Boom and Bust Cycles in Financial Markets—Causes and Cures: Multiple Contradictory Functions of Money and Collective Action Problems

The aim of this conceptualization article is to formulate propositions about: (1) systemic faults in established money and financial systems, in particular the mechanisms that make for boom-and-bust cycles; and (2) the cognitive and action factors which limit the central banks capabilities to consistently and effectively to regulate or to limit these cycles. Drawing on earlier research (our own as well as that of others), this conceptualization is presented in Section 1. Section 2 identifies a new design and institutional arrangement, which would minimize the boom-and-bust predispositions in money and financial systems. This work builds on earlier research invested in “the Chicago Plan” (from the 1930s) in addition to our own research. Section 3 considers the expected political and ideological constraints on reforming financial systems. Previously operating constraints—including Neo-liberal erosion of New Deal banking arguments and reforms—make for formidable barriers. The paper concludes that reform is necessary—if boom-and-bust cycles on the scale of those since 1929 are to be effectively regulated; but it is suggested that such reform is politically and ideologically difficult if not impossible in the short-run.