Housing bubble and economic theory: is mainstream theory able to explain the crisis?

The current crisis in the global economy is considered on a par with the Great Depression of the 1930s. We can therefore ask whether the crisis will lead economists to revise the mainstream theory. The first result presented in this paper is to show that the traditional theory does not permit the formulation of a coherent explanation of the causes of the crisis because it uses concepts that are not coherent with the dominant theory of finance. The second result is to show that these concepts are coherent with a theory of finance that can be elaborated on the basis of the lesson of Schumpeter, Keynes and Minsky.

Are banks really special? A note on the theory of financial intermediaries

Economic theory has not paid much attention to the topic of firm financing; this lack of interest was common to the two principal macroeconomic theories, the Keynesian theory and the Monetarist one. This work considers two important exceptions to the mainstream theory. The first coincides with Tobin’s theory. The second exception is constituted by the asymmetric information approach. These two approaches define in a different way the role of banks; Tobin elaborates a ‘new view’ which, in contrast with the ‘old view’, maintains that there are no reasons to attribute a special role to the banks. In contrast with Tobin’s theory, the supporters of the AI approach attribute a special role to the banks but, unlike the ‘old view’, they think that banks’ specificity is justified by the characteristics of their assets rather than by the characteristics of their liabilities. The objective of this paper is twofold: a) to analyse critically Tobin’s approach and the asymmetric information approach; b) to elaborate a theory of financial intermediaries which get over the limits of these two approaches.

Finance and risk: does finance create risk?

Rajan has earned a well-deserved reputation for having been one of the few to have hypothesized in a famous paper presented at the 2005 Jackson Hole conference that a disastrous financial crisis could have occurred. The key thesis put forward by Rajan was that the radical changes that had taken place over the previous decades rendered the economic system more fragile in that they induced the financial system to create a high amount of risk. The aim of this paper is to show: i) that Rajan’s thesis is not coherent with the mainstream theory according to which finance does not create risk; ii) that a meaningful theory capable of explaining the meaning of the elements used by Rajan to assert that finance creates risk can be elaborated on the basis of the lesson of Keynes and Schumpeter

Are banks special? A note on Tobin’s theory of financial intermediaries.

Since the 1960s Tobin has set himself the objective of developing a macroeconomic model more general than that specified by Keynes in The General Theory. Keynes had assumed that all the assets different from money were perfect substitutes; this hypothesis allowed him to explain only one interest rate. On the contrary, Tobin abandons the perfect substitutability hypothesis and elaborates a theoretical model which envisages more than two assets and explicitly deals with financial intermediaries. Moreover Tobin asks himself whether banks play a special role compared with the other intermediaries and elaborates a ‘new view’ which, in contrast with the ‘old view’, maintains that there are no reasons to attribute a special role to the banks. This paper critically analyses Tobin’s theory and presents two results. First, it shows that Tobin’s theory overlooks an important function of banks; a function highlighted by Keynes in some writings which preceded and followed the publications of The General Theory. Second, this work shows that Tobin’s thesis that the specificity of banks does not exist can be confirmed, albeit on different grounds, also taking into account the function of banks that he overlooks. The paper is divided into four parts: in the first one, the most important aspects of the Tobin’s ‘new view’ are described. The limitations of these theoretical approaches are then showed in the second section; in the last two sections the elements of an alternative theory are outlined.y.

Do information asymmetries constitute a solid foundation for the elaboration of a Keynesian theory of credit and financial institutions?

In the last 20 years, the New Keynesians (henceforth, NKs) have developed a theoretical approach which aims to elaborate an alternative monetary theory to the on traditionally associated with Keynes. The distinctive feature of this new approach is its emphasis on the credit market and the role played by financial intermediaries rather than the money market; the importance given to the credit market is justified by the presence of asymmetrical information. The objective of this paper is twofold: i) to show that the presence of asymmetric information constitutes a weak premise on which to build a Keynesian theory of credit and financial intermediaries; ii) to outline the elements on which a theory of credit consistent with Keynes's thinking can be built. The paper is divided into three sections. In the first one, the most important aspects of the NK's theory are described; the limitations of this theoretical approach are then demonstrated in the second section; in the third section, the elements which should characterise a Keynesian theory of credit and financial institutions are outlined.

The role of banks in financing small and medium firms

Up to a few years ago, economic theory did not pay any attention to the topic of firm financing. This situation has changed in recent years thanks to the development of a theorical approach that has applied the conclusions of information economics to the analysis of the working of the financial markets. The purpose of this paper is to highlight the fact that the asymmetric information approach does not constitute the only theoretical framework which gives prominence to the issue of firm financing; a meaningful theory could be elaborated on the basis of the works of Keynes and Schumpeter. The aim of this paper is to highlight the most significant differences between these two approaches.

The relationship between saving and credit from a Schumpeterian perspective

Mainstream economic theory underlines the close relation between saving decisions and credit supply: the saving decisions determine the credit supply and thus the investment flow carried out by all the firms. The objective of this paper is to highlight the theoretical limits of this causal sequence on the basis of the arguments developed by Schumpeter, who instead maintains that in a capitalist economy the credit supply and investment decisions are independent of saving decisions JEL classification code: E21, E22, G20, O10. Key words: saving, credit, investment, development, Schumpeter

Money as an institution of capitalism.On the relationship between money and uncertainty from a Keynesian perspective

Dillard (1987) notes that to consider money as an institution of capitalism means to emphasise that the presence of money is an essential element in explaining fluctuations in income and employment. He states that Keynes?s General Theory offers a sound explanation of money as an institution of capitalism. Keynes?s explanation is based on a necessary condition, independent of money: the presence of uncertainty. The objective of the paper is to elaborate a different explanation of the role of money as an institution of capitalism according to which the presence of money constitutes the necessary condition to justify the importance of uncertainty.

On Keynes’s criticism of the Loanable Funds Theory

Contemporary monetary theory, by accepting the theses of the Loanable funds theory, distances itself from Keynes, who considered the rate of interest as an exclusively monetary phenomenon, and overlooks the arguments Keynes used, following publication of the General Theory, to respond to the criticism of supporters of the Loanable funds theory such as Ohlin and Robertson. This paper aims to assert that the explicit consideration of the role of banks in financing firms‘ investments connected with the specification of the finance motive does not imply acceptance of the LFT, which holds that the interest rate is a real phenomenon determined by saving decisions, but makes it possible to elaborate a theory of credit alternative to the LFT and a sounder theory of the non neutrality of money than the one based on the liquidity preference theory.