Macroprudential Regulation and SocialPurpose

Andrew Baker and Wesley Widmaier

First Draft – Not for citation without permission.

Social purpose is a concept that has fallen out of favour andbecome unfashionable in the field of International PoliticalEconomy (IPE). Save for the odd passing, fleeting reference tothe term, systematic engagement with social purpose as aconcept has been practically non-existent in contemporary IPEscholarship1. This, we suggest, is unfortunate becausefollowing the financial crash of 2008 and its continuing fallout, thinking in terms of social purpose - conceptually,normatively and empirically, has never been more important asan intellectual undertaking. At the same time, articulatingand building a sense of social purpose is a form of policyactivity in its own right, which is important for legitimatingand imparting a sense of strategic direction to post-crashpolicy and regulatory reform. Regrettably, few policy makersor politicians seem to have recognised or grasped this in thepost-crash period, and efforts to develop and communicate anoverarching vision of social purpose to inform regulatory,social and economic reform efforts since the crash of 2008have been sparse. In this paper we seek to build a case forthe rehabilitation and renovation of the concept of socialpurpose in the field of IPE. We outline three research agendasconnected to the concept of social purpose and lay out a threephase process that constitutes the politics of social purpose.We argue that the new public policy field to emerge from thecrash – macroprudential regulation, or macroprudential policy,as a new third arm of macroeconomic policy to sit alongside1 Social purpose was undoubtedly a central concept, in one of the mostcited IPE articles of all time Ruggie 1982 (2618 google scholar citations).Curiously, given the clear centrality, Ruggie wished to attach to thenotion of social purpose, the concept rather disappeared from view infurther work in IPE at least in explicit terms. For an exception see VanApeldoorn (2003). For example, social purpose features in the subtitle ofAndrew Moravscik’s The Choice for Europe, but the term or concept itselfwas not directly referred to or developed further in the book (Moravscik,1998).

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monetary and fiscal policy, is particularly ripe for analysisin terms of its emerging social purpose in empirical,normative and ontological terms. Our analysis ofmacroprudential’s potential social purpose proceeds throughtwo primary steps. First we consider the intellectual originsand roots of macroprudential, what we call its intellectualgenealogy, arguing that the ontology of macroprudential, whichis reasonably well developed, is linked to its inherentnormative orientation based on ‘macro moralities’, which as ofyet remain hugely underdeveloped, both intellectually and inpolicy terms. Guidance in developing a sense of macromoralities and with it a sense of social purpose for themacroprudential project we suggest, lies in the writings ofMinsky, because the current ontology of macroprudential drawsheavily on Minsky and Minsky makes prescriptive and normativearguments derived from his ontology in the last part ofStabilizing an Unstable Economy (Minsky, 1986). Second, we examine thepolitical, institutional and professional constraints thathave as yet impeded the development of a sense of socialpurpose for macroprudential regulation in policy terms sincethe crash of 2008. This we conclude is due to an unhealthycombination of political, institutional and intellectualfailings, in both academic and policy/ political worlds. The first section of the paper discusses social purpose inbroad conceptual terms and lays out a research framework andagenda for future explorations of social purpose. The secondsection of the paper provides a dissection of the intellectualcontent of the macroprudential perspective. The third sectionof the paper examines the institutional politics andincentives present in the field of macroprudential regulationrelating this to the creeping empowerment of central banks.Here we offer an explanation (part- institutional and partideational ) for the conspicuous public normative silenceconcerning the lack of sense of social purpose formacroprudential regulation, posing incipient legitimacytensions for this embryonic public policy field.

WHY SOCIAL PURPOSE?

In his seminal exposition of ‘embedded liberalism’, JohnRuggie introduced the field of International Political Economy(IPE) to the concept of social purpose (Ruggie, 1982). Ruggie

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actually mentioned social purpose on sixteen separateoccasions in that original 1982 International Organization article.Social purpose was clearly a central part of his conceptualschema which laid out ‘embedded liberalism’ as the definingfeature of the post war international economic order.‘Embedded liberalism’ of course, consisted of a compromisebetween domestic policy autonomy based on demand managementand the welfare state, and an open international tradingorder, including the need for international financialconstraints to preserve both. In this sense embeddedliberalism was the ‘social purpose’ the post war Bretton Woodsorder was supposed to serve and maintain. Unfortunately,Ruggie never formally defined social purpose in clear straightforward terms. However, it is possible to discern fourfeatures of social purpose that he alludes to in the original1982 article, and that should inform future scholarship onsocial purpose and our understanding of the concept. First, one of Ruggie’s primary motivations in his 1982article was to point out that prevailing approaches inInternational Relations had focused on state power to theexclusion of social purpose, and could in turn only tell usabout “the form of the international order, but not its content.”He continued, “to say anything sensible about the content ofinternational economic orders and about the regimes that servethem, it is necessary to look at how power and legitimatesocial purpose become fused to project political authorityinto the international system” (Ruggie, 1982, p.382). Contentthen, was integral to how Ruggie envisaged social purpose, andhis championing of social purpose was in large part motivatedby a desire to urge IR scholars to pay greater attention tothe content of international and domestic economic regimes.Paying greater attention to the content of economic governanceregimes, particularly in our case of macroprudentialregulation, we would claim, requires a more forensicdissection of the ideational construction of economic regimesand the series of truth claims and analytical assumptionsabout the nature of the world and how it is constituted andput together, on which they are based - ontology. For all itsinsistence that ideas matter, and drive policy making, framinghow policy actors relate to the wider world, contemporaryconstructivist scholarship all too rarely provides the kind ofdetailed ideational dissection that we think is required if

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justice is to be done to the content part of Ruggie’s notion ofsocial purpose2. Uncovering social purpose in analytical andempirical terms, but also outlining potential future socialpurpose, (and how that should be communicated publicly)requires a deep engagement and dissection of the intellectualand conceptual foundations of particular economic policyregimes. In this paper, we are making a call for intellectualgenealogy: tracing how ideas evolve and relate to one another,what their claims and intellectual foundations are and whatthe potential implications of this are for policyinterventions and ethical possibilities. We therefore tracethe intellectual roots of the contemporary macroprudentialperspective as a means to make claims about its potentialsocial purpose and the implicit ethical and moral positionsthat we would argue are rooted in the ontology of themacroprudential perspective. Second, Ruggie was also clear that ‘purpose’ relatedto the norms and principles, or normative frameworks ofregimes (Ruggie, 1982, p.384). For example, on the subject ofembedded liberalism, Ruggie later wrote that its socialpurpose involved an effort to combine the efficiency ofmarkets with the broader values of the community that sociallysustainable markets themselves required in order to surviveand thrive (Ruggie, 2008). In other words, analysing andidentifying social purpose requires identifying the moreconspicuous normative claims in public communications made bypolicy makers and political spokespeople, about the values,objectives and aspirations that inform their policy decisionsand how they speak to wider public values and a wider publicgood. The approach we develop here suggests it is necessary togo further than this and also consider the more implicit andoften concealed normative positions that are rooted inassumptions about the nature of the world and appropriatepolicy responses contained in the intellectual frames thatconstruct and inform policy regimes. Social purpose istherefore a series of normative claims about the principles orvalues that should be upheld by sets of social and economicarrangements, what those arrangements should in turn looklike, the objectives and principles they should fulfil andthey kinds of activities and behaviours that should beavoided, or prohibited as potentially harmful to the wider2 For a possible exception see Blyth, 2013.

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social, economic and moral fabric. Obviously, in the field ofeconomic policy and financial regulation, this requires anengagement with the claims of the economic theories andconcepts that inform policy regimes and the sets ofinterventions to which they give rise. Thirdly, in his 1982 article, Ruggie drew on Karl Polanyito make a distinction between embedded (where concerns withsocial cohesion are prevalent) and disembedded economic orders(where market rationales are primary and public interventionfocuses on facilitating markets). Ruggie pointed out thatchanges in social purpose related to shifts in the balancebetween market and (state) authority, which “fundamentallytransformed state-society relations by redefining thelegitimate social purposes in pursuit of which state power wasexpected to be employed in the domestic economy” (Ruggie,1982, p.284). These are the questions of how and when stateintervention is justified based on conceptions of how marketsactually behave, what is appropriate and inappropriate marketbehaviour, when market behaviour is harmful or damaging to thewider social whole and to the public at large, and what anystate intervention should be seeking to accomplish in thelight of this. On this reading, social purpose refers to thejustifications and rationales for state intervention and formarket practices, in terms of how best to serve differingconceptions of a wider collective societal good. This makessocial purpose a particularly pertinent concept to apply tothe field of macroprudential regulation that has emerged sincethe financial crash of 2008, because macroprudentialregulation is essentially a series of new techniques forintervening in financial markets to curb and restrain harmfulfinancial excess and for employing state power in domesticeconomies. The social purpose these interventions are supposedto serve and which should guide their activation is thereforean undeniably important and fundamental, if as yet neglectedquestion, in both policy circles and in academic scholarshipon macroprudential regulation.

