Banking and financial crises

Marc Lavoie and Mario Seccareccia have, together with John Smithin, been leading voices in recent discussions on monetary theory. Among Post-Keynesians they have stood out for their willingness to engage with the rapid evolution of policy, in the wake of the financial crisis of 2008, and for their creative approach to the doctrines of Post-Keynesian analysis. This chapter is therefore dedicated to them formally as well as in the sense that it presents a view of financial crisis that, in many respects, complements their original insights. There are few monetary economists today who doubt the idea that the supply of money is endogenous. That the number of such doubters is so reduced is, in good measure, due to the compelling case for endogeneity that has been put forward by the Canadian Post-Keynesians. The banking and financial crisis, however, stands out as something of an anomaly in this approach to monetary theory: if money, or credit, is generated by processes inherent in the functioning of the credit system according to need, then, by definition, a financial crisis cannot arise because of a shortage of credit. Such crises must be because banks refuse to lend as much as is necessary, or because of some disturbances in the price mechanism (a fall in asset prices, or a fall in the rate of profit in relation to the rate of interest).