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Financial Institutions for Innovation and Development

Financial Institutions for Innovation and Development. Core Problem and a Suggested Analytical Framework Leonardo Burlamaqui The Ford Foundation and State University of Rio de Janeiro Conference on Financial Institutions for Innovation and Development Beijing, October 17-18, 2013.

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Financial Institutions for Innovation and Development

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  1. Financial Institutions for Innovation and Development Core Problem and a Suggested Analytical Framework Leonardo Burlamaqui The Ford Foundation and State University of Rio de Janeiro Conference on Financial Institutions for Innovation and Development Beijing, October 17-18, 2013

  2. Core problem: A global financial system turned to gambling or….more precisely put: Lax Regulation , Debt, Leverage and Financial Fragility: The Economics of Trouble (Minsky)

  3. Nutshell: “ While the value of assets can plummet posthaste, it takes forever to shrink the debt used to buy them” ...Especially if those “assets” are toxic- Bad collateral or securities with “fictitious” valuations.

  4. An Analytical Framework : Financial Systems and Economic Performance CAPABILITIES REQUIRED: Unique knowledge by fin instit. of business firms competences; strategies and of their competitive ecology + sound fin governance. Creative destruction Financial innovation financing productive Investment Schumpeterian Capitalism A. Spirits +Long-term Funding: Public & Venture Capital Development/ Structural Change Schumpeterian Returns in the Financial System HedgeFunds, Securitization & Over-Leverage Ponzi/ Madoff Capitalism Financial innovation financing gambling Paulsonian (John) MadoffianCapitalism CAPABILITIES REQUIRED: Knowledge about the regulatory/legal loopholes and how to structurebetson the formation & evolution of prices in currency, commodities & securities markets + governance by lobbying Destructive creation

  5. What has to be done ? Bring the financial system back from its current “rent-seeking” configuration to a “productive” fit by (but not exhausting the list): • Re-regulating leverage, liquidity creation and K. movements , • Supervising by examining balance sheets' evolution (dynamic regulation), • Removing limited liability from financial institutions (Brazil’s case), • Re-shaping the incentives for private finance (close the casino), • Expanding the public financial system (look at China), • Adopting the Singapore model of bureaucracy. In Short: The Socialization of Investment (Already proposed by Keynes in GT , Chapter 24)

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