Financial Institutions for Innovation and Development

Core Problem and a Suggested Analytical Framework

Leonardo Burlamaqui

The Ford Foundation and

State University of Rio de Janeiro

Conference on Financial Institutions for Innovation and Development

Beijing, October 17-18, 2013

Core problem: A global financial system turned to

gamblingor….more precisely put:

Lax Regulation , Debt, Leverage and

Financial Fragility: The Economics of Trouble (Minsky)

Nutshell:

“ While the value of assets can plummet posthaste, it takes forever to shrink the debt used

to buy them”

...Especially if those “assets” are toxic- Bad collateral or

securities with “fictitious” valuations.

An Analytical Framework : Financial Systems and Economic Performance

Returnsin the

FinancialSystem

Financial innovationfinancing

productive Investment

Financial innovationfinancing

productive Investment

Schumpeterian

Schumpeterian

Paulsonian(John)

Paulsonian(John)

A. Spirits +Long-term

Funding: Public &Venture Capital

A. Spirits +Long-term

Funding: Public &Venture Capital

Hedge Funds, Securitization

& Over-Leverage

Hedge Funds, Securitization

& Over-Leverage

Development/Structural

Change

Ponzi/Madoff

Capitalism

CAPABILITIES REQUIRED:Unique knowledge by fin instit. of business firms

competences; strategies and of their competitive ecology

+ sound fin governance.

CAPABILITIES REQUIRED:Unique knowledge by fin instit. of business firms

competences; strategies and of their competitive ecology

+ sound fin governance.

CAPABILITIES REQUIRED:Knowledge about the

regulatory/legal loopholes and how to structure bets on the

formation & evolution ofprices in currency, commodities

&securities markets + governance

by lobbying

CAPABILITIES REQUIRED:Knowledge about the

regulatory/legal loopholes and how to structure bets on the

formation & evolution ofprices in currency, commodities

&securities markets + governance

by lobbying

Financialinnovation

financinggambling

Financialinnovation

financinggambling

Creative destruction

Destructivecreation

Schumpeterian Capitalism

Madoffian Capitalism

Bring the financial system back from its current “rent-seeking” configuration to a “productive” fit by (but not exhausting the list):

What has to be done ?

• Re-regulating leverage, liquidity creation and K. movements ,

• Supervising by examining balance sheets' evolution (dynamic regulation),

• Removing limited liability from financial institutions (Brazil’s case),

• Re-shaping the incentives for private finance (close the casino),

• Expanding the public financial system (look at China),

• Adopting the Singapore model of bureaucracy.

In Short: The Socialization of Investment

(Already proposed by Keynes in GT , Chapter 24)