Is the neoclassical belief on financial system still valid?

Aug 8, 2018 by

During this session we have learned about the role of finance, money and debt in the economy. According to Mr. Wahl, finance is a kind of “neural” system of the economy, because without it the modern economy would not function. Mr Wahl also showed us how we could carry out a speculation opportunity if we knew the future exchange rate. Besides, finance is considered as an intermediary in the economy, but in reality its main aim is to maximize profits first and social needs come second.

During the presentation we have learned the definition and forms of money. We have received information on different functions of money. Money functions as a medium of exchange, a measure of value and storage of wealth as the mainstream economics suggests, but he came up with an additional function, which is tradeable good only for speculation. Money is an instrument of power and basically represents a social contract. In his presentation he described the role of a bank as an intermediary and applied it to development of credit, which he does not necessarily considers as bad. Good credit allows intensification of economic development.

Afterwards he described the globalization of financial markets, which was caused by general trend of deregulation.The aforementioned trend has created basically one global market. This global market has lead to a huge increase of the financial sector in the global economy, where 5 trillion dollars of capital flows are exchanged in financial markets per workaday and less than 2% of them goes to Foreign Direct Investments.

What we also learned is that deregulation leads to power asymmetry in favor of the financial institutions, increased inequality and erosion of democracy. The most important consequence of this  is the creation of financial crises, such as the one that happened in 2008. As a result, we could see massive debt increase among the developed countries. We expected Peter Wahl to clarify who exactly bore the cost of savings of banks of 4.4 trillion dollars. It was clear to us  that the governments had to intervene to save the banks. In any case, we do not doubt that this intervention happened and this proved that the neoliberal belief, that financial markets would be efficient and could regulate themselves, was wrong.

What we would “take home” from Peter Wahl’s lecture was that speculation differs from investment, where investment is responsible for producing added value in the future, whereas speculation creates only price volatility and rent extraction and not added value. As a result, a new system has emerged, where financial markets are dominant over the real economy and this creates further inequality. Later on, Peter Wahl elaborated on credit and securitization, where in the new system toxic assets are created as well as high frequency trade, which are used for banks to increase leverage.

Finally, he proposed principles on how to transform banking, for example by simplifying regulation and reducing complexity of the financial system and set up democratic control of financial markets. However, there is not one single solution, but many tools are needed. We believe that this perspective is true, since we live in a complex world and someone has to understand this complexity, especially of the financial system, in order to try to contribute to a change, which will aim at making the financial sector serve the public good.


Written by: Jakub Viater and Ioannis Milioritsas

Based on the lecture by: Peter Wahl (“Understanding Money, Banking and Financial Markets”)