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Cambridge Journal of Economics 2009 33(4):653-663; doi:10.1093/cje/bep036
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Right arrow E12 - Keynes; Keynesian; Post-Keynesian
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© The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

This article appears in the following Cambridge Journal of Economics issue: Special Issue: The Global Financial Crisis [View the issue table of contents]

Why don't the bailouts work? Design of a new financial system versus a return to normalcy

Jan Kregel*

* Levy Economics Institute of Bard College

Address for correspondence: Levy Economics Institute of Bard College, Annandale-on-Hudson, NY 12504-5000, USA; email: kregel{at}levy.org

The innovative support measures introduced by the US Central Bank and Treasury in response to the current crisis to bolster bank balance sheets have had little success in restoring liquidity to financial markets. These policies mirror similar policies employed in the 1930s in the USA and the 1990s in Japan, in both cases with little impact. This paper identifies three policies impacting incomes rather than prices, the assessment of system failure, and proposals for system design that were employed in dealing with prior financial crises. That they have not been introduced in response to the present crisis may explain why current measures have not yet had their intended impact of restoring bank lending to the productive economy.

Key Words: Liquidity crisis • Debt deflation • Bank balance sheets • New Deal financial regulation • Zirp (zero interest rate policy) • Quantitative easing

JEL classifications: E12, E32, E58, G21, G38, G19

Manuscript received March 25, 2009; final version received May 8, 2009.


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