Do you also believe that your credit
cards are cursed -- and that an all- powerful financial sector
controls our existence? The overwhelming might of the
financial sector is increasing - and more crises are on the way. The financial sector and the real
world continue to drift apart -- so the next crisis will likely be
worse than those that came before. Finance ended up becoming the master
of the economy, not the servant. How could you not be angry at the
way in which tens of millions of people were thrown into misery
and unemployment, and the banks, which guaranteed the incomes of the
tiny elite, were subject to such generous rescue? What will future crises look like?
It's impossible to say, but a crisis always hits the weakest the hardest. Is this the end? Things don’t look so good... This is the story of a divorce, the
end of a marriage of convenience between the financial sector and
its customers, between average people and bankers. Over the last few years, trust
between the two sides has declined, and they are further apart than ever.
But the financial sector is still doing business as before, and its
influence on the global economy continues to increase. Many
believe that this imbalance is responsible for the numerous
crises that plague us today: The 2007-2008 financial crisis, and
the austerity policies that followed -- political crises that have shaken
democratic societies -- and the climate crisis that's
now making headlines. The financial sector controls billions
of dollars, and that can have a serious negative impact on large
numbers of average people. Has the financial world
taken us hostage? When did the politicians lose
control of the financial system? And will we be able to
deal with the next crisis? Let's see what sort of options are
available. An alternative system is not only possible; it will be
essential if we are to master the challenges that lie ahead. The financial sector is enormously
important for any economy. Think of the financial system as a human
body: capital resources are the white blood cells that bring oxygen
and nutrients from one part of the body to the other. They distribute
these materials throughout the system. The original function of this
sector was to finance a country's economy -- and to provide support
for individuals, companies, and institutions in times of
financial difficulty. Let's say your car or refrigerator
breaks down. If you don't have the money for a new one, you can
borrow it. The primary task of the financial sector is to
make that money available. In addition, it also promotes
investment into production. The profits that result are then used
to repay that investment. So the financial sector helps people and
businesses to invest for the future. That's one of the fundamental and very
positive aspects of a market economy. There's no finance without credit,
and no credit without a banker. Ah yes, the good old bank advisers.
They manage our savings, and provide us with financial
advice and support. To understand how a bank works
today, we have to move away from old ideas. Banks don't just
manage the money of average people and then lend it to
investors who take risks. Rather, banks borrow money from other
market institutions, and re-invest it. That's how banks have become
more and more dependent on the financial markets. And as a
result, banking has become more unstable, more prone to booms
and crashes; and the banking sector now has a larger presence
in our society than it used to. Finance in the 20th century became
an end in itself. Essentially, money started moving in these
never-ending loops, and financiers became... made money by using
money to make more money. If you just let bankers and financial
experts do what they want, the same thing always happens: they
compete with each other, and take huge risks. That creates a
speculative bubble. Then the bubble bursts, and banks run
out of money and stop lending. Businesses and consumers can't get
the loans they need. Loans are the life-blood of the economy --
and if that blood stops flowing, there will be a collapse. In other words, a financial crisis. To help prepare for future crises, it
can be helpful to take a closer look at the past. The first major documented
financial crisis was the so-called "tulip mania" in Holland during the
17th century. Tulips had recently been introduced in Europe,
and became quite popular. A speculative bubble developed
when future contract prices for tulip bulbs went through the roof. The value of a single tulip bulb
eventually reached that of, in succession, a cow... several pigs...
