is protected fixed-income that return due to the but non-

variable-income tranche.

tranche These funds

"protects" be

value

would have say, risk a

so structured expected losses

variable-income would also

portion the

would first,

high of

absorb assets:

10%

performing all credits Thus, which was

interest

rate credits.

could

be finessed

by making

floating-rate as the 21st

century during

is about the
1930's

to be ushered discussion

in, an idea of reform can

on the table

21

once is

again it

be on the separates

table. the

One virtue two functions

of the that

100% the

money

scheme and

that

monetary

banking means By

system of

has to perform: and the

the provision

of a safe of

and secure economy.

payments, these little, are

capital

development us aware

the

separating too

functions as well

it makes

that

an economy

can have

as too much, to realize

government the dual of mutual

debt. set-up of 100% by a

We now money:

in a position the capital

financing

development such upon as

the

economy and

contingent-valued payments bonds system. business fund, holders in the mechanism is held The is

liabilities that by is based the of

funds, of for

a portfolio

government

that

authority the

responsible fund the in order

weakness the

mutual

way

the payment of financing of a mutual the fund

that not

position-taker, his capital

manager to

does

hazard loss

protect for bank tranche

against form of

of principal.

A surrogate

capital in the

a high-risk, need

high-expected-return

portfolio

will

to be developed. world, other people's money is put at risk

In a capitalist by corporate This is true

managements to a greater

and portfolio extent

managers ever

of various before,

kinds. of

now than mostly of

because

the wider that owners has is

spread been by

of wealth, realized.

albeit One way

in small

accumulations, today's asset by

protecting widely

broad

public

information

disseminated:

transparency.

Compartmentalization Like and every

and Transparency of be

for the

21st

Century realities of of has

application need to

principles, adjusted The for

compartmentalization the

transparency and

institutions institutions largely been

usages.

compartmentalization in the 1935 21st structure, century

by function, eroded.

so prominent

As we prepare

for the

we have

22

to

adjust

the

still-valid to the

concepts of

of the

compartmentalization 21st century and

and our

transparency understanding The

technology

of how our economy of home the

functions. mortgages increase holders the and automobile loans,

securitization that funds primary

an adjustment and pension reflecting savings the

reflected as the

in the weight of market

of mutual

proximate has sales that the

instruments of both

loans,

changed finance now

operations

banks

and consumer company to be will format under be

companies.

Furthermore, banks and and

holding funds

allows

commercial umbrella, and

mutual we can

same to

corporate

which

expect

opened

allow

commercial format,

investment

banking erased banking.

to co-exist the

under

a holding

company of

has virtually and investment

functional

segmentation

commercial

Legislation of the barriers

and administrative to This nation paves wide the

decisions branch way of

that

eliminate are now

most being of

banking the

implemented. geographical One the past

for

elimination

segmentation. in the stagnation been the the British economy over of as a in of for of and

element century

has

ever-greater branch

concentration systems, such as even exist rule

banking rich

into of and often

a small fringe Italy, made

number

of national

mix

banking never

organizations, The

Germany thumb, the

arose.

prudent

banker

part of

of the

regulatory

structure, than

provides 10% or 15%

distribution (in

credits

so that capital,

no more retained

equity

principle profits)

earnings,

undistributed This size

can be allocated rule

to any one credit. the an natural loan

lO%-to-15%-of-capita1 of a banking assets

determines example,

habitat

group.

For that

eight-percent bank line

capital-to-total would have

rule means

a 100 million-dollar The maximum credit

8 million

dollars

in capital.

23

of such

an institution scene

would

be from

$800,000 with

to

$1,200,000.

In

the American as the its

as it now line

is, any bank is a bank bank for

$l,OOO,OOO

or less By

maximum rule,

credit

smaller have of would 8

business. an to have

same

a 1 billion-dollar and a 100 a maximum

will line

80 million12 a million maximum

dollar dollars, credit

capital and line

credit

billion-dollar to 1,200 to

bank million

of 800 million of the of Every

dollars. branch state, will credit banking regional, increase that can will and the be

The see an

opening

gates smaller case the

nationwide into

amalgamation banks. and

banks

national capital, given

of

amalgamation line of

therefore

maximum A movement The

to any one customer. will each so take place.

of banks to a

to higher small

natural of

habitats banks, lines

progress

number

one of which that the

is too big conditions relative seems to

to fail, of supply the

with

maximum to

credit large of of

large will small

of credit of

borrowers credit what to

improve

conditions a most

supply outcome

borrowers, place. that

to be

likely

is now taking A series

of rules

segments

banking

by

bank

size

seems as as be

in order the

if small

businesses proceeds. organizations

are to receive The idea for

adequate

financing as well to

consolidation support

of special

rules

special

community

banks

needs

explored."