The fourth element in Ruggie’s original discussion ofsocial purpose was his reference to shared inter-subjectivities, or common understandings. International policyregimes had an inter-subjective quality and were akin tolanguage, or a ‘generative grammar, - the language of state

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action, or the underlying principles of order and meaning thatshape the manner of regimes’ formation and transformation(Ruggie, 1982, p.30). Actions and decisions by an actor withina given international policy regime would therefore be subjectto an "intersubjective" evaluation of the intentionality andconsequences of those acts within a broader normativeframework. In his article, Ruggie was referring tounderstandings between state elites that an ‘embedded liberal’order was desirable, that state actions should seek to upholdand be informed by such an order and its basic principles,with constituent international organizations and treatiesconstructed in accordance with these principles. Socialpurpose therefore becomes pervasive when a range of relevantregime actors consent to it, understand and identify with thedesirability of its constituent principles and objectives, andact in accordance with that understanding. In the case ofmacroprudential regimes that will involve domesticallymandated authorities intervening directly in domesticfinancial systems to direct and steer flows of finance andcredit, albeit within international frameworks of principles,this means going beyond the inter-state inter-subjectiveunderstandings almost exclusively considered by Ruggie, toconsider the inter-subjective understandings shared betweenelites and electorates, or mass publics. In this sense, socialpurpose and its articulation is a form of legitimation forstate action, and that requires public understanding and thesubsequent satisfying of public expectations of that widelyshared and understood social purpose, through policy actionand public explanation for those actions. As we will see thetask of communicating social purpose for macroprudentialregulation is greatly complicated by institutional factors,some of the macroprudential perspective’s own internalintellectual inconsistencies, but also because its benefitsare collective and long-term, rather than individual andshort-term. That means the reasoning accompanyingmacroprudential policy interventions will need to be couchedin terms of systemic and societal gains, which in turnrequires a much clearer sense of its social purpose, that canin turn be communicated, understood and accepted by the publicand other economic actors. The particularities ofmacroprudential regulation, we argue therefore, make it aregulatory project in search of and need of a clearer sense of

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social purpose. Social purpose is required not only to createthe expectations and act as the cohesive glue that will makemacroprudential policy decisions and regimes operational andbinding, as relevant actors respond to policy signals andbehave accordingly, but also in creating the political consentfrom markets and citizens that will continue to enable policymakers to be empowered and mandated by legislation to makediscretionary macroprudential policy interventions. To recap therefore social purpose refers to fourinterconnected and overlapping features: i) the intellectualcontent and ontology that informs and designs policy regimes;ii) the normative claims, frameworks, assumptions andprinciples that underpin policy regimes and construct a senseof wider societal good; iii) public rationales for desirabledegrees of state interventions in markets, or indeed arelative lack of state intervention; and iv) shared inter-subjective understandings between key actors, elites, publicsand market participants, that legitimate policy regimes, theirinstitutional design and subsequent policy actions byproviding an overarching sense of purpose of what they aresupposed to achieve and contribute to in broad systemic terms.

Social Purpose: A Research Agenda

How then can we become much more systematic and thorough inour treatment and application of the concept of socialpurpose? We propose thinking in terms of social purpose interms of three stages or elements, that are constitutive ofbroader efforts to construct, convey and build consensus for asense of social purpose. First, is what we call the constitutiveelement, relating to Ruggie’s call for a greater emphasis oncontent. In a lot of policy fields (and especially inmacroprudential regulation which is in essence a series ofclaims about the financial system as a whole, about financialmarket behaviour, the nature of financial risk, how thisinteracts with the wider macroeconomy and what can be done tomitigate negative effects,) this means placing ideational andcognitive frames centre stage. But it also means going beyondmost of the existing ideational scholarship in IR and IPE thatmerely seeks to show empirically how, when and why, whichparticular ideas matter and influence policy. We propose

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dissecting the content of prevailing and influential ideas,(especially newly influential macroprudential ideas) in termsof their causal inferences, ontological and normativeimplications. Such ideational analysis runs into fairlyrudimentary objections that ideas are not free floating, withRisse Kappen calling on scholars to specify the conditionsunder which specific ideas are selected and influencepolicies, paying due attention to domestic coalitions,political institutions, state-society relations, and thevalues and norms embedded in a particular state’s politicalculture. (Risse-Kappen, 1994, p.187). One of the few scholarsto have taken the concept of social purpose seriously,BastiaanVan Apeldoorn, similarly argues that a focus on socialpurpose requires understanding the social power underpinningpublic power, through an analysis of underlying social forces(Van Apledoorn, 2000, p.158). Van Apeldoorn does acknowledgethe power of ideas and ideological practices in constructingand defining social purpose, but the crucial question for himis by whom, and for what purpose a prevailing discourse hasbeen constructed (2000, p.158). We sympathise to the extentthat actors, their strategic motivations and theirrelationship to wider social structures are clearly important,but we first need to dissect and understand the claims thatactors make through the ideas and concepts they employ, andwork backwards. We do not wish to distil ideas from social andinstitutional context disconnected from political and socialstruggle. However, the practice of giving ideas prior statusseems to us to be the correct sequence in considering thepolitics of social purpose (Blyth, 2002, p.44). When actors inthe policy process are making arguments and claims about thenature of the world and necessary policy responses, includingthe overarching purpose these responses should serve, how canwe relate this to coalitional preferences, particularinstitutions and their relationships to wider political andsocial structures, until we have fully dissected andunderstood the nature of the claims being made and theirimplications, including their moral, ethical and practicalpossibilities and lines of reasoning employed? Starting withsocial structures and asserting that certain social forcesgenerate and orchestrate particular sets of ideas, tolegitimate and realise clearly established material

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preferences, seems to us to run the risk of falling into adeterministic and telescoped trap of preconceived causality.It involves identifying powerful social forces and the motivesthat lurk behind a particular set of initiatives, before theintellectual constitution and implications of the claims beingmade have been fully considered and understood, in theirontological as well as their ethical and normative terms.Moreover, such an approach shrinks the scope for cognitive andreflexive reasoning amongst agents, reducing it to a productof their prior pin pointed position in prevailing socialstructures. As one wry observation has it such socialstructures do not come with an instruction sheet, but requireinterpretation aided by cognitive and intellectual frames(Blyth, 2003). When claims concerning the social purpose of aregulatory, or policy project are not fully fleshed out, orhave been left unstated, as in the macroprudential case,interpreting, interrogating and dissecting these claims,beliefs and conceptual assumptions further, becomes even moreimportant, as long as we are also prepared to locate theagents carrying these ideas, in appropriate social, politicaland institutional context and consider the resultinginteractions. Of course all of this is a well-trodden, and inour view, largely futile irresolvable debate3, because the mostappropriate starting place for analysis will be case dependentand will be particularly dependent on the historical evolutionof particular sets of ideas and the process through which theybecame prominent, but even that requires some prior knowledgeof intellectual history, albeit one placed in appropriatepolitical and institutional context, which is precisely ouraim here. In any event we are not concerned here withunderstanding or advancing theories of causal paths relatingto the importance of ideas or otherwise. We are interested inhow to understand and interpret social purpose and thatrequires understanding the claims, arguments and reasoning ofagents, which in turn means dissecting the ideas they hold andthe intellectual frames they employ and use.

3 For example see Bell, 2011 and response from Schimdt, (2012), Bell(2012). We also direct the interested reader to Bieler and Morton 2008 whosee ideas as material social processes best understood through historicalmaterialist theory.

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While we focus and concentrate mainly on the constitutiveelement of social purpose in this paper, there are two furtherelements to social purpose. The first is a communicativeelement, which refers to the more direct public communicationsfrom politicians and senior policy makers that explain, orarticulate the broad purpose and objectives of their policyinterventions in markets. These are often explicitly normativearguments that attach values to action and serve to legitimizeideas (Schmidt 2002, 213–217; Finnemore 1996). Vivien Schmidtrefers to this as communicative discourse, that takes place inthe political sphere , where political actors engage thepublic in a ‘communicative’ discourse about the necessity andappropriateness of such policies through public speeches,media commentary and interviews and so on (see Schmidt 2002,2008, 2014.) In the macroprudential case this involves publicjustifications and explanations of what macroprudential policyis supposed to achieve and contribute to in systemic terms. Todate the communicative discourse surrounding macroprudentialpolicy, the question of whether it is supposed to contributeto preserving the existing global financial system bycorrecting an existing fault, or whether it is intended totransform the system, changing the relationship between thefinancial system and the macroeconomy, has barely beendeveloped. These are big questions and invariably requireinput from political leaders. In the final section of thepaper we consider the reasons why macroprudential’scommunicative discourse remains so under developed to date. A third element of the process of constructing socialpurpose is a responsive element. This refers to how a combination of market actors and masspublics respond to the arguments made in communicativediscourse. Social purpose, as Ruggie noted, revolves aroundshared intersubjectivities concerning appropriate action andthe norms that actions should be guided by. Social purpose forpolicy and regulatory projects therefore requires some broadsocietal wide agreement, or acceptance of the kind of socio-economic order at a systemic level, policy interventionsshould be seeking to deliver and contribute to. Forarticulations of social purpose to be workable therefore, theyhave to be accepted and recognised by the public at large aslegitimate and desirable. In other words, the publicpopularity of policies and acceptance of the long to medium

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benefits derived from them, matters. Policy regimes buildtheir legitimacy and acceptance through this responsive element,based on the persuasiveness of the claims of agents operatingwithin that regime to deliver a wider societal public good anda vision of that good. In this paper, we touch only on thisresponsive element in passing in the final section of thepaper when we look at the reasons why macroprudential’scommunicative discourse is, as of yet, somewhat stunted. Finally, there are three important future researchagendas behind our call for a scholarly rehabilitation of theconcept of social purpose that relate explicitly to thefinancial crisis of 2008 and the role of academic researchprogrammes in relation to that. The first relates to the taskof interpreting what the crash of 2008 and the various reformefforts underway actually amount to. Social purpose and thequestion of intentionality and vision are key here. In thissense, future scholarship needs to detect and decipher thesocial purpose that reforms and policy interventions aresupposed to serve. Problems occur when this is hidden, orconcealed, whether deliberately, or through a lack ofintellectual vision or knowledge. In such instances theontology and implicit normativity of policy programmes needsto be investigated and considered. We do this for themacroprudential policy programme in the next section of thepaper. A second agenda is to generate normative argumentsconcerning what the social purpose of post-crash financial andeconomic reform should actually be. This will almost certainlyrequire closer collaboration between the areas of politicaleconomy and political philosophy, so that normative principlesthat should be represented and respected by future governanceefforts can be identified. One area for investigation is thenormative theory and principles that should guide and informefforts at financial systemic risk management, because smallgroups of individuals and institutions generating hugesystemic risks, the burden of which have to assumed by borneby society as a whole, raise some very fundamental questionsabout fairness, equity, inclusion and domination of the few.The social purpose that emerges for macroprudential regulationwill depend on how these questions are answered andcommunicated by elites and responded to by the public atlarge. Finally, the third agenda for future research on socialpurpose is to identify and explain the patterns emerging in

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relation to social purpose. Why what appeals to which socialpurpose by which actors are being made and with whatconsequences, in terms of public acceptance of thosearguments, including when the question of social purpose isnot being raised in a policy field and a normative silenceensues4. The final section of the paper seeks to offer anexplanation for macroprudential regulation’s current relativenormative silence.

