Money and Financial Crises: Theory, History, and Policy

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In this seminar, we will analyze the nature of money and finance from a variety of theoretical perspectives, including both heterodox and orthodox approaches. The theoretical discussions will be related to the current and previous financial crises. Since the Reagan/Thatcher era of the early 1980s, the conventional wisdom is the doctrine of monetarism and the policy of laissez-faire financial globalization, which is based on the theory of rational expectations and the efficient markets hypothesis. These policy proposals came into prominence on the heels of the global economic crisis that started in the late 1960s/early 1970s and the Third World Debt Crisis of the 1980s. We will critically analyze the monetarist doctrine by first studying the nature of money and debt from both the monetarist and alternative approaches. The goal of this part of the course is to analyze monetarist policies regarding the supposed ability of central banks to control the money supply so as to maintain the economy at its full-employment level of output. These policies are at the core of the so-called Washington Consensus (IMF and US Treasury Department) policies. With a laissez-faire policy in place, according to this perspective, the economic system will not exhibit endogenous financial instability. This approach will be contrasted with rival ones in which incalculable uncertainty prevails and financial instability is endogenous and recurrent, while the central bank cannot control the money supply. We will study alternative theoretical analyses of business cycles and seek to situate all of these debates in the context of the history of economic thought on monetary issues. The second part of the course will be an analysis of the current financial crisis and situate it in a historical context. This part of the course will introduce students to the relatively new literature on monetary stocks and flows and their implications for the accumulation of debt. Finally, the third part of the course will focus on the policy responses of debt crises, as well as their effects. Here, we will focus on alternative policy proposals; in particular, monetary and fiscal policies. This course requires interested students to have some background in economics or social science and a strong interest in political economy.