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Can It Happen Again?

I elaborate on the structural causes of the global systemic crisis of 2007-9 to show that its ultimate origins lie in the still defective bookkeeping structure of national and international payment systems. As monetary circuit theory shows, banks are special, insofar as they can grant loans without the need to dispose of preexistent bank deposits. When the loans-generate-deposits causal chain occurs on the factor market, for firms to pay the wage bill, the money-output relation is not affected by banks' intermediation. This relation is modified when banks exploit the loans-generate-deposits mechanism for any financial market transactions, whether for their clients or for their own sake. Financial liberalization and deregulation pushed banks to compete with nonbank financial institutions, for them to retain their market share, reducing both their markup on monetary policy rates of interest and the credit standard they used to apply to firms as well as households. In that process, banks have, therefore, become "financial supermarkets," engaged first and foremost in investment banking, which is a misnomer, because, in fact, it has nothing to do with investment properly speaking: it is speculation on "global" financial markets, which are indeed far from providing any support to productive investment within the economic system.