a mansion... And finally, a yacht. The speculation continued until
February 1637, when the bubble burst. People figured out that it
was insane to pay that much for a tulip bulb, so they stopped buying
-- and the price collapsed. Boom-and-bust cycles came and
went regularly over the next several centuries. But they always
followed the same pattern. A financial "wizard" discovers a new
way to make money, a speculative bubble forms and then bursts --
and a financial crisis follows. Speculation in stocks led to the
Wall Street crash of October 1929, which in turn signaled the start
of the Great Depression. US unemployment eventually
reached nearly 25-percent. The president at the time - Franklin
Delano Roosevelt - sought to restore confidence by regulating the
financial sector, including the banks. A well-regulated financial sector
will help to keep an economy stable. From the 1850s until today,
there were numerous financial crises in various countries around
the world -- with one exception: there were almost none between
1945 and 1975. Why is that? Because all countries followed
Roosevelt's example from the 1930s. They imposed regulatory
measures on the banks, both at the national- and at the
international level. So over a period of about 30 years, there
were almost no financial crises. So everything was fine. Order was
restored in the financial markets. Economies were stable
and citizens could enjoy the benefits of prosperity. That is, until the global financial
crisis of 2007-2008. Banks extended credit hand over fist,
politicians looked the other way, speculative bubbles
formed -- and then burst. What was happening in finance
before 2007 was that you had a tiny tribe of specialists who
controlled a technology that nobody else understood, to do with a
re-packaging of financial instruments. And because they had sole control
of this technology and this knowledge, and because they spoke
a language which was completely incomprehensible to anyone else...
I used to say they spoke 'financial Latin,' like the priests in
the medieval Catholic church. And because this language and this
knowledge was making them very rich, they became incredibly
arrogant and incredibly dominated by what I call 'tunnel vision.' They
simply couldn't see out of their tiny little worlds, and couldn't see the
consequences of what they were doing. Their methods are so complicated
and incomprehensible that the regulators just let them
do whatever they want. Traders used a practice called
"securitization" to sell packages of debt -- including SPVs, CDOs, and
CDSs. Many were based on sub- prime mortgages. The market soon
became flooded with these debt products, and eventually collapsed.
But how exactly did that happen? How did these "Wolves of Wall
Street" get away with it? In the 1970s, the 'theory of
efficient markets' became increasingly popular. It says
essentially that markets should be allowed to regulate themselves.
According to this theory, markets will operate more efficiently,
because those who actually work in the financial sector know the
markets better than government regulators do. Even the most progressive lawyers,
whether in legal academia or in law firms, or the students that we teach,
for a long time have fallen for the belief. So the goal was to make
markets more efficient. The goal was to ensure that shareholders and
corporations can really control what’s going on. And so if you give
them all the right incentives, then the right outcome will happen. But that didn't work. Why? Because
these periods of euphoria and crisis are based on a kind
of collective irrationality. The financial players are no longer
able to work out solutions among themselves, so outside
intervention is required. The sub-prime mortgage crisis shed
light on a dark corner of the financial sector: traders were
making deals that were so risky that they threatened the U-S economy. The U.S. and Europe were rocked
by this crisis. Those responsible were facing possible criminal charges.
And the world leaders who'd done little to prevent the collapse
then promised to steady the ship. We brought the global economy
back from the brink. We laid the groundwork today for long-term
prosperity, as well. “Long-term prosperity" is an
ambitious goal even in the best of times. The leaders agreed to ban
extremely risky transactions, and ordered banks to increase
their emergency reserves. Their top priority was to rescue the
world’s banking system. Central banks would play a key
role in this effort. The U-S Federal Reserve fired up
the printing presses, pumping more money into the ailing economy. Central banks, in their current
form, have only been around since the end of the 19th century. Their
primary function is to keep prices and currency stable - to guard against
inflation and stock-market crashes. Central banks are the link between
politicians and the financial system. These institutions regulate that
system so that it doesn't exert too much influence on society. The European Central Bank started
lending huge amounts of money to individual banks, because they
were too nervous to lend to each other. And while the ECB dealt
with this situation, more trouble appeared on the horizon. In Europe, the global financial
crisis was followed by a second emergency, and this involved the
European currency. It exposed weaknesses in the financial system
as a whole, and problems with sovereign debt in particular. It
started when Greece revealed that its finances were in worse shape
than previously thought. This crisis spread throughout the Eurozone, and
raised serious questions about whether the common European
currency could survive. Investors in Italy, Spain, and
even France panicked, and tried to dump their government bonds. ECB president Mario Draghi then
made a policy statement that would become famous. Draghi soon became known as
"Super Mario" for his role in dealing with the crisis. He
dismissed speculation about the end of the Euro, and the solvency
of individual EU countries. Within our mandate, the ECB is
ready to do whatever it takes to preserve the Euro. And believe me, it will be enough. Draghi promised to take all
necessary measures to protect the Euro, and to put an end to
speculation in the financial markets. The politicians had failed
to stop it, so the ECB had to step in to try to keep things
from getting even worse. It was a highly unusual move --
and some EU states criticized it, especially Germany. There were
questions about whether this decision was compatible with the
ECB's mandate. But others said it was the most successful monetary
policy measure ever, because it calmed the markets -- and the
policy itself was never fully implemented. That's what's
so unusual about it. By law, the ECB does not have the
right to finance government debt. At the time, Draghi said, 'I'm not
financing sovereign debt; I'm buying promissory notes from
investors.' But he was obviously financing the sovereign debt of EU
states, through the ECB. His goal was to curb inflation, promote
economic growth, and create jobs. To sum it up, the central banks
in Europe and the US spent huge amounts of money to bail out the
banks, and restore some order to the financial sector. And what was the result? Did all
that new money strengthen the global economy? It did not. In
fact, it did just the opposite. Government debt soared as a result
of the crisis. Central-bank balance sheets will never look the same again.
