Abstract
This chapter states that Keynes, Minsky, Tobin and others warned about the dangers of too large a financial sector and in this context money, of which bank credit is a large part, impacts on the real economy and vice versa. Too much money will affect the price level and will reduce the ability of relative prices to perform their signalling function for investors. However, the ability of central banks to affect changes in the money supply or to control the cost of production by varying interest rates has been found to be asymmetric; that is, lower interest rates might boost activity in the economy but higher interest rates cannot deflate asset bubbles. Since the 1980s, as the sector has been deregulated risk-taking has multiplied. Furthermore, increasing financialization has brought additional risks of default and of over-leveraging in the economy to the fore.
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- 1.
There have been several instances of price increases of 20% or more annually at the time of the second Oil Shock as, indeed, of hyper-inflation in post-World War I Germany.
- 2.
The UNDP Human Development Report provides much relevant information on the global distribution of wealth as do NGOs like Oxfam.
- 3.
The Financial Times and the Wall Street Journal were founded in 1888 and 1889, respectively, but catered to a tiny readership.
- 4.
In the case of Germany, it is necessary to point out that following the reunification of West and East Germany in 1990, the former has spent around $1 trillion on all the costs associated with reunification.
- 5.
The Saving and Loan Associations of the USA were thrift associations, the US equivalent of UK building societies. Between 1986 and 1995, 1043 out of 3234 went bankrupt and their depositors had to repaid by the Federal Government.
- 6.
A lot of the stress tests are not unlike the scandals in which pupils of some schools were told the questions in the exam papers before they sat them.
- 7.
The collective wisdom of markets is often assumed to be infallible. In practice, it is no more than the views of like-minded men and women who bounce their ideas within a narrow circle of friends and colleagues and result in herd behaviour.
- 8.
The Basel Concordat of 1988 agreed at the Bank for International Settlements in Basel was the first time that the concept of capital adequacy, i.e. capital as a ratio to assets became operational in banking.
- 9.
Trustee Saving Bank (TSB) in the UK being its latest example.
- 10.
It is a moot point whether the collapse of manufacturing in the Anglo-Saxon economies has been a cause or an effect of the lack of support from finance. The direction of causation is difficult to establish in this case, so it could be both.
- 11.
As of March 2017, the global banking industry had been fined $321 billion for offences ranging from money laundering to market manipulation. The figure is, however, only a tiny fraction of its assets.
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Ahmed, S. (2018). Money, the Real Economy and Financial Services. In: Ruling or Serving Society?. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-00521-4_2
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DOI: https://doi.org/10.1007/978-3-030-00521-4_2
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