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Alexander Douglas

People who propose more equity financing as a magic bullet solution have an unearthly faith in the wisdom of markets. What bothers me about that proposal is that it distracts us from asking whether there are certain things that banks just *shouldn't do*, since nobody - not even the equity investors, to whom neoclassicals ascribe powers of private revelation - can appropriately manage the risks.

I have yet to hear a convincing explanation of why banks should do any more than administer the payments system and lend to creditworthy borrowers, keeping the loans on their own balance sheets. It remains a mystery to me why they should be able to sell loans on to third parties, to engage in financial speculation (taking financial assets as collateral for loans), to do forex speculation, to sell credit default insurance, etc. People say all this gets much-needed liquidity into the markets, by which they mean hot money going into speculative bubbles. I don't see the social need for any of that. I have nothing against speculation in principle, as an activity free economic agents can engage in on their own behalf. But nobody has yet explained to me why *banks* should do it.

Rather than getting banks to fund off more equity, why not let equity investors engage in such activities on their own if they choose, while keeping banks to their original, narrow purpose? This is what Minsky proposed (cf http://www.levyinstitute.org/pubs/wp_612.pdf). Am I missing something important?

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Here's a link to my past blogging (and discussions involving me) at: New APPS.


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