Understanding the Basics of Financial Markets and Responsibilities of Global Monetary Institutions

Aug 5, 2019 by

Our first lecturer of the day, Peter Wahl set themselves the high goal to explain in 45 minutes how financial markets work.

Starting with why finance matters, they gave an example of someone trying to become rich when lending in currency A, exchange to currency B and after some time reverse the procedure. With a high drop in value of A relative to B one could make a profit (known as money market operation). In our opinion, this is not really the true sense of finance but a side effect that under certain circumstances is possible in the current system. As we see it, the main task of finance is to enable undertakings, which require a relatively large amount of resources, by splitting risk across various parties. For example, enabling companies to create production facilities, which require a large amount of capital or/and labor.

Then Wahl introduced the three functions of money (value, storage, exchange) and to our surprise a fourth function: being a tradable good. We think that the 4th is an interesting observation but only shows up in economies where multiple currencies exist.

They emphasized that credit and debt always coexist. One cannot be present without the other. They challenged us with the myth about the unpayable debt of future generations, as the credit to pay back the debt would always exist. To our understanding this is true but the hard point to make, is to find a legitimization of why a creditor should cancel the debt. The lack of this legitimization is probably a reason why it is so hard to establish laws which redistribute from the creditor to the debtor.

Besides the obvious task of banks (payment services, deposits, giving out credit) Wahl also mentioned the trade of securities which are bonds, debentures, notes, options, shares, and warrants but not insurance policies, and may be traded in financial markets such as stock exchanges. We also heard that banks issue money by giving out credit. When giving credits it can come from various sources such as deposit, banks own reserve or ex nihilo.

Further, Wahl tried to distinguish the difference between investment and speculation. Investment is being driven by continuous flow of benefits because of added value in the product, or accumulation of production capital. Contrasting, the main driver of speculation is the money gain from price volatility only; without any interest for what the money does in the real, physical world.

Their final statement was that civic society has to gain back control over finance. During the discussion session the proposal was to achieve this not by trying to change the system from the inside but rather with social movements and pressuring the ones in power to do so!

Our next lecturer, Kurt Bayer, started explaining how the initial idea of trade was to make life more comfortable in the sense of security, diverse commodities and resources distribution. Since trade spans worldwide it needs institutions that provide a medium for exchange to facilitate it over whole nations. They clustered three monetary systems which they claimed can solve this problem (fixed rates like in the Eurozone, pegged exchange rates and floating exchange rates between the Euro, US-Dollar and other currencies). Nevertheless, with these currency systems trade did not improve living conditions for all states. Some even lost under the economic power of others facing very harmful and unjust conditions.

Therefor financial institutions like IMF, BIS, World Bank, Development Banks were established. All of them had to face a lot of criticism in recent years concerning their lack of cooperation, the separation of monetary and development policies, as well as their slow recognition of environmental and social issues. Although according to Bayer this led to some consultancies with NGOs and research into alternative solutions there can hardly be seen any substantial changes so far.

In the end their main critique on current financial institutions was that nationalism and protectionism works against international cooperation and endangers solutions to global public goods problems. Vice versa, multinational trade (considering its initial purpose and with right implementation as a just and ethical system) might help to strengthen cooperation among nations and can reinforce peace.

Written by: Inge Siegl & Banafsheh Zaker

Based on the lectures “Understanding Money, Banking and Financial Markets” by Peter Wahl and “International Money Institutions” by Kurt Bayer held during AEMS 2019.