2018/36 | LEM Working Paper Series | ||||||||||||||||
The Financial Innovation Hypothesis: Schumpeter, Minsky and the sub-prime mortgage crisis |
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Eugenio Caverzasi and Daniele Tori |
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Keywords | |||||||||||||||||
Minsky, Schumpeter, securitization, financial firms, Great Financial Crisis
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JEL Classifications | |||||||||||||||||
B52, G21, O33
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Abstract | |||||||||||||||||
Neo-Schumpeterian economics inspired by the work of Schumpeter and the
financial Keynesianism of Minsky are often regarded as unrelated
theoretical strands. In this paper, we try to combine these two
literatures building on a parallelism between non-financial and
financial firms. We focus on recent financial innovations,
highlighting how the evolution experienced by US financial
institutions led them to transcend their traditional role of credit
providers, shaping as 'producers' of financial products, through
securitization. This allows on the one hand to broaden the application
of Neo-Schumpeterian insights to the financial sector and, on the
other, to provide an original explanation of the so-called sub-prime
crisis by applying the Financial Instability Hypothesis of Minsky to
the alternative context of financial production. We maintain that the
2007-8 crisis was not the result of an innovation in the real sector,
but came from an innovation (or a series of innovations) intrinsic to
the financial system itself, which fostered credit creation. We argue
that this 'cluster of innovations' can be placed under the label
'securitization', defined as the business of packaging and reselling
loans, with repo agreements as the main source of funds.
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