MACROPRUDENTIAL’S IDEATIONAL CONSTITUTION

The Macroprudential Ideational ShiftIt is now fairly widely established, both in the policy andacademic worlds that the financial crash of 2008, resulted ina macroprudential ideational shift (Haldane, 2009, Borio,2009, Turner, 2011, Baker, 2013a, 2013b, Baker and Widmaier,2014a, Datz, 2013, Goodhart, 2014, Casey, 2014, Mackintosh,2014, 2015, Lothian, 2012). Prior to the financial crash of2008, the dominant approach to financial regulation acrossmost major financial centres was almost exclusivelymicroprudential in nature. It involved evaluating the safetyof individual institutions, including their individual riskprofile and risk management systems. Intellectualreinforcement for this approach came from simplified versionsof Eugene Fama’s efficient markets hypothesis (Fama, 1970,)while the dominant strains in macroeconomic modelling paidlittle or no attention to financial and credit cycles assources of macroeconomic system wide instability (Borio,2011b, Goodhart, Tsomocos, Shubik, 2013, Drehmann et al,2012). After the crash, central bankers and regulatorsdiscovered macroprudential regulation as a series of policyinstruments and techniques that could potentially contain andcurb systemic financial risk (Borio, 2009a, 2011a, Baker,2013a). In 2009 G20 leaders called on regulators to startdeveloping macroprudential regulatory regimes for this purpose(G20, 2009). Macroprudential efforts to mitigate systemic risk4 The range of research methods available for such a task is considerablebut experimental randomised survey data on how members of the public willreact and respond to the use of various macroprudential instruments anddifferent accompanying rationales and explanations for these policyinterventions would be useful in illuminating the responsive element ofsocial purpose.

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involve a series of policy interventions in financial andcredit markets, comprising a variety of largely untestedcountercyclical stabilisation techniques that are designed toinfluence price formation and/ or to direct credit andinvestment flows away from certain areas into other areas. Itconsequently involves a much more interventionist and activiststate approach to financial regulation based on analyses ofsystemic data and macro trends across the system as a whole.Macroprudential policy has been described as a new third armof policy to sit alongside more traditional fiscal andmonetary policies, that exists somewhere between monetarypolicy and the supervision of individual financialinstitutions (Jones, 2011). It involves the use of a varietyof prudential measures, such as countercyclical capitalrequirements, administrative caps on aggregate lending, limitson leverage in asset purchases, loan to value ratios formortgages, loan to income ratios and limits to foreignexchange exposure through the use of levies and charges, forthe macroeconomic ends of preventing potentially destabilisingand deleterious financial bubbles, thereby increasing the‘macroeconomic ambidexterity’ of public authorities (Haldane,2014a). The term macroprudential was first used at a BasleCommittee on Banking Supervision (BCBS) in 1979 and the termwas subsequently referenced in some of reports of the Bank forInternational Settlements (BIS) during the 1980s and 1990s(Clement, 2010.) It was given a boost by renewed interest atthe BIS following the Asian financial crisis and a speech bygeneral manager Andrew Crockett signalled the start of seriousconceptual work at the BIS on core macroprudential conceptssuch as procyclicality during the 2000s (confidentialinterview with BIS official). There was however littleinterest amongst senior figures at major central banks in theperiod leading up to financial crash and macroprudential wasseen as an unnecessarily costly set of proposals (Baker,2013a, Balizil and Scheissel, 2009). Following the financialcrash a group of policy makers connected to the BIS, tocentral banks and academic and private sectors economists withlinks to central banks, became much more vocal and launched acampaign of advocacy to make the case for the macroprudentialperspective with some success (Baker, 2013a, 2013b, Borio2009a, 2011a, Haldane, 2009.) In the process they critiqued

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the simplified version of efficient market theory that hadbecome part of the institutional DNA in the world of financialregulation, in something that resembled an insiders’ coupd’etat, because these individuals already had a foothold inthe broad central banking community, but became more centraland their arguments much more persuasive given the events of2008 (Turner, 2011, Baker, 2013a). Notions that financialmarkets would tend towards equilibrium, would clear andprocess information effectively, making them by and largeefficient, with prices a good measure of underlyingfundamentals, were replaced with a much more jaundiced readinghighlighting an endemic procyclicality in modern financialmarkets, the propensity for herding and the endogenousdynamics of systemic instability. This suggests that themacroprudential shift has at least some of the features of agestalt flip (Tucker, 2011, pp.3-4). A hands off approach tofinancial markets was also replaced by recognition of a needfor more steering and intervention by public authorities. InRuggie’s terms this implies a shift in the balance betweenmarket and (state) authority creating questions about the“social purposes in pursuit of which state power would beemployed in the domestic economy” (Ruggie, 1982, p.284). Of course, we can quickly become embroiled in definitionaldebates about whether the macroprudential ideational shift isin fact a paradigm shift5, but the macroprudential perspectiveis at the very least, a different way of thinking about thefinancial system, its relationship with the macroeconomy andthe policy challenges this implies. A range of policyinterventions and techniques previously largely out of reach,because of a cognitive filter that assumed market efficiencymost of the time, are now very much on the table. What thismacroprudential ideational shift actually amounts to over thelong to medium term we would suggest rests on the very big

5 For example a lively and interesting debate between a policy maker andIPE scholars has broken out on this very question on the pages of ThePolitical Quarterly, McIntosh (2014), Mugge (2014), Tsingou (2014). More generallysome of the big statements on the significance of the crash of 2008 interms of continuity and change all seem to point very firmly in thedirection of continuity (Helleiner, 2014, Blyth, 2013, Hay, 2011, Crouch,2011). We merely wish to highlight the ongoing contingency of thesequestions concerning the historical significance of the crash in terms ofpolicy change, while placing the concept of social purpose centre stage inour investigations and analyses of these questions.

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question of the appropriate social purpose of newmacroprudential policy interventions. To date this very largequestion has only been flirted with somewhat sporadically byboth policy makers and scholars in the field of politicaleconomy. In the very simplest of terms what this question ofsocial purpose amounts to in the case of macroprudentialregulation is whether macroprudential regulation is intendedto fix and preserve the existing financial system and thegrowth models and social settlements it gives rise to(particularly in the Anglo-American world), or whethermacroprudential regulation is about changing the relationshipbetween the state and markets and gradually transforming therelationship finance has with the macroeconomy and the role itplays in the economy. Certainly, in the Anglo-American world,from where the crash emerged, Terrence Casey has framed thisin characteristically clear terms: can and shouldmacroprudential regulation be used to save neoliberalism?(Casey, 2014). Casey’s argument is that macroprudential shouldbe understood and used as a convenient set of policyinstruments for fixing the Achilles heel in neoliberal Anglo-Saxon capitalism, - it’s propensity to generate large creditbubbles that cause macroeconomic harm. We argue in whatfollows that there are clues in the analytical frames andclaims of the macroprudential perspective and in itsintellectual history and constitution that actually point usin the opposite direction and point to the need for a deepertransformation as the legitimate social purpose ofmacroprudential regulation. In considering macroprudential’sintellectual constitution we confine ourselves to what we seeas the three major work streams within the broadmacroprudential perspective. These are: the analytical work ofthe BIS under the leadership of Claudio Borio as the spiritualhome to early conceptual work on macroprudential; the positionof leading UK macroprudential advocates Paul Tucker and AndrewHaldane from the Bank of England and Adair Turner formerchairman of the Financial services Authority in converting theUK to a macroprudential perspective as the western country tohave arguably gone quickest and furthest in advancing amacroprudential framework; and the work of group of mainlyacademic economists, a senior former policy maker and afinancial market analyst as authors of the Geneva Report, -the most intellectually substantial of the spate of reports

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published in 2009 advocating macroprudential regulation, (2009was the pivotal year in the macroprudential ideational shift,)and this group also included a cluster from the London Schoolof Economics Financial Markets Group and from Princeton whodid early important academic work on the macroprudentialperspective6. All of three of these streams can lay claim tohaving played a pivotal role in pioneering and establishingthe macroprudential perspective. We consider these streams ofwork across what we see as the core foundational

6 To justify these choices further Borio is often cited in policy circlesas the person who invented macroprudential, although that was clearly acollective effort (point made in confidential interview with Central Bankofficial). Officials at the BIS in turn think the macroprudentialideational shift could not have happened without the UK’s conversion andthink that macroprudential ideas always had a latent presence in the UK,due to a number of intellectual sympathisers at the LSE’s financial marketsgroup. The small centralised nature of the UK financial policy communityalso means it was easier for ideas to go viral in a shorter period of time.Notably, the Bank of England’s financial stability team had been conductingmacroprudential type conceptual analysis in the pre-crash period but chosenot to make it public, meaning that enthusiastic voices were present in theUK when the crisis broke (confidential interview). Finally, one UK officialrecalls that the report he felt made a ‘real difference’ because of whocontributed, including serious academic voices such as Charles Goodhart,Markus Brunnemeir and Huyn Shin, was the Geneva Report. It was certainlythe most substantive in intellectual terms. Crucially it also includedformer General Manager of the BIS, Andrew Crockett, whose supportive speechin 2000, had rankled some central bankers, but had establishedmacroprudential in the policy lexicon and gave BIS staff an impetus todevelop a macroprudential research agenda (interviews with officials). TheGeneva group is particularly interesting because it represents academics(albeit with central bank experience), a private sector representative anda well respected elder statesmen policy maker. In this sense it wasrepresentative of the linked professional ecologies that characterisefinancial policy making (Seabrooke and Tsingou, 2009). The fact it linkedup the private sector (market analysts), policy officials and academiceconomists in this way undoubtedly made it stand out as a piece of analysisand contributed to its authority across the financial world. The Spanishcentral bank was also a source of practical macroprudential expertisehaving operated countercyclical capital buffers, but their conceptual workhas been less important. Likewise, there is evidence of an emerging Asianregional approach to macroprudential based on greater use of LTIs and LTVsas quantity based instruments, as opposed to the price based instrumentsfavoured by the UK, (Lim et al, 2013a) but this only began to crystalliseafter the crash and has been less influential in the conceptual evolutionof macroprudential. The focus here in this paper on the work that hasdeveloped the core foundational concepts that define the macroprudentialperspective, to give a better sense of the working ontology from which a

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macroprudential concepts in what follows: fallacies ofcomposition; procyclicality; herding and complex (adaptive)systems.

