Beyond the market failure argument: Public banks as stability anchors

Ana Rosa Ribeiro de Mendonça and Simone Deos

Chapter 1 in Public Banks in the Age of Financialization, 2017, pp 13-28 from Edward Elgar Publishing

Abstract: The authors emphasize an overlooked raison d’être for public banks. They argue that limiting public banks to filling the gaps left by private banks, the standard argument in economics, neglects a very important dimension of public banks, that is, their capacity to act countercyclically and thereby stabilize access to credit during economic downturns. Taking a cue from Hyman Minsky, they point to the immanent volatility of financial markets dominated by private actors. In order to counter destabilizing tendencies, the presence of institutions with the logic of action that differs from that of the market is necessary. As public banks are not primarily concerned with profitability, they can play this role. To a certain extent, their presence in the market is an automatic stabilizer because public banks provide credit with long maturation. In times of crisis, they can also be used for discretionary intervention, that is, opening up new credit lines.

Keywords: Economics and Finance; Politics and Public Policy (search for similar items in EconPapers)
Date: 2017
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