Remaking finance
More than a decade after the global financial crisis there still seems to be something seriously wrong with the financial system. Financial markets still tend to periodically misprice risk and contribute to boom and bust cycles. A better financial system needs to discourage short-termism and speculative activity, curtail systemic risk and distribute wealth more broadly.
Climate
New Paradigm Knowledge Base
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The Challenge
The 2008 Global Financial Crisis was the worst economic crisis since the Great Depression and the world still suffers from systemic financial instability.
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What went wrong?
The efficient market hypothesis stipulated that bubbles could not exist and that the market is the best disciplining device.
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New Economy in Progress
A better financial system needs to counter herding, booms and busts and the inherent tendency towards instability.
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CHART: Financial crises in advanced economies, 1870-2015
Evidence shows that larger and more complete financial markets have not led to a reduction in the incidence of financial crises. On the contrary, systemic risk is back.
5 ways that are discussed to remake finance
- Macro-prudential regulation such as caps on loan-to-value or debt-to-income ratios to lower systemic risk.
- Higher bank capital ratios to reduce leverage levels and the risk of bank collapses.
- Countercyclical capital buffers to reduce the procyclicality of the financial system
- Financial transaction tax to reduce unnecessary or destabilising financial activity.
- A new version of the Bretton Woods System, which shaped the post-war era.
More News on Climate
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IfW Kiel on the EU Financial Transaction Tax: “Instrument suitable, proposed implementation flawed”
According to a recent German-French proposal, a financial market transaction tax (FTT) at a rate of 0.2% on the purchase of securities is to be introduced in 10 EU countries, including Germany, and limited to shares in large companies. In their study, the authors of the Kiel institute for the world economy compare this proposal in an international perspective, assess its strengths and weaknesses on the basis of empirical evidence and develop policy recommendations.
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Towards a New Paradigm: Stabilizing Financial Markets
By Moritz Schularick and Kaspar Zimmermann, University of Bonn
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Crashed: How a decade of financial crisis changed the world
By Adam Tooze, Penguin, 2019.
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Between debt and the devil: Money, credit and fixing global finance
Adair Turner, Princeton University Press, 2017
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Why rigged capitalism is damaging liberal democracy
Martin Wolf, Financial Times, September 2019
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House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent it from Happening Again
Atif Mian and Amir Sufi, University of Chicago Press.
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CHART: Financial crises in advanced economies, 1870-2015
Evidence shows that larger and more complete financial markets have not led to a reduction in the incidence of financial crises. On the contrary, systemic risk is back.
-
New Economy in Progress
A better financial system needs to counter herding, booms and busts and the inherent tendency towards instability.
-
What went wrong?
The efficient market hypothesis stipulated that bubbles could not exist and that the market is the best disciplining device.
-
The Challenge
The 2008 Global Financial Crisis was the worst economic crisis since the Great Depression and the world still suffers from systemic financial instability.