Macroprudential’s Intellectual ConstitutionThe intellectual constitution and roots of the macroprudentialperspective are complex. For example, much of the conceptualthinking that takes us into what is now considered to bemacroprudential policy space, the use of prudentialinstruments to affect the macroeconomy based on an acceptancethat the interaction of asset prices, the banking system andthe wider economy can induce instances of cyclical systemicinstability, comfortably predates the Basle Committee’s firstusage of the term in 1979 (Confidential interview with centralbank official). Indeed, in earlier periods executing monetarypolicy often involved altering regulatory requirements formacroeconomic ends in both the UK and the US7. Of course, suchregulatory adjustments fell out of favour as macroeconomictools, as monetary policy converged on money supply andinflation targeting regimes, under variations of monetarist,new classical and new Keynesian turns. In one sensemacroprudential can be understood as a return to the oldertradition that pre-dates monetary aggregate/ inflationtargeting regimes, but given a distinct name, differentiatedfrom and conducted in a distinct process to monetary policy,with movement towards a separate institutional mandate and aseparate policy committee (Confidential interview with CentralBank Official). When we think in terms of this longer historyit becomes clear that macroprudential is not the property ofany single school, but has a multiple and varied intellectualancestry. Virtually all policy makers interviewed in our

sense of social purpose maybe derived. Note that several of these keyconceptual architects are also of the view that despite some rhetoricalcommitment to macroprudential in the United States, the commitment issuperficial and key concepts such as procyclicality haven’t reallytravelled or gain traction. 7 For example Elliott, Feldberg and Lehnert, 2013 count 245 instances ofthe use of countercycial regulatory and prudential tools to counter creditcycles since 1913 in the United States, with their usage slowing in the1980s and stopping altogether from the 1990s onwards. The reading thatafter 1945 monetary policy often operated through what would now be calledmacroprudential policy was advanced in an interview with a Bank of Englandofficial.

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research not only acknowledged this, but have drawn onmultiple and contrasting influences in their own work. This ofcourse means that macroprudential is also a terrain ofpotential intellectual contestation, but nevertheless we willargue, some claims to intellectual heritage are stronger thanothers, when it comes to macroprudential. The basic position that financial crises are preceded andcreated by a credit boom, which has been particularlyprominent in the work of Claudio Borio and the BIS forexample, has partial roots in Irving Fisher’s Debt Deflationthesis, which is further echoed in Borio’s recent concernsabout a balance sheet recession (Fisher, 1933, Borio, 2011b).Borio and his former BIS colleague from the first part of the2000s, Bill White, have also both alluded to sympathies withAustrian Business cycle theory (White, 2009, Borio, 20128).However, this Austrian affiliation is not only vague in termsof cited intellectual influences. It is most evident in theirviews of how lax monetary policy can fuel financialinstability, credit booms and mal investment. It is not reallyevident at all in their thinking and conceptual claimsrelating to macroprudential. Their arguments relating tomacroprudential have focused on the nasty side effects offinancial liberalisation and the ‘procyclicality’ that marketscan display that makes financial systems prone to instabilityand cycles as an endogenous in built structural feature ofmodern financial markets and risk management techniques(White, 2006, Borio, Furfine and Lowe, 2001). Moreover, thepolicy prescription that emerges from this conceptualapparatus emphasising the need for public policy to respond by‘mitigating procyclicality’ with countercyclical measures andinterventions, such as countercyclical capital buffers, isdecidedly non-Austrian, as BIS officials themselvesacknowledge, precisely because it points in the oppositedirection towards some expansion in central bank powers andpolicy instruments (Confidential interview with BIS official).Minsky is also a detectable intellectual influence in Borio’swork, although Borio himself was slow to realise this, as histhoughts on financial instability at first owed more to thework of Charles Kindleberger9. In later iterations of his work,

8 And in an interview with the author9 Apparently the linkage only crystallised in his own mind when it waspointed out to him by UK based IPE scholar Anastasia Nesvetailova.

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particularly in relation to his concept of ‘paradox offinancial instability’, Borio favourably cites Minsky as theinspiration due to his observation that periods of stabilityinduce instability and that the system as whole is likely tobe most vulnerable, precisely because it appears to be safestto a majority of actors encouraging growing risk taking (Borioand Drehman, 2008, p.4). All of this intellectual eclecticism,using useful concepts somewhat selectively undoubtedlyreflects the pragmatic and non-doctrinaire nature of thepolicy maker and the need to offer practical solutions to realworld problems. Nevertheless, the influence of Minsky’s ideasrun throughout macroprudential’s conceptual shell and arediscernible in the work of our other macroprudential pioneers.Indeed, our claim is that Minsky’s work is central to thecurrent working ontology of the macroprudential perspectiveand its conceptual claims, but also the ethical possibilitiesand macro moralities that arise from this ontology (Best andWidmaier, 2006). In the UK context, the Bank of England’s FinancialStability team began to develop macroprudential thinking andmodels relating to the potential for cyclical financialinstability from the mid 2000s onwards, but kept this in-houseas brainstorming work because of the unfavourable climate ofopinion within the Bank, but also in the macroeconomic andcentral banking community more generally. After the crash of2008, it became easier to put the kinds of arguments andanalytical frames they had been developing ‘in play’, butprior to this such thinking was very much a fringe pursuit(confidential interview). One particular intellectualinfluence on this early work at the Bank, was AxelLeijonhufvud’s work on the dynamic properties of complexadaptive systems and his corridor hypothesis (Leijonhufvud,1973, Confidential Interview with official). The basicproposition behind this work was that dynamic systems behavein a self-stabilising range within a narrow corridor of localstabilisation. However, once you move beyond that corridor,the non-stable dynamics of a system become apparent. TheBank’s small financial stability team were beginning to thinkin terms of what happens outside the corridor from the mid2000s, becoming convinced that the dominant strain of DynamicStochastic General Equilibrium (DSGE) modelling had lost sightof the corridor problem, by focusing only on behaviour within

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the corridor (Confidential interview with official.) In termsof big questions, the Bank eventually used these kinds offrames to re-orient their own thinking and the focus of publicpolicy towards the question of what kind of action wasrequired to stay out of the unstable zone. Leijonhufvud wasalso a renowned scholar of Keynes’ focus on disequilibriumphenomena, prior to Minsky treading similar ground with hisfinancial instability interpretation of Keynes (Leijonhufvud,1968, Minsky, 1977.) Leijonhufvud’s later work acknowledgesthe contribution of Minsky as having explained that financialinstability extends beyond just the commercial banking systemand by drawing attention to how long periods without crises,(such as the late “Great Moderation” ) tend to lead to anincreased willingness to assume risk and thus cause the systemto become financially fragile, increasing the prospects of acrash, making the events of 2008 – a “Minsky story”(Leijonhufvud, 2009). From Minsky, Bank staff drew that moneyand banking were particularly prone to instability and selfharming due to endogenous destabilising forces of excessivedebt creation and leverage that could drive themselves totipping points (Confidential interview with official). BothKindleberger and Fisher were also points of reference for theBank’s team in developing their own conceptual thinking.However, as one member of the Bank’s Systemic Risk AssessmentTeam working directly to Andy Haldane during the 2008-10period has written: “Minsky’s view of the role of the bankingsector (habitual reach for yield through riskier assets,increasing leverage, while relying on short-term liabilities)is as good a summary of (the diagnosis of) the newmacroprudential agenda as any” (Barwell, 2013, p.268). Adair Turner has also been influenced by Minsky in comingto his understanding of why building a macroprudential policyregime was necessary. Turner was crucial in leading the casefor macroprudential regulation in the UK context, through theTurner Review (FSA 2009,) which made a strong case foradopting a macroprudential policy framework, but also becausehe nullified potential opposition at the FSA, which had becomea stronghold of efficient market thinking in the UK, untilTurner arrived to take charge of the institution just prior tothe outbreak of financial crisis (Turner, 2011). Turner’ssupport for a macroprudential perspective was in part aproduct of discussion with Charles Goodhart, Avinash Persaud

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and John Eatwell, with the first two having contributed to theGeneva Report (Confidential interview.) Minsky has beenimportant in Turner coming to the realisation that creditcycles have grown in both importance and size as the multiplealternative uses of credit have grown, as leverage grew in thefinancial sector overall and as shadow banking changed thenature of credit creation, hardwiring and turbo charging thedynamics of the credit cycle (Turner, 2013, p.18 -19 andp.24). Turner’s lament is that contemporary macroeconomicmodelling has omitted the role of credit creation and debtcontracts play in the macroeconomy as a whole, including itspropensity for instability, thereby losing the lessons ofearlier work, including Wicksell, Hayek and Fisher, as well asMinsky, but it is the latter’s focus on the feedback effectsof liquidity and leverage cycles that seem of mostcontemporary relevance. The Geneva Report authored by Markus Brunnermeier(Princeton), Charles Goodhart (LSE and ex-Bank of England)Hyun Shin (formerly LSE, Princeton, Bank of England andcurrently Head of Research BIS), Andrew Crockett (former BISGeneral Manager) and Avinash Persaud (ex-State Street Bank),contained no references to any of the figures mentioned here,but rather synthesised the more recent work of its authors.Figures at the Bank of England, remember that this report wasimportant because it re-framed the notion of what regulationwas for in what felt at the time a quite radical way, with itsacademic quasi academic character giving it extra resonance(interview with official). One of the biggest contributions ofthe report was to make the case that macroeconomic analysisand insight had, in the past, been insufficiently applied tothe design of financial regulation and to help rectify thatlacuna. The emphasis in the report was that microprudentialsupervision and macroprudential regulation were differentprofessional specialisms, with the latter the preserve ofmacroeconomists, while the former had increasingly become thepreserve of lawyers and accountants. Notably, contemporaryacademic macroeconomic modelling, as we have seen, had largelyturned its back on credit and financial cycles (Borio, 2012,Goodhart, Tsomocos, Shubik, 2013, Drehmann et al, 2012). Asimilarly important contribution was to identify that thefinancial crashes were not random, but cyclical eventsfollowing booms (Aikman et al, 2010, Drehmann et al, 2012).

