Financial Instability and the Reregulation of Financial Institutions and Markets

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In 2008, the Ford Foundation awarded the Levy Economics Institute of Bard College a multiyear grant to conduct research on the nature and dynamics of the crisis in the US subprime mortgage market, and to generate a new regulatory framework to address it.

This project is administered by the Institute’s Monetary Policy and Financial Structure program under the supervision of Jan Kregel. Its analytical framework is based on the work of the late financial economist Hyman Minsky, a Levy Distinguished Scholar who considered financial crises an endemic, permanent internal process of any capitalist system. From this point of view, the current crisis is not a peculiar event but rather a natural response of financial markets to a period of relative stability and innovations in risk management.

One of the main drawbacks of the current regulatory framework is that it was designed for a financial architecture that no longer exists. The main sources of private sector financing are not commercial or investment banks but rather private investment vehicles such as hedge funds and sovereign wealth funds. Most of these vehicles are highly leveraged, via securitized loans obtained from financial holding companies, making the ultimate risk holders difficult to identify. It also means that they cross multiple lines of regulatory jurisdiction as well as national borders—as evidenced by how quickly the US subprime crisis became a systemic, global one. The recent Dodd-Frank financial reform bill does little to address these issues, nor does it sufficiently expand consumer protections.

The challenge is to design regulations that are compatible across different countries and regimes while preventing regulatory arbitrage and ensuring client protection. An important focus of the Ford-Levy Institute Project is extending Minsky’s framework to an analysis of the ad hoc regulatory responses to the subprime crisis and the formal government proposals that arose from it. The ultimate goal is a cohesive program of reforms of the financial architecture and associated regulatory reforms at both the national and international levels.

Recent Minsky Conferences on the State of the US and World Economies have been held under the aegis of the Ford-Levy Institute Project at the Foundation’s New York headquarters, providing a forum for the presentation of project outcomes as well as discussion of the application of Minsky’s financial fragility approach to the analysis of market regulation and supervision. These presentations, as well as public policy briefs and other publications related to the project, are available on our website. The global Implications of reregulation have also been approached through research collaboration and links to a number of associated Ford projects throughout Europe, Asia, and Latin America. This work is ongoing, and we will continue to expand our global research network.

In 2010, The Hyman P. Minsky Summer Seminar was instituted as part of the Ford-Levy Institute Project. This weeklong annual program of training and analysis is designed for young finance professionals in the public and private sectors, and graduate-level scholars engaged in research on these issues.

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Blithewood
Bard College
Annandale-on-Hudson, NY 12504-5000
845-758-7700
The Levy Economics Institute of Bard College, founded in 1986 through the generous support of Bard College trustee Leon Levy, is a nonprofit, nonpartisan, public policy research organization. The Levy Institute is independent of any political or other affiliation, and encourages diversity of opinion in the examination of economic policy issues while striving to transform ideological arguments into informed debate.

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