Financial instability and functional finance : a Lerner-Minsky perspective

The 2007/08 financial crisis results in two major problems that issue difficult challenges for the economic theory and policy. The first challenge is the rise of unemployment notwithstanding growing imbalances of budget deficits. The second is the monetary and financial instability threatening the permanence of economic development. In response to these two challenges a reappraisal of the functional finance approach of Abba Lerner and of the financial instability hypothesis of Hyman Minsky seems to be a relevant way of reconsidering the pitfalls of the working of capitalist economies. Consistency of public interventions in face of growing unemployment and atonic economic activity rests on the new principles that should guide financial system's reform in order to deal with the malfunctioning of liberalized markets.