Financialization and the financial cycle after the GFC crisis: the role of the Federal Reserve

This paper aims at understanding the evolution of financialization from the global financial crisis of 2007-8 to the Covid crisis. It focusses on a particular aspect of financialization, the evolution of the financial cycle. Drawing on Minsky’s and Toporowski’s insights the paper starts with a discussion of stages of capitalism dealing in particular with the finance capital stage of the Gold Standard age and the state finance capital phase of the period 1920-70 and compares them with the present period. The intervention of the state through the central bank in providing liquidity to financial markets in the United States will be examined. The liquidity provision by the central bank is directed to both the domestic and the international financial market for securities denominated in dollars. Central in this respect is the foreign exchange swap market. This reflects the increased integration in financial markets and the rising share of dollar denominated securities. The paper argues that a novel state finance capitalism could come out of the current Covid crisis. The main feature of that stage would be liquidity provision in dollars to financial markets and enterprises without steering them towards any societal shared goal. So that intervention would preserve the private interests of parts of the society without pursuing any public interest. Further, a contradiction is emerging between the regulatory changes enacted after the global financial crisis, the evolution of financial markets and the traditional way of conducting monetary policy.