“Money manager capitalism” is the root cause of the current global financial crisis, according to a paper from the Levy Economics Institute of Bard College.
The “current stage of capitalism is dominated by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk,” wrote the paper’s author, L. Randall Wray, professor of economics at the University of Missouri–Kansas City and director of research at UMKC’s Center for Full Employment and Price Stability, a policy institute. He is a scholar at the Levy institute.
“With little regulation or supervision of financial institutions, money managers have concocted increasingly esoteric instruments that quickly spread around the world,” Mr. Wray wrote. “Contrary to economic theory, markets generate perverse incentives for excess risk, punishing the timid. Those playing along are rewarded with high returns because highly leveraged funding drives up prices for the underlying assets.”
Among the policy recommendations in the paper, “Money Manager Capitalism and the Global Financial Crisis,” Mr. Wray wrote, “Policy should avoid promotion of financial institution consolidation — a natural result of financial crises that can be boosted by policy-arranged bailouts.” Instead, the policy should “promote small-to-medium sized financial institutions.”
“We must return to a more sensible model, with enhanced oversight of financial institutions and with a financial structure that promotes stability rather than speculation,” he wrote.