Macroeconomic Policy Redressal for Financial Stability

ABSTRACT. Despite the present world context, originating in the implosion in the United States of America, we believe that the time has come to, at least partly, invert Joan Robinson's dictum. We propose instead mildly, 'where finance leads, enterprise follows'. Critiquing the neoclassical orthodoxy, we propose the Kalecki-Kaldorian synthesis, a Post-Keyensian alternative, in the tradition of sectoral distinction between agriculture and industry, production and foreign exchange bottlenecks with an added emphasis on the public sector in development strategy to address present day policy concerns for stability, growth and income distribution.JEL Codes: B22; E02; E44Keywords: globalization; economic downturn; stability1. Financial WhirlwindDespite the present world context, originating in the implosion in the United States of America, we believe that the time has come to, at least partly, invert Joan Robinson's dictum. We propose instead, mildly, 'where finance leads, enterprise follows.' The world has recovered from the East Asian crisis and traversed through a decade of structural change in the landscape brought about by globalization. All the while, we witnessed breathtaking growth in transactions through a host of innovative risk-mitigating instruments such as securitization and derivatives. Financial institutions like mortgage/investment banks, hedge funds burgeoned. Y et, the spirit of Hyman Minsky lives on. On the upward hump of the cycle, optimism quickly turned to euphoria and entities fell over themselves feverishly supplying novel products. Due diligence was given the go by and contracts were written upon contracts and further in a whorl of standardization. As contingent claims got more and more complex, fundamental characteristics, for example the traits of potential homeowners could not be discovered even by experts. At some point, the bubble had to burst.2. Financial Globalization and New Financial MilieuIn essence, there have been far-reaching changes in the modus operandi of markets. The structural changes attendant on liberalization have significantly changed the connections between finance and the real economy. Monetary and systems as social organizations evolve endogenously through a process of invention and innovation. Besides the abandonment of repressed structures, innovations in the form of new instruments have changed the nature of contractual obligations. Market participants now enjoy a fair degree of freedom to determine the quantity and price of capital in accordance with the natural forces of demand and supply. The liquidity of instruments has increased, as has the speed of substitution among them in response to the slightest change in information (Sheng, 2009). Notwithstanding a vibrant and liquid market, the process has resulted in hyper-information-sensitive markets, resulting in instability. Increasingly, opaque arrangements are entered into with limited connection, even with full information, with the production processes (Yeyatia and Williams, 2012, Prasad and Kose, 2009 and Rao, 2003). The recent empirical evidences pointing towards financial decoupling reflects the changing nature of finance and production process has brought back age-old investment booms and busts (Prasad and Kose, 2009).Economic calculus is built on the premise of market participants' collective assessment of economic gains of not today, but the likelihood of realized gains in an uncertain future. This leaves the very notion of fundamentals 'thinly hanging in the air'. Given such conjectural-cum-subjective evaluations, the level of generic uncertainty has risen sharply with an increased instability caused by sudden liquidity shifts. Consequently, there are sharp fluctuations in asset prices, affecting financing productive investment significantly. …