VII.

A Modest

Proposal

The structure changes mean

time of now

has the

come banking

to

open and

national

inquiry The

into

the

financial

system. and

radical

underway of what the

in technology, we now have decades,

computing,

communication The the sluggish apparent

that

much of

may be obsolete. combined with

economy

past

24

reluctance chance, with

of

the

Federal

Reserve

to

give

full

employment consistent

can mean

that

our financing

structures

are not

the needs In the

of a progressive serious I

democracy. were the result is of serious in back our to and late amiss to go

past,

changes

public financial

inquiries. and banking

suggest structures

that that what be in

enough it

is time

the drawing financing 20th

board

and determine should Monetary

the monetary, the 21st should

financial, A

arrangements National

century.

century

Commission

be on the public

policy

agenda.

25

ENDNOTES

rates and financial The strong reaction of interests 1. Reserve actions may markets after the modest early-1994 Federal well reflect an increase in uncertainty by agents of how these now more-complex the will work their through actions way For an argument about how monetary policy financial markets. operates by affecting uncertainty see Minsky, Hyman I?., "The New (179-191) in Minsky, Hyman P. (1982) Uses of Monetary Powers" "Can It Happen Again?", Armonk, N-Y.: M.E. Sharpe. Introduction to the French edition of Keynes, 2. Maynard, (1973) The General Theory of Employment Interest VII of Collected Works of Money, as reprinted in Volume Macmillan. Maynard Keynes, London and Basington: John and John

This two-price-level interpretation of Keynes's non3. neutrality of money is stated in Minsky, Hyman P. (1975), John Columbia University Press, as well as in (1982) Maynard Keynes, One way Press. Stabilizing an Unstable Economy, Yale University of making the idea of the two price levels clear is to note that a capitalist economy has both a "CPI" and a "Dow Jones". long duration, but fairly may be of Turbulence 4. In the turbulent incoherence is almost always of short duration. dominated no more than great contraction of 1929-33, incoherence the last 10 weeks before the inauguration of Franklin Roosevelt. Decisive action by the government over the first hundred days of of reforms to come, combined with promises Roosevelt's term, ended the incoherence. The perspective on our economy to which the financial 5. leads has much in common interpretation of Keynes instability with the stress upon the evolutionary properties of capitalist such as enlightened the work of economists, that economies Schumpeter and the American institutionalists, who were prominent in the first half of this century. In the In the core case, profits equals investment. 6. plus the world as it is, gross capital income equals investment government deficit minus the international deficit of trade, with

26

corrections for savings out financed by capital income.

of

labor

income

and

consumption

Keynes visited the University of Chicago in 1931 to 7. lectures on Unemployment as participate in the Harris Foundation While in Chicago he noted that a preference for a World Problem. and persons. It liquidity was rampant among banks, businesses, seems that Keynes came to Chicago to sell the analysis of his quantity-theoretic Treatise on Money, and left Chicago with the General The revolutionary germ of his liquidity preference Theory. Fisher's 8. Econometrica. article appeared in the first (1993) volume of

One aspect of the process of reform was the assembly, in 9. young the summer of 1934, by Jacob Viner of a gaggle of bright economists in the Treasury Department: they were labeled Viner's Their charge was to design a banking and financial Freshmen. One of these young economists was Laughlin system from scratch. Both of them were friendly another was Albert Hart. Currie; a doctrine usually associated with Henry toward 100% money, See Phillips, Ronnie J. Simons of the University of Chicago. The Chicago Plan and New Deal Banking Reform, (1994 forthcoming), Armonk, N.Y.: M.E. Sharpe. lie," is a "Entrepreneurs law, William Janeway's 10. about the determination of whether a project parallel statement of the institution of "security The importance is bankable. for the functioning of a transparent market based analysis" financial system is one reason why it is easier for a newly capitalist economy to replicate a universal banking system than a market based financial system. act replaced a currency The original Federal Reserve debt with one that monetized private that monetized government The period of the National Banking Act (1863 debts (and gold). The William characterized by falling prices. was to 1913) "Cross of Gold" speech was a response to the Jennings Bryan chronic deflation of the post- Civil War era.
11.

