Where Bernanke is taking the Federal Reserve: a Post Keynesian and institutionalist perspective

Abstract

We develop a perspective on where Bernanke is taking the Federal Reserve by drawing from Paul Davidson's Post Keynesian analyses of the current financial crisis and the Federal Reserve as an effective market maker and Thorstein Veblen's perception that the Federal Reserve was supporting creditinflation by large investment banks in the 1920s. New Deal legislation restricted the ability of investment banks to create credit-inflation and left the Federal Reserve with only an indirect relationship with investment banks. Financial deregulation and financial derivatives resulted in a new and larger form of credit-inflation by underwriter-bank conglomerates. Bernanke's responses to the inevitable financial crisis are bringing the Federal Reserve into an even closer relationship with underwriter-bank conglomerates than Veblen envisioned.

Keywords:

• credit-inflation
• deregulation
• financial derivatives
• investment banks
• liquidity crisis
• nonergodic uncertainty
• underwriter-bank conglomerates