The next financial crisis and how to save capitalism

Abstract

The financialization of the economy - the rapid growth of the financial sector relative to the real sector and their decoupling - has brought a number of interrelated problems which have contributed to growing income and wealth inequality. In this work, Hossein Askari and Abbas Mirakhor assert that it is time to make a bold change by putting our financial house in order and on a better path. Patchwork solutions such as higher capital requirements for banks and better regulations, supervision and enforcement are important, but at best they will only delay another inevitable financial crisis with devastating fallouts. The authors identify the prevalence of debt financing as the heart of the problem, and advocate for a fundamental reform of the financial system that reduces the supremacy of debt and increases the fraction of reserves in fractional reserve banking.