Institutional Changes in Financial Crises: Lessons from Latin America

Abstract

Mainstream thinking seems to support the idea that once a financial crisis ends everything returns to normal. At the most, some regulatory changes on capital and reserves of the banks could be required. However, to understand what really happens during financial crises and the changes in overall economic activity that they produce, a post-Keynesian institutionalist theoretical approach is essential. This paper discusses how several of the changes in funding relationships, driven by financial crises since 1980s, have cleared the way for money manager capitalism. The political and institutional diversity in Latin America allows one to observe not only the trajectory of change, but also its forms. These countries have made different choices regarding economic stabilization and financial regulation, with moderately different results in the distribution of income, wages, and employment. In turn, widespread difficulties to slow or abolish policies of austerity show the depth of the institutional changes that restrict monetary and fiscal policies in the context of financialization. I conclude that financial crises have changed the foundations of social organization.