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The reading advanced of that process certainly had echoes ofMinsky, with the emphasis placed on balance sheet expansion,lowering costs by accessing short term funding in moneymarkets, and increased leverage all brought about by marketpressures and the pursuit of yield (Brunnermeier et al, 2009,p.xii). Falling asset prices in a price sensitive risk basedsystem then results in over leveraged institutions withimpaired assets, with forced sales of assets, further drivingdown prices, driving up risk and further lowering prices in acorrelated procyclical fashion that leads to bust.Macroprudential regulation was advocated to calm booms andsoften busts. Other prominent themes in the report were therole of liquidity expansions and contractions, maturitymismatches, margin spirals and procyclical dynamics played ingenerating systemic risk. Regulation therefore had to be madecountercyclical, focus on liquidity and maturity mismatchesand be conducted primarily at the national level with enhancedpowers for host country regulators. The idea ofcountercyclical regulation of liquidity would certainly fitwith Minsky’s framework, not least because it would make‘Ponzi style’ financing more difficult and would seem toresonate with Minsky’s idea of a cushion of safety(Papadimitriou and Wray, 2010, p.129, Kregel, 2008). In hisown work Brunnermeir has sought to formally model aspects ofthe five-fold Minsky boom bust framework, with a particularfocus on contemporary amplification and propagation mechanisms(Brunnermeier and Oehmke, 2012). Goodhart has written that hefinds Minsky’s idea that stability breeds instability veryattractive, but difficult to model. Nevertheless, in a recentpaper Goodhart and colleagues model the interactions betweenoptimism and the leverage cycle building on the second theoremof Minsky’s financial instability hypothesis that stabilityinduces optimism and ultimately destabilising leverage levels(Bhattacharya, Goodhart, Tsomocos and Vardoulakis,forthcoming.10) The common strand in this conceptual work onmacroprudential is the emphasis on endogenous financialinduced instability that follows cyclical systemic patterns,which can generate socially harmful macroeconomic costs. Ourpurpose in all of the above discussion is not to make the case

10 It is worth noting that the fourth author on this paper is now working inthe macroprudential analysis team at the Federal Reserve.

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for or develop a Minsky perspective on macroprudentialregulation, as several authors have already moved in thisdirection (Tymoigne, 2012, Esen and Binalti, 2012). Quitesimply it is to point out that in the case of key actors whodeveloped and laid the conceptual foundations of themacroprudential perspective, Minsky ran through and shapedtheir conceptual thinking. We would suggest that the workdiscussed above that provides the conceptual foundations forthe macroprudential perspective can be thought of in terms offour recurring concepts, or claims about the nature of thefinancial world that in turn comprise ‘macroprudential’s’ontology, and provide a firmer basis for productive discussionrelating to the social purpose of macroprudential. The first of these is ‘fallacy of composition’. Fallacyof composition is the starting point in the intellectual casefor macroprudential regulation and the identification ofsystemic risk as a real world phenomenon (Crockett, 2000,Borio, 2011a, p.4, Brunnemeir at al, 2009, p. 11, XV, p.15.)As Borio has explained the objective of macroprudentialregulation is to avoid fallacies of composition, becausefinancial crises are the result of systematic distortions inperceptions of risk caused by fallacies of composition (Borio,2011a, p.2). Fallacy of composition also features prominentlyand plays an important conceptual role in the Geneva Report.The starting point for the Report’s critique of existing pre-crash regulation was that it implicitly assumed it waspossible to make the system as a whole safe by simply tryingto make sure that individual banks are safe, therebyrepresenting a fallacy of composition. The report furtherexplained that, “by trying to make themselves safer, banks,and other highly leveraged financial intermediaries, canbehave in a way that collectively undermines the system.”(Brunnemeir, et al 2009, p.11). A fallacy of compositionarises when one infers that something is true for the wholefrom the fact that it is true for each of the individualcomponents of the whole (Morris and Shin, 2008). In verysimple terms this means recognising that a system is more thanthe sum of its parts, or that the properties of a systemcannot be ascertained simply by identifying the properties ofthe individual agents within that system and engaging in acrude process of aggregation. The broader point here, is thatindividual units and agents alone, possess too little

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knowledge of systemic patterns and dynamics. Therefore, whatmakes sense for an agent through their individual lens ofself-interest and calculation is not necessarily good, eitherfor the system as a whole, or ultimately for their own well-being and economic security, because individual actions cangenerate negative system wide feedback effects. In modernfinance, fallacies of composition arise because of thecomplexities of the cross sectional dimension (finance as acomplex adapative system (Haldane and May, 2011,) – which isthe interconnections and feedback loops between institutions,and the time dimension, which is how perceptions of risk andthe reality of risk change over time (Borio, 2009). Both thecross sectional dimension and its complexity, and the questionof how risk profiles change over time, can combine to createblindness and myopia in individual decision making. Minsky was well aware of the phenomenon through hisscholarship on Keynes, citing him, “it is not a correctdeduction from the principles of economics that enlightenedself interest always operates in the public interest. Nor isit true that self interest generally is enlightened, moreoften individuals acting separately to promote their own endsare too ignorant, or too weak to attain even these” (Keynes,1931, pp.287-288 quoted in Minsky, 1975, p.147). Minsky makesthe point that Keynes used the above reasoning to make anargument against laissez faire, or policy makers doing nothingwhen confronted with systemic market distress, and toemphasise the need for policy makers to guide the economythrough intervention from a macro vantage point (Minsky, 1975,p.148). Seeking to prevent fallacies of compositionconsequently means developing macro mentalities, recognisingthe inherent instabilities of financial markets, and therebymandating a systemic regulator to monitor and respond tosystemic risks from a macro system wide vantage point. It alsomeans recognising that collective social entities and systemspossess an autonomous standing, as the aggregate is more thanthe sum of individual parts and that the world is made up ofmore than just atomistic individuals, but interconnectedsystems of instability that can be harmful to the socialwhole. From such a vantage point an individual’sresponsibility for his or her wealth is always complicated bybroader systemic forces over which they have little control.Within the ontology of the macroprudential perspective

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therefore there is an implicit recognition that public formsof economic action become necessary to stabilize macro-levelprocesses and serve a wider collective benefit and good. Inother words, macroprudential has an inherent implicit socialpurpose that is rooted in its ontology relating to collectivesocietal wide benefits and purpose, that go beyond individualbenefits and appeals to individual rationality. Macromentalities in other words open up macro moralities (Best andWidmaier, 2006), – potential forms of ethical and normativereasoning concerning the social purpose of macroprudentialthat have as yet not been embraced by either scholars orpolicy maker, but are almost certainly a crucial question forthe future of macroprudential regulation and its politics. Space prevents a detailed treatment of the other threeconcepts of: procyclicality – the notion that leverage andcredit expansion in periods of stability due to risingoptimism and the pursuit of yield in good times result inexcessive risk taking and a leverage cycle that moves inextremes in both directions, fuelling extreme movements inasset prices in financial markets in both good and bad times,exacerbating the cyclical movements in the economy moregenerally (Borio, Furfine and Lowe, 2000, Goodhart, 2009,Borio, 2009, 2011, Bhattacharya et al, forthcoming ); herding,partly arising from fallacies of composition where individualincentives result in collective movements with all agentsmoving in the same direction, either buying and selling ofassets as a risk management strategy that follows pricemovements, but also exacerbates those movements, or becauseoptimism develops following a period of stability reflecting a‘paradox of financial instability,’ or where information andcognitive capacity is limited, resulting in investors basingdecisions on market movements and the behaviour of thosearound them (Persaud, 2000, Brunnermeier and Nagel, 2004,Abreu and Brunnermeier, 2003, Tucker, 2011, Borio, 2013,Bhattacharya et al, forthcoming): and complex adaptivesystems, which are less stable than simple systems due to thevast array of interconnections that act to spread instabilityand distress, generating all kinds of unanticipated reactionsand consequences, through what macroprudentailists havereferred to as the cross-sectional dimension (Haldane and May,2011, White, 2014, Borio, 2009). All have partially beencovered in the earlier discussion and for the purposes of the

