The Construction of Systemic Risk as a Pathology of Monetary Government

• In Event: 118 - Section on Economic Sociology Refereed Roundtable Session and Business Meeting
  In Refereed Roundtable 60min: Table 01. Central Banking

Abstract

How did the Federal Reserve come to govern the sector most closely associated with capitalism—finance—against the most fundamental principle of political liberalism, private risk- private reward? To unravel this paradox, this paper examines the construction of systemic risk as a pathology of monetary government since the mid-1960s, and the subsequent efforts to manage this problem at a distance. It argues that systemic risk is intimately tied with what the paper calls monetary project to govern the economy from the Federal Reserve at a distance, without intervening in its structure. Because such a task required transforming the financial system into a vital and yet highly leveraged credit infrastructure, this project replaced the Glass- Steagall regulatory regime with an aggregationist risk management regime. This effort, however, brought into being its own pathologies in the form of “limited liquidity crises” in short- term lending markets. It was at this juncture that the Fed constructed systemic risk as a governmental problem, spending the next four decades reforming the aggregationist regime to manage this new problem effectively. The paper concludes that the institution of a new systemic risk regulation regime under the Dodd-Frank Act of 2010 symbolizes that this reiterative problem-solving process has reached its limits. This new regime points to the emergence of an alternative problematization of systemic risk as an irreducible structural vulnerability and seeks reduce the vulnerability of the system to a certain point so that the Fed can continue to govern the economy, as well as systemic risk, at a distance.

Author

• Onur Ozgode, Duke University