Understanding the Money, the Financial System and its Institutions

Aug 10, 2020 by

Explaining money, banking and financial markets in about half an hour is ambitious, yet Peter Wahl made the attempt to fulfill the task in order to lay a foundation for the second week of AEMS, which will deal with “Society, Money and the Environment”.

To begin with, Peter Wahl explained the basic meaning and functions of money, banks, and credit. Afterwards, he already dived into financial markets and some of their mechanisms. Thereby, he highlighted the instability of financial markets by drawing from Keynes “casino capitalism” analogy and illustrative figures, like over 80% of the transactions in the financial markets consisting of pure speculation. Next, Peter Wahl embedded his introduction of the basics of financial markets into the current context by explaining how the rescue packages given to stimulate the economy after the COVID-crisis carry the danger of exacerbating the pressure for governments to protect banks that become “too important to fail” and therefore perpetuate the vicious circle of financial state capitalism. Hence, he ended his lecture with a call for financial reforms.

The second lecture with the purpose of preparing us for the upcoming week was given by Kurt Bayer, who made another ambitious attempt to explain international money institutions in his lecture. First of all, Kurt Bayer made us aware that monetary institutions are always a reflection of the political context. Therefore, he did not only explain the official purpose of existing institutions, which is mainly to provide a currency system and provide a global safety net, but also showed how they reflect global power relations and keep the economic system in place.

Kurt Bayer named the BIS, the IMF, Multilateral Development Bank and the G-7, G-20 or similar coalitions as important international monetary institutions. Apart from explaining their particular characteristics, he also issued criticism on the IMF and the financial system in general keeping up a neo-liberal system which only recently started getting more concerned about environmental and social problems. He ended his lecture wondering whether – with or without Corona disrupting the economic situation – the neoliberal model is at an end due to its lacking sustainability.

During the discussion with Peter Wahl as well as Kurt Bayer, there was not enough time to answer all questions asked by students, yet a variety of topics was covered. Initially, the meaning of some terms, i.e. arbitrage and leverage, was clarified. Afterwards, Kurt Bayer explained the basic function of the WTO and its “most favored nations” rule, yet also pointed out that currently the institution does not progress in further opening global trade and struggles to fix its appellate body. Next, both of them tried to answer the question of where money is created, referring to its nature of being a social contract but also how central banks are the “masters” of money, while, yet, any bank can create money by simply giving a credit.

Afterwards, the recent topic of the rescue packages due to COVID-19 was addressed in connection to the question of what will happen with the high debt caused by it. Peter Wahl explained that it is unlikely that all of it will be paid back after austerity measures; instead, central banks have already started introducing tools like buying back debt titles that will, together with low inflation, lower the debt. Also, he pointed out how central banks of countries with strong currencies are able to cancel out their own debt whilst this is not an option for less stable economies. This led to the topic of forgiving debt of developing countries. Due to COVID-19, a large number of developing countries has turned once more to the IMF for loans, which is as an institution unable to forgive debt. Yet, if many countries go bankrupt it will not only turn into a humanitarian crisis but also affect high-income countries so the question whether debt will be forgiven again remains open. Next, Kurt Bayer explained why a banking union in the EU with a deposit insurance scheme could break the doom loop of countries being in too much debt to get new credits. Yet, Wahl mentioned that it currently seems unlikely for this to be introduced any time soon.

Apart from this, the conversation circled around different currencies and many interesting points were raised: There are many ideas of what could be an alternative to floating exchange rates, e.g. semi-fixed exchange rates, special drawing rates or only one single currency worldwide. These might be able to solve the current injustice of the US having an advantage through being able to control the most important currency in the world.

For their final statement, Peter Wahl and Kurt Bayer were asked to explain whether they think that reforms are likely to happen to the banking system. Unfortunately, they both gave a pessimistic outlook: Kurt Bayer argued that obvious already before COVID-19 it has become that the current financial system is instable and often goes against what would be good for society. Yet, he reminds that the system also serves the interest of some powerful actors which will do their best to keep it in place. Peter Wahl confirmed this, reminding that finance and money are mostly about political power. He added that what would be needed in order to overcome the crisis of instability in the financial system – as well as most other major crisis of humanity like COVID-19 or climate change – is global cooperation. However, currently the international community is rather drifting apart.

Written by: Luzie

Based on the session with Peter Wahl and Kurt Bayer during the AEMS 2020.