The Financial Innovation Hypothesis: Schumpeter, Minsky and the Sub-Prime Mortgage Crisis

LEM Working Papers (Online ISSN 2284-0400), November 2018

34 Pages Posted: 18 Dec 2018

See all articles by Eugenio Caverzasi

Eugenio Caverzasi

Department of Economic and Social Sciences, Marche Polytechnic University, Ancona; University of Limerick

Daniele Tori

The Open University

Date Written: September 1, 2018

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.

Keywords: Minsky, Schumpeter, Securitization, Financial Firms, Great Financial Crisis

JEL Classification: B52, G21, O33

Suggested Citation

Caverzasi, Eugenio and Tori, Daniele, The Financial Innovation Hypothesis: Schumpeter, Minsky and the Sub-Prime Mortgage Crisis (September 1, 2018). LEM Working Papers (Online ISSN 2284-0400), November 2018 , Available at SSRN: https://ssrn.com/abstract=3291987 or http://dx.doi.org/10.2139/ssrn.3291987

Eugenio Caverzasi (Contact Author)

Department of Economic and Social Sciences, Marche Polytechnic University, Ancona ( email )

Piazzale Martelli 8
Ancona, 18039
Italy

University of Limerick ( email )

Limerick
Ireland

Daniele Tori

The Open University ( email )

Walton Hall
Milton Keynes, Buckinghamshire MK7 6AA
United Kingdom

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