If the trend decline in the ratio of government debt to 12. gross domestic product of 1946-1980 had continued through 1993, we would now be concerned about the shortage of government debt and we would be system, to satisfy the needs of the financial

27

debating what the structure should be of a banking and financial system in which the currency and the reserve base for deposits private reflect would Reserve Federal the furnished by obligations that the Federal Reserve obtains either from an open market or through the discount window. For the concept of a contained depression see Levy, S 13. Outlook for the 1990's: The Contained and David Levy (1991), Jay, Jerome Levy Economics Institute. Depression, For an explication of the relations between the composition and David Levy of aggregate demand and profits see Levy, S Jay, (1983) Profits and the Future of the American Economy, New York: Stabilizing an Hyman P. and Minsky, and Row, (1986), Harper Press. Unstable Economy, Yale University Recall that over 1929-33 the price level of current 14. output and the wage level of employed workers fell by about l/3; the Dow Jones, the second price level, fell by some 85%. Using crunches to contain demand is a form of policy 15. and bankers succeed as businessmen Crunches brinkmanship. The danger that the believe that their survival is at stake. central bank will carry the crunch too far and set off a debt deflation is always present. "New Deal's Unfinished Ronnie J. Phillips, 16. (1994), The American Banker, April Merging the bank regulators",

Work: 18.

In the light of the French and Italian experience with 17. investment banks, it is difficult to recommend a government government investment bank except for the possibility that in the of this bank will tend to be the activities United States transparent. Some of the main references for 100% money are: 18. Banking for Plan' "'The Chicago Albert Hart, (1935), and Statistics 2: 104-116. Reform," Review of Economics Irving (1945), 100% Money, 3rd Edition, New Haven: Fisher, The City Printing Company (First Edition 1935). and Currency Reform", Simons, Henry, et al (1933) "Banking Research in the Manuscript Reprinted in Warren Samuels, ed., History of Economic Thought and Methodology, Archival Supplement, Conn.: Jai Press, Forthcoming. Volume 4, Greenwich,

28

reference to Henry Simons is Economic Policy a Free Society, Chicago: the University of Chicago Press. The general
19.

for

Phillips, Banking:" Institute.

Minsky, and L.

Public

B Papadimitriou, Ronnie Hyman P., Dimitri Randall Wray (1993) "Community Development Policy Brief no.3, The Jerome Levy Economics

WORKING

PAPER SERIES

No. 1
No. 2 No. 3

Macroeconomic

Profitability:

Theory and Evidence...THOMAS SHAPIRO

R. MICHL

November

1987

The Firm and Its Profits...NINA

March 1988 Profits: An Empirical Approach March 1988

Competing Micro Economic Theories of Industrial MARK GLICK AND EDUARDO M. OCHOA Housing Quality Differentials The Finance Constraint A Structural Approach

No. 4 No. 5 No. 6 No. 7 No. 8

in Urban Areas...DIMITRIOS

A. GIANNIAS KOHN A. GIANNIAS

July 1988 August 1988 August 1988 September September 1988 1988

Theory of Money: A Progress Report...MEIR to Hedonic Equilibrium Models...DIMITRIOS R. MICHL

Why is the Rate of Profit Still Falling?...THOMAS

The Effects of Alternative Sharing Arrangements on Employment: Preliminary Evidence from Britain...JEFFREY PLISKIN AND DEREK C. JONES Consumer Benefit from Air Quality Improvements...DIMITRlOS A. GIANNIAS

No. 9

October October

1988 1988

No. IO

Long-Term Trends in Profitability: The Recovery of World War II... GERARD DUMENIL. MARK GLICK AND DOMINQUE LEVY Ranking Urban Areas: A Hedonic Equilibrium DIMITRIOS A. GIANNIAS The Real Wage and the Marginal Approach to Quality of Life...

