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Five Key Points for Italy’s Banking Woes

There is serious concern about Italy’s banks and whether the bad debt they are carrying signals trouble for the Eurozone. In facing up to its troubled financial system Italy’s political leaders could also benefit from a moment of reflection on what the role of finance could, and should, be in a dynamic economic system marianamazzucato.com

There is serious concern about Italy’s banks and whether the bad debt they are carrying signals trouble for the Eurozone. In facing up to its troubled financial system Italy’s political leaders could also benefit from a moment of reflection on what the role of finance could, and should, be in a dynamic and functioning economic system. As finance is central to the capitalist system, the lessons for Italy’s financial system are broader than the role of its banks. I will concentrate on 5 key points.

First, money is not just a medium of exchange, replacing barter and then gold. Money lies at the centre of the economic system which is, as understood especially by the great economist Hyman Minsky, based on debt. It is through debt creation (as long as it is backed and guaranteed by a higher authority, historically government) that money is endogenously created. Thus the characteristics of debt—who lends to who and how—are central to understanding the characteristics of the modern capitalist economy.

Second, finance should, in an ideal world, be creating debt in order to finance growth of activity in the real economy. Instead, what has happened since the 1970s de-regulation of global finance, has been that finance has, over time, been increasingly financing…finance. That is, it has been financing itself. Indeed, in most of the western world, the growth of financial intermediation as a percentage of gross value added, has over the last two decades outpaced the growth of the real economy. That is until the bubble burst in 2007. Finding ways to redirect finance towards productive activity in the real economy is thus crucial.

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