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argument two points suffice. First, they have all featuredprominently in the work of our macroprudential pioneers as theaccompanying references and a comprehensive reading of some ofour named authors would indicate. Second, all of theseconcepts illuminate the processes and mechanisms that produceendogenous and endemic instability in contemporary fragilemarket based financial systems, resulting in cyclicalvolatility in prices, because fallacies of composition dooccur. Moreover, this instability can generate poormacroeconomic performance and growth and harmful externalitiesfor society collectively. Of course in broad terms this wasthe broad thrust of Minsky’s analysis and overall contribution(Minsky, 1986). The macroprudential prescription is that this necessitatesa range of countercyclical policy interventions, through theadjustment of prudential regulatory requirements to cushionprocyclicality and minimise harmful financial instability.However, rooted in the ontology of the macroprudentialperspective is the claim that due to complex systemicprocesses, modern financial systems are inherently unstableand prone to socially harmful bouts of cyclical instability.That in turn implies that some sort of systemic reform andremoulding maybe required to reduce that instability. Forexample, Haldane and May’s complex systems analysis was atleast in part motivated by and pointed in the direction of,increased modularisation and separation of the financialsystem to challenging the universal banking model (Haldane andMay, 2011). This again relates directly to the social purposeof macroprudential regulation, - the kind of system, or thesocio-economic order to which this regulatory project issupposed to contribute and maintain, or the distributionalprinciples and rationales on which policy intervention shouldbe based and justified. Because macroprudential regulation iseffectively about the macroeconomic effects of the financialsystem as a whole and deals with the relationship betweenfinance and the macroeconomy, it can hardly avoid suchquestions in the long term. It is, as we have sought to show,a systemic mode of thought that seeks to diagnose andinfluence the relationship between the financial system andthe macroeconomy. As an embryonic policy project this wouldsuggest macroprudential will require a sense of what thedesirable nature of that relationship should look like if it

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is to have a sense of purpose that will be politicallyexplainable, justifiable and sustainable in legitimacy terms,- if it is to be well received in the receptive phase ofsocial purpose dynamics. We turn to this argument in the finalsection of the paper. However, given that the ontology ofmacroprudential draws heavily on Minsky, for its macromentalities, and given that we have argued macro mentalities,or ontology gives rise to macro moralities, we would suggestthat Minsky’s broader body of thought may provide some cluesas to macroprudential’s appropriate social purpose.

Minsky and Social Purpose What our macroprudential intellectuals, considered in the lastsection, have essentially done is that they have revisited anolder tradition that placed a heavy emphasis on the dynamicmacroeconomic effects of financial and credit cycles, and usedsome of that work as conceptual foundations for explainingsystemic financial behaviour and dynamics in the currentconjuncture, leading up to and after 2008, through moredetailed dissections of the mechanisms and processes in play.They have used that conceptual apparatus to suggest a range ofpolicy instruments (as yet largely untested) that could beused and experimented with to contain and cushion endogenousinstability. Governments around the world have taken thesesuggestions up and are building macroprudential regimes on anexperimental and incremental basis (Baker, 2013b). Minsky hasbeen the most prominent of scholars from this older traditionin this intellectual exercise and his general notions ofleverage cycles and the phases of booms have shaped themodelling activities of our macroprudential pioneers in theirmore recent academic work (Bhattacharya et al, forthcoming,Brunnermeier and Oehmke, 2012)11. This amounts to a broad andgeneral acceptance of Minsky’s ontology of structural

11 It should be noted that none of the macroprudentialists mentioned herehave gone as far as Anastasia Nesvetailova, an IPE scholar, in explainingthe crash of 2008, precisely in terms of hedge, speculative and ponzifinance (Nesvetailova, 2010). Rather they have accepted the broad ontologyof Minsky concerning the kind of constituent cyclical processes thatcharacterise the financial system and their sources and causes.

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endogenous instability12. In other words, ourmacroprudentialists are not followers of Minsky. They havemerely extracted some of the basic foundational conceptualpremises from his work and applied them to diagnose andexplain the events leading up to and following the 2008 crash,and then used this diagnosis to generate institutional blueprints for reform to contain future occurrences of a similarkind (Blyth, 2002). It is a very limited and selectiveapplication of Minsky, but nobody would begrudge policy makersand their economist colleagues making use of some of thebroader conceptual tools at hand to navigate and make sense ofa highly uncertain situation. However, this also means thatthe macroprudential frame has taken something of a distilled,rarefied, and narrow technical form. The deeper systemicmacroeconomic implications of the financial system’soperation, that the macroprudential frame’s ontology impliesis an area of concern for this perspective, have barely beentouched upon. The macroprudential frame as currently conceivedand constituted, has made significant strides forward inchanging how financial regulation is thought of and conducted,but it currently neglects some of the deeper and foundationalrelationships considered by Minsky, when in his prescriptivemode, including his appreciation of the political and socialelements of financial reform. Somewhat poetically for our purposes Minsky appearedfully aware of the significance of clear articulations ofsocial purpose for the political success of financial reformprojects. In the process he put his finger on the politicaldifficulties of the current macroprudential regulatory projectrelating to social purpose.

To be precise the most important thing in court politics is access tothe mind of the prince. And if economics is too important to be leftto the economists, it is certainly too important to be left toeconomist courtiers. Economic issues must become a serious publicmatter and the subject of debate if new directions are to beundertaken. Meaningful reforms cannot be put over by an advisoryand administrative elite that is itself the architect of the existing

12 For an argument that reports on financial reform in 2009 can be dividedbetween structural and behavioural diagnoses see Seabrooke and Tsingou(2014). Interestingly, the work of all of the figures considered herefollows the structural distinction identified by Seabrooke and Tsingou atleast in the first iteration.

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situation. Unless the public understands the reason for change theywill not accept its cost; understanding is the foundation of legitimacyfor reform. (Minsky, 1986, p. 321).

Interestingly he begins his discussion of policy and agendafor reform, by indicating that such a debate has to begin withthe premise that financing processes introduce endogenousdestabilising forces not well suited to accommodatingspecialized long lived, expensive capital assets (Minsky,1986, p.320). Minsky is at pains to explain that his reformproposals are a logical corollary of this observation. Wewould claim a similar logic could apply given the existingontology of macroprudential draws heavily on Minsky, inbeginning to develop a sense of social purpose for themacroprudential reform project. As a result of this startingpoint Minsky was equally clear that piecemeal approaches andpatchwork changes, (policy making in narrow intellectual andsectoral silos) will not suffice, rather pieces have to fittogether in a workable consistent fashion (p.323). At thispoint Minsky becomes normative and articulates some broadprinciples to guide policy interventions, which he sees as aroute to greater economically efficiency and counteringendogenous financial instability, but also as a step towards amore humane society (p.326). These are full employment(primary) rather than growth, price stability and greaterequity, with all three viewed as interconnected, and bestdelivered through mechanisms that rig markets rather thanaffect the details of the economy (p.326). In Minsky’s ownterms this would imply central banks using the macroprudentialframe and through new macroprudential instruments to be muchmore hands on in guiding the evolution of financialinstitutions, favouring long term stability enhancingactivities, over short-term speculative rentier activities anddiscouraging instability augmenting institutions and practices(p.349). In Minsky’s notion this means prioritizing employmentenhancing financial activities as a precondition for financialreforms aimed at decreasing financial instability (p.350). Ouraim here is not to advance a practical detailed reformprogramme but to point out that an ontology identifyingendogenous systemic financial instability logically leadsMinsky in the direction of a radical reform programme in whichthe state (the central bank) needs to direct, regulate and

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steer the evolution of the financial system towardsemployment and long term, stability enhancing activities(p.359)13. The current macroprudential agenda is clearly a longway from such a prescription, but taking Minsky’s basicanalysis of financialised capitalism seriously and using hiscore ontology, as the macroprudential perspective does,implies the need for a much more fundamental structural reformof finance than is currently being contemplated, not leastbecause many of the trends and problems identified by Minsky,have accelerated hugely since the time of his writing. Our position in suggesting this is not dissimilar to thatof Daniel Mugge and James Perry, who advocate acknowledgingthe challenges associated with what they call ‘reflexivefinance’, urging for its implications to be publicly discussedso that: “a space would open up for regulators to insteademphasize how financial governance has a direct bearing on arange of broader societal domains, and then to design ruleswith an eye to substantive policy goals in those” (Mugge andPerry, 2014, p.20). What Mugge and Perry are implicitlyreferring to is the social purpose of financial reform, whichcannot be ignored in such debates if you adopt amacroprudential perspective that is true to the ontologysketched earlier, or what they call ‘reflexive finance,’because as Minsky illustrates financial reform within aframework that acknowledges endogenous instability is linkedto broader macroeconomic debates and values concerninginequality, employment, demand and sustainability. Our basicposition therefore takes issue with Terry Casey’s recentargument that the appropriate social purpose ofmacroprudential regulation is to preserve neoliberalism byexecuting a technical fix for its principal weakness, itspropensity to generate credit bubbles. Casey’s analysis claimsthe ideas of Hyman Minsky - an opponent of the free market,are the potential saviour of the neoliberal growth model(Casey, 2014, p.10). We are suggesting that a deeper analysisof the ontology of macroprudential and the ontology of Minsky,suggest the ideational content of macroprudential ispotentially incompatible with neoliberalism’s own premises and13 It might be possible to argue that a new central bank directed capitalismhas materialised due to quantitative easing (Bowman et al, 2013), butarguably this involves a form of state welfare for large financialinstitutions potentially the financial sector towards destabilising assetexpansion activities, the exact opposite of Minsky’s prescription.

