Neoliberalism, Financialization, and the Credit Cycle

This paper offers a novel analysis of the financial crisis and potential solutions by arguing that the crisis resulted less from flaws inherent in the neoliberal growth model and more from the excessive growth of credit. Focusing on the two quintessential neoliberal economies, Great Britain and the US, the first part of the paper examines the concept of ‘financialization’ and the purported necessity of rising private debt to neoliberal growth (the so-called ‘debt ratchet hypothesis’). While logical in construction, the empirical evidence for this argument is thin. The debt ratchet hypothesis fits the economic data from the early and mid-2000s, yet does not capture the dynamics of the entire neoliberal era, calling into question its veracity as a general critique of neoliberalism.  The final section of the paper argues that the neoliberal model suffers less from a systemic problem of rising debt and more from a cyclical tendency toward excessive credit. The primary solution to this flaw is the development of new macroprudential financial regulations, designs for which are emerging predominantly from the Bank of England and Bank for International Settlements. Macroprudential regulations aim to place controls on credit markets so as to smooth the credit cycle. The argument of this paper is that implementing macroprudential financial controls is a means of securing the robust output of neoliberal economies while avoiding the disruptive financial shocks that serve to undercut their dynamism.