Stability through financial embeddedness

Abstract

Purpose

The purpose of this paper is to appraise the transition from bank‐based systems to universal banking.

Design/methodology/approach

The Wynne Godley and Francis Cripps macroeconomic framework is used to structure the argument.

Findings

It is shown that the activity of oligopolistic firms leads, through their build‐up of inventories, to an unstable system. However, the industrial structure of an economy might be embedded in a network of inter‐bank linkages. The coupling of real and credit activities delivers a weak stability.

Research limitations/implications

The paper is an attempt to marry a structural cycle model with the institutional transformations. The cyclical model could be made more complex and the institutional analysis richer, thereby generating a thicker set of connections between the two.

Practical implications

The conclusion is that firewalls should be reconstructed between the traditional functions of banks as a conduit in the production of goods and services, and other financial entities involved in financial innovations.

Originality/value

Schools of political economy that theorise the transformation of the regime of accumulation of yesteryear are synthesised into financialisation and potential instability.

Citation

Correa, R. (2009), "Stability through financial embeddedness", International Journal of Social Economics, Vol. 36 No. 10, pp. 1021-1033. https://doi.org/10.1108/03068290910984795