No. 11

October

1988

No. 12 No. 13

Product of Labor...TRACY

MOTT

November November

1988 1988

The Effects of Worker Participation, Employee Ownership and Profit Sharing on Economic Performance: A Partial Review...DEREK C. JONES AND JEFFREY PLISKIN Classical and Neoclassical Elements in Industrial Organization... MARK GLICK AND EDUARDO M. OCHOA The Financially Fragile Firm: Is There a Case for It in the 1920s?... D.L. ISENBERG Unionization and Labour Regimes: A Comparison Between Canada and the U.S. Since 1945...DAVID KETTLER, JAMES STRUTHERS AND CHRISTOPHER HUXLEY Social Progress after the Age of Progressivism: The End of Trade Unionism the West...DAVID KETTLER AND VOLKER MEJA Profitability and the Time-Varying Liquidity Premium in the Term Structure of Interest Rates...TRACY MOTT AND DAVID ZEN A Dynamic Approach to the Theory of Effective Demand...ANWAR JARSULIC Model...TRACY MOTT SHAIKH in

No. 14

December

1988

No. 15

January

1989

No. 16

January

1989

No. 17

February

1989

No. 18

March 1989

No. 19
No. 20 No. 21 No. 22

March 1989 April 1989 April 1989 May 1989

Profits, Cycles and Chaos...MARC

The Structure of Class Conflict in a Kaleckian-Keynesian Debt and Macro Stability...MARC JARSULIC

WORKING PAPER SERIES -continued-

No. 23 No. 24

Viability

and Equilibrium:

ISLM Revisited...JEAN Simulation

CARTELIER Structure...

May 1989 June 1989

Financial Instability: A Recession DORENE ISENBERG Kaleckianism

on the U.S. Corporate

No. 25 No. 26

Vs. New Keynesianism...TRACY

MOTT Interpretation..

June 1989 June 1989

Marxs Value, Exchange JEAN CARTELIER

and Surplus Value Theory: A Suggested

No. 27

Money and Equilibrium: Two Alternative Activities...JEAN CARTELlER The Covariance Transformation Fixed Effects Model...JEFFREY

Modes of Coordination

of Economic

June 1989

No. 28

and the Instrumental PLISKIN

Variables

Estimator of the

July 1989

No. 29

Unionization and the Incidence of Performance-Based DEREK C. JONES AND JEFFREY PLISKIN Growth Cycles in a Discrete, Nonlinear The Changing Model...MARC

Compensation

in Canada...

August 1989

No. 30 No. 31 No. 32

JARSULIC ISENBERG

August 1989 September November 1989 1989

Role of Debt in Bankruptcy...DORENE

The Effects of Mergers on Prices, Costs, and Capacity Utilization in the U.S. Air Transportation Industry, 1970-84...FRANK R. LICHTENBERG AND MOSHE KIM What Remains of the Growth Controversy?...NANCY The Determinants of U.S. Foreign Production: Comparative Advantage...THOMAS KARIER Industrial De-Diversification FRANK R. LICHTENBERG The Microeconomics What Happened The Mathematics J. WULWICK Power, and

No. 33 No. 34

December January

1989 1990

Unions, Monopoly

No. 35

and Its Consequences

for Productivity...

January

1990

No. 36 No. 37 No. 38 No. 39 No. 40 No. 41

of Monopoly

Power...THOMAS

KARIER KARIER

April 1990 May 1990 July 1990 November November December 1990 1990 1990

to the Corporate

Profit Tax?...THOMAS

of Economic Growth...NANCY Composition...JOAN

J. WULWICK

Poverty and Household A Kernel Regression

R. RODGERS J. WULWICK and Y.P. MACK and Stability Among

of Phillips Data...NANCY

Generalized Entropy Measures of Long-Run Inequality Male Headed Households...SOURUSHE ZANDVAKILI Poverty and Choice of Marital Status: A Self-Selection International Comparison of Household Inequalities: with Decompositions...SOURUSHE ZANDVAKILI

No. 42 No. 43

Model...JOAN

R. RODGERS

December December

1990 1990

Based on Micro Data

No. 44

Accounting for the Decline in Private Sector Unionization: Elections, Structural Change and Restructuring...THOMAS

Representation KARIER

February

1991

WORKING PAPER SERIES -continued-

No. 45 No. 46 No. 47

Female-Headed Redistribution

Families: Why Are They So Poor?...JOAN Through Taxation: An International

R. RODGERS ZANDVAKILI

March 1991 April 1991 April 1991

Comparison...SOlJRlJSHE History...