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prescriptions, where appeals to the primacy of individualincentives and rational expectations generate dangerousdestabilising systemic risks and socially deleteriousfallacies of composition (Baker and Widmaier, 2014b). The above discussion raises the question of whetherthere is any awareness of the issue of social purpose ofmacroprudential regulation amongst policy makers and how thisconnects to issues and objectives of societal and financialinclusion, not just analytically, but also politicallyrelating to the legitimacy of the macroprudential project andthe articulation of social purpose. There are in fact signsthat some policy makers in the UK have given some thought tothese questions in the context of the project ofmacroprudential regulation and financial reform. This has beenmost evident in the speeches of the Bank of England’s currentChief Economist Andy Haldane, and in some of the analysis andmusings of former FSA chair Adair Turner. Turner favours amore expansive and ambitious form of macroprudentialregulation spilling over to include fiscal measures to taxdebt pollution (albeit with a macroprudential rationale), muchcloser management of the quantity and the mix of categories ofcredit, including diverting credit away from property towardsbusinesses to fund new capital investment by specially publiclicensed banks whose sole function is to finance suchactivities, thereby leaning against identifiable biasesarising from free market dynamics (Turner, 2010, p.30). Suchpolicies would result in a much more interventionist publicpolicy regime, that would seek to restructure financialactivities and target some of the diagnosed root causes ofrising debt, reducing the scale of financial transactingtherefore potentially modifying current growth models andsocial settlements (Turner, 2011). Andy Haldane has suggestedthat macroprudential regulation is about making finance ‘theservant rather than the master’14. Such a notion speaks aboutre-structuring some of the power relations at the core offinancialised growth models. Haldane has also talked about theneed for the greatest and most radical financial reformationfor over 80 years, which he also believes is underway(Haldane, 2012). Haldane is also an advocate in the growth of

14 At 1.28.50 in this video http://speri.dept.shef.ac.uk/2014/03/07/video-conversation-andrew-haldane/

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small community oriented banks for lending to SMEs andborrowers within tightly defined catchment areas, inaccordance with a Scandanavian type model, but seems to thinkmarket demand will be sufficient to generate such a shift(Haldane, 2012.) He has also identified financial short-termism and a suction pump or vacuum cleaner effect exerted bylarge financial sectors, that draw human and financial capitalaway from other areas of the economy, in an echo of some ofMinsky’s concerns. Similarly, the economic debate of themoment is of course focused on the effects of inequality ongrowth, but also the impact of the financial sector infuelling but also propping up inequality through thegeneration of debt and credit and resulting in ‘unfair shares’(Haldane, 2012, 2014b Galbraith, 2012, Rajan, 2010, Piketty,2014.) All of these matters are relevant for and linked tomacroprudential management because they relate to the questionof highly liquid leveraged financial sectors and themacroeconomic and distributional effects of such sectors.Finally, at least one highly influential figure at the Bank ofEngland believes that because such questions are being askedand because the analytical lens has changed, we are in theearly throes of a paradigm shift, with macroprudential animportant part of that (Confidential interview.) In short, there are at least some limited signs thatsome voices view macroprudential as a regulatory project thatcan make a more far reaching contribution to a fundamentalrestructuring in social and economic relations, including asthe basis for a reduced reliance on liquidity financeactivities, which in turn would surely fundamentally alter thecharacter of financialized capitalism and its constituentsocial and political relations. In other words, the sense ofsocial purpose that macroprudential is supposed to serve isfar from settled. It is a contested and contingent publicpolicy question, but one that has as yet barely been debated.Policy makers in general, including the two mentioned here,have been inhibited in their public consideration of thesocial purpose of macroprudential regulation to date. Vagueutterances have indicated some awareness of the social purposequestion, but this has not translated into a fully developedsense of that social purpose. In the final section of thepaper we offer a brief explanation for this and some of the

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enduring tensions in the macroprudential project that make thequestion of social purpose its biggest political challenge.

SOCIAL PURPOSE AND CENTRAL BANKSThus far this analysis has focused on the constitutive elementof social purpose. However, the earlier Minsky citation aboutpublic understanding being pivotal to legitimacy is areference to the interaction between communicative andresponsive elements of social purpose. This relationship isparticularly tricky in the case of macroprudential regulation.The earlier analysis indicates that the macroprudentialperspective has been developed by central banks or thoseconnected to the central bank policy community, either via theBIS, or as academic economists with experience of working withand for central banks. Central bank independence during the1990s and 2000s was based on a simple delegation contract(Crowe, 2008, Broz 2002, Keefer and Stasvage, 2003). Sovereigngovernments created mandates for a non-elected agency andassigned control over a particular instrument to meet thatmandate. Such arrangements were referred to as operationalindependence and in monetary policy usually involved a centralbank being given control of interest rates, to meet aninflation target set by the government (Crowe, 2008, Mihailov,2006). Politically inflation targeting worked because it waseasy to understand and had intuitive appeal. On the whole, oneinstrument – interest rates, was adjusted to meet one target,– an inflation target, making it was relatively easy to judgecentral bank performance and creating a basis for some degreeof accountability. Moreover, individuals appeared tointuitively grasp that rising prices can damage their ownmaterial welfare by reducing their purchasing power,irrespective of the actual realities of this. Such an argumentappeals directly to an individual’s own welfare (the benefitsof constraining the rate of price rises in the economy as awhole) in straight forward terms. In contrast, amacroprudential perspective alludes to systemically beneficialand desirable outcomes that are much more difficult tocommunicate and to translate into straight forward individualmaterial gains. Moreover, in the short term at least,macroprudential policy can often appear to run in the oppositedirection by potentially constraining an individual’s accessto credit and assets. Finally inflation targeting also had the

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additional element of some cross class appeal in that those onlowest incomes tend to have their income squeezed most byrising prices, while those at the top of income scale aregenerally most fearful of inflation eroding their wealth. Macroprudential regulation has a political problem in thesense that it does not share these apparent politicaladvantages with monetary policy. The benefits ofmacroprudential relate to reducing the hidden long term costsgenerated by systemic risk and financial instability are muchmore difficult to articulate and communicate in terms of nearterm individual benefits. Moreover, the case formacroprudential regulation rests on a series of counterintuitive claims about the paradoxical nature of financialrisk taking. Again these are much more complex arguments thatare less easy for the public at large to grasp than referencesto harmful price rises. Furthermore, macroprudential policyinvolves interventions to reduce liquidity in the financialsystem in boom periods, (and increase it in contractionaryperiods) making access to credit more difficult for certaingroups at certain times. Countercyclical macroprudentialpolicy can therefore be expected to be unpopular andexplaining its long term benefits in lowering the hidden costsof future financial crises is problematic precisely becausemacroprudential policy is intended to prevent future uncertaincosts that are difficult to calculate and quantify, or toexplain to the public at large. In this sense, both theconstituencies supportive of macroprudential policy are lesseasily identifiable than in the case of monetary policy andthe material benefits of such policies are less easy toexplain. The delegation contract and accountability relationshipis similarly complicated in the case of macroprudentialpolicy. Whereas monetary policy involved a straight forwardarrangement whereby one instrument targeted one objective,there is no ready equivalent in the case of macroprudentialpolicy. The primary reason for this is that themacroprudential perspective views financial risk as systemicdynamic and endogenous, with financial bubbles taking subtlydifferent and evolving forms. One of its primary purposes isto increase the capacity of authorities to respond to emergingfinancial bubbles in an increasingly differentiated fashionwithout having to resort to interest rate adjustments, which

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may have undesirable wider macroeconomic effects, therebyincreasing authorities ‘macroeconomic ambidexterity’ (Haldane,2014a). The potential macroprudential policy armoury is wideincluding: countercyclical capital requirements; dynamic loanloss provisioning; countercyclical liquidity requirements;administrative caps on aggregate lending; reserverequirements; limits on leverage in asset purchases; loan tovalue ratios for mortgages; loan to income ratios; minimummargins on secured lending; transaction taxes; constraints oncurrency mismatches; and capital controls (Elliot, 2011). Notall policy makers will want to avail of all instruments to thesame extent and political, social, institutional and culturalcontext will have a bearing on this. Certainly, one likelyoutcome is that increasingly differentiated and calibratedresponses to changing conditions will require technicallyadept policy makers having plenty of room to exercisediscretion, rather than a one size fits all policy target, ifflexible policy responses are to be designed and executed, atleast during experimentation phases. Given this undoubtedcomplexity, the likelihood of variability, and the currenthighly experimental nature of macroprudential policy it isvery hard to replicate inflation targeting with a single catchall policy objective and mandate, without compromising thesupposed benefit of enhanced ‘macroeconomic ambidexterity.’ All of this means central banks need to give particularattention to how they build and sustain legitimacy bycultivating public support for macroprudential policy. Withoutthis political questions about the discretion unelectedcentral bankers enjoy are sure to follow. As officials fromwithin the broad central banking community have acknowledged,the most difficult challenge facing macroprudential policy isits political economy (Borio, 2013, Haldane, 2013b). Thisrelates to the lack of a readily identifiable constituency andthe fact that macroprudential policy that will involve makinghighly unpopular decisions that run against prevailing publicand market sentiment. Consequently, for leading voices withinthe macroprudential perspective, giving responsibility formacroprudential policies to independent central banksinsulated from political interference and pressures becomes aneven more important and pressing issue than it was in the caseof monetary policy (Borio, 2013, Haldane, 2013b).

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The basic case for having independent central banks incharge of macroprudential policy rests on two claims. First,the public is expected to have a limited collective memory andpreferences for financial stability that will wane the furtheraway we move from specific instances of financial disturbance(time inconsistency) as a societal wide 'this time isdifferent' narratives take hold (Haldane, 2013b, Kyland andPrescott, 1977, Barro and Gordon, 1983, Reinhart and Rogoff,2011). In contrast, central banks as long lived institutionsare said to have a considerable ‘collective institutionalmemory’, enabling them to react accordingly to threats tofinancial stability (Haldane, 2013b). Second, macroprudentialpolicy is more explicitly and starkly distributional (more sothan monetary policy even), which means it is best handled bya politically and institutionally insulated, arms-length bodythat will not be as susceptible to popular pressures fromvested interests. Macroprudential’s more explicitdistributional quality can therefore be expected to provoke apolitical reaction from those adversely affected by suchdistributional interventions. The seeming requirement for macroprudential policy makersto have high levels of discretion is also likely to increasethe political scrutiny and political pressures that centralbanks will be subjected to. In this sense, efforts todepoliticise macroprudential policy by allocating power andresponsibility to unelected central banks, whose claims toauthority are based on technical expertise, actually runs therisk of not only politicising macroprudential policy, but alsopoliticising central banks themselves. In other words,depoliticisation begets politicisation, as macroprudential’sultimate central bankers’ paradox (Baker, forthcoming). To date publicly articulated rationales formacroprudential policies have not gone much beyond iterationsof the importance of financial stability, but according to therationale advanced by central banks themselves for vestingthem with macroprudential powers, the public at large havetime inconsistent preferences and suffer from financialstability myopia (Haldane, 2013b). Simply citing the benefitsof financial stability given the explanation problem, theconstituency problem, the distributional problem and thediscretion/ accountability problem is therefore highlyunlikely to build the legitimacy that the macroprudential

