Financial Instability Revisited: The Economics of Disaster

Abstract

The fundamental issue in monetary theory is whether a capitalist economy is inherently stable or whether, due to its very nature, it is unavoidably unstable. Capitalism requires that financial institutions and instruments exist which permit flexibility in financing. As a result of the existence of financial innovations and learning, the relation between money or the monetary base and economic activity changes. Abstracting from the financial layering process, the fundamental inside asset is the capital stock and the fundamental outside asset is the government debt money supply. An increase in financial intermediation and of government endorsements will tend to raise the price per unit of capital as a function of the outside money supply. The United States 'Central Bank' is a peculiarly decentralized institution. Specialized organizations such as the Federal Deposit Insurance Corporation and the Home Loan Bank Board as well as the Federal Housing Authority are, along with the Federal Reserve System, part of this 'Central Bank'.

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