Financial Disturbances RICHARD SYLLA

and Depressions:

The View from Economic

No. 48

The Economic Significance of Equity Capital: Lessons from Venture an Economist-Practitioner...WILLlAM H. JANEWAY The Role of Banks Where Service Replication RICHARD ASPINWALL How Useful Are Comparisons ALBERT GAILORD HART Financial Crises: Systemic Debt, Price Flexibility

Investing

by

April 1991

No. 49

Has Eroded Institutional

Franchises...

April 1991

No. 50

of Present Debt Problems With the 193Os?...

April 1991

No. 51
No. 52 No. 53 No. 54

or Idiosyncratic...HYMAN Stability...JOHN

P. MINSKY CASKEY AND STEVEN in Japan...DAVID FAZZARI

April 1991 April 1991 May 1991 June 1991

and Aggregate

A Critical Analysis of Empirical Studies of Transfers Why the Ex-Communist Countries Economy...KENNETH KOFORD

W. CAMPBELL

Should Take the Middle Way to the Market

No. 55

The Measurement of Chronic and Transitory Poverty; with Application United States...JOAN R. RODGERS AND JOHN L. RODGERS W(h)ither the Middle Class? A Dynamic View...GREG AND WILLARD RODGERS Why Were Poverty

to the

June 1991

No. 56

J. DUNCAN, TIMOTHY

SMEEDING,

July 1991

No. 57 No. 58

Rates So High in the 1980s?...REBECCA and Transfers: Distributional

M. BLANK

July 1991 July 1991

Social Security Annuities EDWARD N. WOLFF

and Tax Implications...

No. 59

The Health, Earnings Capacity, and Poverty of Single-Mother BARBARA L. WOLFE AND STEVEN HILL

Families...

July 1991

No. 60

Who Are the Truly Poor? Patterns of Official and Net Earnings Capacity 1973_1988...ROBERT HAVEMAN AND LARRY BURON

Poverty,

July 1991

No. 61

Changes in Earnings Differentials in the 1980s: Concordance, Convergence, and Consequences...MC KINLEY L. BLACKBURN, DAVID E. BLOOM AND RICHARD B. FREEMAN The Changing Contributions Income, 1968_1988...MARIA PETER GOTTSCHALK of Men and Women to the Level and Distribution CANCIAN, SHELDON DANZIGER AND

Causes,

July 1991

No. 62

of Family

July 1991

No. 63

Wealth Accumulation of the Elderly in Extended Families in Japan and the Distribution of Wealth Within Japanese Cohorts by Household Composition: Analysis of the Literature...DAVID W. CAMPBELL

September A Critical

1991

WORKING PAPER SERIES -continued-

No. 64 No. 65

Market Processes

and Thwarting

Systems...PlERO

FERRI AND HYMAN P. MINSKY

November November

1991 1991

A Package of Policies to Permanently KENNETH KOFORD The Transition to a Market Economy:

Increase Output Without Inflation...

No. 66 No. 67

Financial

Options...HYMAN

P. MINSKY

November December

1991 1991

Employment Restructuring and the Labor Market Status of Young Black Men in the 1980s...DAVID R. HOWELL Transfer and Life Cycle Wealth in Japan, 1974-1984...DAVID W. CAMPBELL

No. 68 No. 69

January January

1992 1992

Reconstituting the United States Financial Issues...HYMAN P. MINSKY The Distributional Implications SOURUSHE ZANDVAKILI

Structure: Some Fundamental

No. 70

of the Tax Changes

in the 198Os...

January

1992

No. 71

Macroeconomic Market Incentive Plans: History and Theoretical KENNETH J. KOFORD and JEFFREY B. MILLER The Capital Development HYMAN P. MINSKY Money, of the Economy

Rationale...