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policy project badly needs if it is to be politicallysustainable. Delegated responsibilities can after all berevoked, especially if as expected by central banksthemselves, public discontent and the political unpopularityof macroprudential policies grows15. The upshot of this combination of issues and difficultiesis that if central banks are to build public support formacroprudential regulation they will have to give attention tohow they can best explain the public and social purpose thatmacroprudential regulation is supposed to serve. Articulatingthe benefits of macroprudential policy therefore, requires avision of what a socially useful financial would actually looklike and some conception of how best to explain and articulatethe kind of macro moralities derived from the ontologydiscussed earlier. For central banks this would requireconnecting their conceptual, empirical quantitative analysesas to how the financial system as whole is constituted andbehaves, with more normative analyses relating to how publicpolicy can and should respond to produce better outcomes forthe system and for society as a whole. This may includereaching verdicts on the appropriate size of the financesector (Cecchetti and Kharroubi 2012, Haldane, 2012), theworth and contribution of certain financial activities tomacroeconomic stability and growth, whether financial activityof certain kinds fuels destabilising and growth retardinginequality (Haldane, 2012, Galbraith, 2012, Rajan, 2010,Piketty, 2014,) and most crucially of all what macroprudentialpolicy contributes to differing answers to these questions16.15 The literature suggests that a combination of legal transparency, checksand balances and political competition in democracies has prevented thedelegation contract being revoked and overturned in democratic states inthe case of monetary policies, (Broz, 2002, Bodea and Hicks, 2014), but thelack of a clear mandate in macroprudential policy and the greaterdiscretion required means that the same institutional incentives and publicacceptance of monetary policy frameworks are unlikely to translate acrossto macroprudential policy for some of the reasons discussed here. 16 Some research (Cecchetti and Kharroubi 2012), indicates that once a bankgoes above 100% of GDP it starts to act as a drag on growth. This becomes amacroprudential issue because such research is implying that once thefinancial sector as a whole goes above a certain size, it starts to crowdout and sucks human and financial capital from other sectors, exercising asuction pump or vacuum cleaner effect, distorting and inhibiting widermacroeconomic performance. Haldane 2012 has touched on some of these issuesin a limited way. Haldane is amongst the more radical central bank voicesbut his dilemma reflects the Bankers’ Paradox. Intellectually he has

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Central banks can present data and evidence that would informsuch a debate, but due to their status and delegation contractrelationships, it is impossible for them to lead such adebate. Politicians across western democracies have not playeda leadership role on macroprudential policy questions to date,beyond initial legislation on policy frameworks andinstitutional design questions, that central banks have fedinto via their testimonies, written recommendations and adviceto various parliamentary committees. Whether due toinhibition related to poor understanding of the technical andconceptual issues surrounding macroprudential, or deeper lyingmotives relating to the short term political advantages of theturn to credit expansion, the question of what the broadersocial and political objectives of macroprudential regimesshould be, has not been picked up by politicians (especiallyin the UK and the US). Yet taking clear positions on suchquestions and explaining this to the public would seem centralto the political future of macroprudential and its long-termsustainability. For the time being macroprudential debate hasremained technical and has been extracted from both its socialand political context and implications. Central banks, perhaps understandably, have been veryreluctant to address these political questions in anythingother than a very implicit fashion, because of fears ofperceptions of creeping politicisation. The most fundamentalpolitical problem to date for the macroprudential project isthat it lacks a clear sense of social purpose. It suffers froman identity crisis in relation to the question of whether itis supposed to be conservative or transformative. Centralbanks have displayed a reluctance to raise the question ofsocial purpose because doing so, would involve moving outsideof their supposed narrow technical functions and remit. Takingexplicit positions on these questions would make authorityclaims based on technical expertise, above, beyond and outsideof politics, look hollow. Central banks face clear

challenged the status quo and called for a great financial reformation, thebiggest in 80 years, but he has stopped short of sketching a view of what‘socially useful banking’ would look like and how macroprudential cancontribute to its delivery. Inhibition and caution is the result of arecognition that professionally as a central banker there are limits to howfar he can go in making reform arguments for reasons of professional normsand credibility, and the entire authority base of central banks based ondelegation contract arrangements – the bankers’ paradox.

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disincentives in articulating a sense of social purpose. Yetat the same time, based on the analysis developed here, in theabsence of a sense of social purpose, macroprudentialregulation’s long term political sustainability looksquestionable. Central banks face a dilemma. Failure to buildbroader rationales and constituencies will damage theircapacity to perform their new regulatory role, yet cultivatingconstituencies and a broader sense of purpose for thisregulatory project potentially erodes their claims totechnical impartiality and non political authority. Theprimary danger from a central bank perspective is erosion ofhard won independent status. One important contribution to the literature on postcrash political economy had pointed to a problematicdisconnect between technocrats and politics that candisempower reform, lamenting that unlike social reformers froman earlier era such as Keynes and Beveridge, central banktechnocrats have not been able to cultivate links to thepolitical process and build constituencies of support thatcould in their words ‘democratise finance’ (Engelen et al,2011, p.189.) This is an important point because itilluminates the political tension at the heart of themacroprudential project. Critical reflexive thinking and databased critiques of the existing system and practices, wereimportant in opening up the debate about financial reform andestablishing the macroprudential frame in the early part ofthe crisis. Since then the lack of a sense of clearlyarticulated social purpose makes it likely thatmacroprudential will by default become about systemmaintenance and preservation, - focusing on a limited andvague definition of enhanced financial stability andresilience, but doing little beyond this from a macroeconomicperspective.

CONCLUSIONWe have made a case in this paper for a rehabilitation ofsocial purpose and set out an agenda for this. We have alsoargued that the politics of macroprudential regulation willrevolve around the question of social purpose. With this inmind we have explored the ontology of the macroprudential

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perspective through the work of key macroprudential pioneers.This ontology we have suggested points us in the direction ofmacro moralities and the need to connect financial reform tomacroeconomic performance and inclusion. Minsky provides someclues as to the kind of logic best adopted, albeit littleguidance on specifics in the current moment. In the finalsection of the paper we have argued that from a politicalperspective the macroprudential project requires a sense ofsocial purpose that is plausible and intuitive to the publicat large and therefore politically saleable. The difficultquestion facing macroprudential regulation, we have indicated,is who should articulate and develop this sense of widersocial purpose. Contemporary political and regulatory systemshave been characterised by an effort to create a cleardemarcation and divide between evidence based technicalanalysis, and big picture normative reasoning about adesirable society and the values and principles on which itshould be based. In reality such divisions are not clear andthe boundaries are always blurred. In the UK context,technocratic voices who have been intellectually radical suchas Andy Haldane at the Bank of England and the former FSAchair Adair Turner have embodied this dilemma. Both havecritiqued socially useless finance, referencing unfair shares,arguing against financial short termism and highlightingmarket failures, but they have also been constrained andinhibited and have yet to fully flesh out a clear vision of adesirable financial future (Haldane, 2012, 2014b, Turner,2011, 2013). This dilemma reflects the key tension at theheart of macroprudential regulation. It has a regulativefunction. That is to say it seeks to regulate and correctfaults in the existing system, yet there is also anunderdeveloped transformatory logic in the ontology ofmacroprudential regulation which alludes to the need for agreat reformation of finance for macroeconomic reasons ofsluggish growth, rising inequality, poor productivity,financial crowding out, poor wages in the non financialsector, brain drain, impatience and short-termism (Haldane,2012). Technical instruments including a range of taxes,licensing arrangements, prohibitions, caps on aggregateactivity, and sliding adjustable capital requirements todirect finance into areas neglected by current market short-termism, by creating publicly licensed infrastructure,

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research and development, and green technology banks have beenalluded to and can all be justified using a macroprudentialframe that illuminates how active liquid financial sectors cancause wider macroeconomic harm, crowding out alternativesectors (Haldane, 2012, Turner, 2013). In this sense, anydebate about the social purpose of macroprudential has to beled by evidence and research into the dynamic processesalluded to above and it is here that central banks can informthe debate on social purpose, but as the analysis here hasindicated they cannot deliver it alone. The analysis here is essentially illuminating thatthere are political limits to technocratic led change. Thepostcrash political economy of the early part of the twentyfirst century is characterised by a dilemma, or a tension.Those who have the evidence, analysis and understanding toadvance a sense of social purpose for post-crash financialreform efforts are located in institutions that cannot be seento be doing that kind of thing. While those located ininstitutions that can do that kind of thing, such as inlegislatures and political parties have to date lacked thecapability, understanding and inclination to do so. Debatesabout the purpose and end product of reform efforts in themainstream party political arena, in virtually all states havebeen concerningly thin to date. A reading of the history ofthe interwar period and of the political economy of the 1930s,and the 1970s, quickly reveals that political parties have notbeen performing the transformative role they did in theseearlier eras. During these periods fundamental questions aboutthe lessons from the crisis, the role of regulation and thestate in the economy were thoroughly debated and new ideaswere embraced in the name of social and politicaltransformation, as parties acted as mechanisms for themediation of competing ideas and the accommodation ofpluralistic interests (Blyth, 2002, Hall, 1993). The reasonsfor contemporary political parties current muddling throughapproach based on limited thinking and a superficial soundbite approach to the crash of 2008 are the subject of anentirely separate research programme, but to date this has hadan inhibiting effect on macroprudential regulation. Politicalleadership is essential for macroprudential regulation interms of defining social purpose, but has to date beenminimal. The political economy of macroprudential regulation

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therefore points to an uneasy growing co-dependence betweencentral bankers and political leaders. As macroprudentialregulation continues to evolve in its experimental phase itwill require ongoing and more intense forms of collaborationand communication between politicians and central bankers thanwe have been used to, with highly uncertain consequences.

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