Financialization’s new normal and Keynes

This paper contributes to the literature on how finance works under financialization, focusing more narrowly on the stock market. Stock market boom and bust cycles and sluggish responsiveness of real investment to equity prices have been salient characteristics. Together they raise the question, how overvalued equity prices self-correct and what can stall this process? The paper turns to Keynes’s ideas from A Treatise of Money (TM) on finance that complement his well-known stock market insights in Chapter 12 of his GT. Of special interest are the roles played by financial sentiment and bank credit in equity mispricing in his earlier work.