January

1992

No. 72

and The Structure of Financial

Institutions...

January

1992

No. 73 No. 74 No. 75 No. 76 No. 77 No. 78

Growth, Distribution Instability

and Prices in a Simple Sraffian Economy...MILIND P. MINSKY

RAO

May 1992 May 1992

The Financial

Hypothesis...HYMAN in Triggering

The Role of Unemployment The Chicago

Internal Labor Migration...GEORGE J. PHILLIPS

MCCARTHY

June 1992 June 1992 July 1992 August 1992

Plan and New Deal Banking Reform...RONNIE J. PHILLIPS

Credit Markets and Narrow Banking...RONNIE

The Predication Semantics Model: The Role of Predicate Class in Text Comprehension and Recall...ALTHEA A. TURNER, PAUL B. ANDREASSEN, BRUCE K. BRITTON, DEBORAH McCUTCHEN The Investment Decision of the Post Keynesian Firm: A Suggested Microfoundation Minskys Investment Instability Thesis...JAMES R. CROTTY and JONATHAN A. GOLDSTEIN Growth and Structural Change in China-US Trade...HONG WANG for

No. 79

September

1992

No. 80 No. 81

September September

1992 1992

The Impact of Profitability, Financial Fragility and Competitive Regime Shifts on Investment Demand: Empirical Evidence...JAMES R. CROTTY and JONATHAN A. GOLDSTEIN Job Quality and Labor Market Segmentation on the Effects of Employment Restructuring GITTLEMAN and DAVID R. HOWELL in the 1980s: A New Perspective by Race and Gender...MAURY B.

No. 82

March 1993

No. 83

Community Development Banks...HYMAN P. MINSKY, DIMITRI B. PAPADIMITRIOU, RONNIE J. PHILLIPS and L. RANDALL WRAY

December

1992

WORKING PAPER SERIES -continued-

No. 84

Migration of Talent: MILIND RAO The Relationship

Foreign Students and Graduate

Economics

Education

in the US..

February

1993

No. 85 No. 86

Between

Public and Private Investment...SHARON of the Modern Financial

J. ERENBURG System

February

1993

The Origins of Money and the Development ...L. RANDALL WRAY The Psychology

March 1993

No. 87 No. 88

of Risk: A Brief Primer...PAUL

ANDREASSEN Problems, Institutional Failure

March 1993 March 1993

The Limits of Prudential Supervision: Economic and Competence...BERNARD SHULL Profits for Economists...THOMAS Narrow Banks: An Alternative KARIER

No. 89 No. 90 No. 91

April 1993 SPONG April 1993 May 1993

Approach

to Banking Reform...KENNETH the US Financial System...

A Comparison of Proposals to Restructure R. ALTON GILBERT

No. 92 No. 93 No. 94

The Current State of Banking Reform...GEORGE Finance and Stability:

G. KAUFMAN P. MINSKY

May 1993 May 1993 May 1993

The Limits of Capitalism...HYMAN

Productivity, Private and Public Capital, and Real Wage in the United States 1948-1990... SHARON J. ERENBURG The Community Reinvestment Development Banks...DIMITRI L. RANDALL WRAY Act, Lending Discrimination, and the Role of Community B. PAPADIMITRIOU, RONNIE J. PHILLIPS, and

No. 95

May 1993

No. 96

Mortgage Default Among Rural, Low Income Borrowers...ROBERTO GEORGE W. MC CARTHY. MICHAEL A. STEGMAN Is Health Insurance Investment Crippling the Labor Market?...DOUGLAS

G. QUERCIA,

June 1993

No. 97

HOLTZ-EAKIN FAZZARI Innovation

August 1993 October October 1993 1993

No. 98 No. 99

and U.S. Fiscal Policy in the 1990s...STEVEN Preference,

Government Deficits, Liquidity ...L. RANDALL WRAY

and Schumpeterian

No. 100

Avoiding a Future of Unemployment and Low Wages: What Opportunities to Young Unskilled Workers?...ROBERT M. HUTCHENS Technological Change and the Demand for Skills in the 1980s: Does Skill Mismatch Explain the Growth of Low Earnings?...DAVID R. HOWELL Credibility of the lnterwar Gold Standard, Uncertainty, Great Depression...J. PETER FERDERER Business Tax Incentives The Anatomy of Changing of Determinants...ROBERT and Investment...THOMAS and the

Are Open

October

1993

No. 101

November

1993

No. 102

January

1994

No. 103 No. 104

KARIER

February February

1994 1994

Male Earnings Inequality: An Empirical Exploration H. HAVEMAN and LAWRENCE BURON

WORKING PAPER SERIES -continued-

No. 105

The Collapse of Low-Skill Male Earnings in the 1980s: Skill Mismatch or Shifting Wage Norms?...DAVlD R. HOWELL The Role of Consistent Implementation of Policy: An Assessment of the Section 502 Low-Income Homeownership Program...GEORGE MC CARTHY, JR., ROBERTO QUERCIA and GABOR BOGNAR Economic inactivity of Young Adults: An Intergenerational and BARBARA WOLFE Community-Based PAPADIMITRIOU, Analysis...ROBERT HAVEMAN

March 1994

No. 106

March 1994

No. 107

March 1994

No. 108

Factoring Companies and Small Business Lending...DIMITRI RONNIE J. PHILLIPS and L. RANDALL WRAY Profits Tax Revisited: A Post Keynesian

B.

April 1994

No. 109

The Incidence of the Corporate ANTHONY J. LARAMIE Banking Industry Consolidation: GARY WHALEN Banking Industry Consolidation: DANIEL E. NOLLE

Approach...

April 1994

No. 110

Efficiency Issues...ROBERT

DE YOUNG and

April 1994

No. 111

Past Changes and Implications

for the Future...

April 1994

No. 112

Business Strategies: Bank Commercial DONALD G. SIMONSON Lines of Credit and Relationship and GREGORY F. UDELL Banking in Transition...GEORGE

Lending vs. Finance Company

Lending...

April 1994

No. 113

Lending in Small Firm Finance...ALLEN

N. BERGER

April 1994

No. 114 No. 115

E. FRENCH Coefficient...DOUGLAS MAIR,

April 1994 May 1994

The Economic Consequences of Weintraubs Consumption ANTHONY J. LARAMIE, JAN TOPOROWSKI The Regulation and Supervision RONNIE J. PHILLIPS Chief Executive Compensation Micro Data...TAKAO KATO

No. 116

of Bank Holding Companies:

An Historical

Perspective...

May 1994

No. 117

and Corporate

Groups in Japan: New Evidence

from

May 1994

No. 118 No. 119

The Rhetoric of Policy Relevance

in International

Economics...WILLIAM

MILBERG Spread...

June 1994 June 1994

Liquidity, Uncertainty, and the Declining Predictive Power of the Paper-Bill J. PETER FERDERER, STEPHEN C. VOGT, RAVI CHAHIL The Productivity Convergence Debate: A Theoretical ...BRUCE ELMSLIE and WILLIAM MILBERG and Methodological

No. 120

Reconsideration

June 1994

No. 121

The Timing of Promotion to Top Management in the U.S. and Japan: A Duration Analysis...TAKAO KATO and LARRY W. TAYLOR Recent Trends in U.S. Male Work and Wage Patterns: An Overview...LAWRENCE ROBERT HAVEMAN and OWEN ODONNELL BURON,

July 1994

No. 122

August 1994

WORKING PAPER SERIES -continued-

No. 123

The Utilisation of U.S. Male Labor, 1975-l 992: Estimates of Foregone LAWRENCE BURON. ROBERT HAVEMAN and OWEN ODONNELL Flying Blind: The Federal Reserves Experiment with Unobservables... DIMITRI B. PAPADIMITRIOU and L. RANDALL WRAY Profit Sharing and Gainsharing: A Review of Theory, Incidence DEREK C. JONES, TAKAO KATO and JEFFREY PLISKIN

Work Hours...

August 1994

No. 124

September

1994

No. 125

and Effects...

September

1994

No. 126

Financial Institutions, Economic Policy and the Dynamic Behavior of the Economy... DOMENICO DELLI GATTI, MAURO GALLEGATI and HYMAN P. MINSKY Financial Instability and the Decline (?) of Banking: HYMAN P. MINSKY Public Policy Implications...

October

1994

No. 127

October

1994