Interest rates have plunged to zero. We have the threat of, as it
were, the 'zombification' of a large part of the corporate sector,
which is being kept alive by extraordinarily low interest rates.
And growth rates and productivity growth rates have all fallen very
considerably since the early 2000s, and really quite dramatically since
2008. And so, we're left with this deeply uneasy sense that we don't
really quite understand the world that we're in. We know it isn't the
apocalypse, but quite what kind of a world it is very unclear. And there are fears that a new
financial crisis may strike soon, because real reforms
have not been imposed. There have been no major changes
in the way that banks operate, and no serious changes in the structure
of the financial system. So the same situation that led to the
financial crisis of 2007-2008 is still in place. No-one has addressed
the problems caused by financial imbalances. So instead making a
fresh start, the politicians just poured more money and financial
instruments into the system. The measures that were taken did
not go far enough. Most important, they did nothing to address the
growing divide between the financial sector and society as
a whole -- so now, part of that sector no longer serves society, but
pursues its own interests exclusively. Many average people feel betrayed.
Their tax money helped to bail out the banks, but consumers
got nothing in return. The losers are the populations
of Europe and the United States, which suffered the immediate effects
of the fallout, the ten- to eleven million American families
that lost their homes. This is the largest forced movement of
Americans since the Dust Bowl of the 1930s. And in the Eurozone,
even more acutely, the millions of people who were driven into
unemployment between 2008 and 2013-2014, and where government
policy really failed to respond in a way which would have enabled
them to escape that. People don't realize how much the
financial sector affects their lives. They may experience some aspects
of it, but they don't realize how much damage a financial
crisis can do. And we keep having these crises because no-one wants
to push through reforms -- and we all pay a price for that. Why has our financial system
become so unstable? We seem to have learned nothing from previous
crises. The regulators seem powerless to fix things -- and the
next financial disaster could already be in the works. After the financial meltdown of 2007
- 2008, the politicians focused most of their efforts on regulating
the banks. But other sectors of the economy may be on shaky
ground, as well. After the crisis, the authorities
imposed strict regulations on the banks. This was expensive and
time-consuming for the banks -- so a lot of them shifted some of
their transactions to non-bank institutions, where there's less
regulation. This is called the 'shadow banking' sector. But that
term is misleading. These non- bank companies don't really
operate 'in the shadows.' They include insurance companies and
investment funds, and they pretty much regulate themselves. A shadow financial system, where
traders -- far from the prying eyes of regulators -- buy and sell all
kinds of financial products. And in broad daylight The shadow financial sector has
become a bit more transparent in recent years, but huge sums continue
to flow into it. A lot of this money is parked in tax-havens, which
are often difficult to trace. Tax havens are opaque. No-one
knows how they operate or how they finance themselves. Tax
havens create more risk in international finance, and
that can lead to instability. One of the ironies of what's
happened in the last decade is that the shadow banking sector was a
crucial reason why the last financial crisis happened. And essentially,
you'd think that because of that, in the years after the crisis, regulators
would have shut down the shadow banks. And there was some decline
initially. But in reality, the shadow banks are actually in some ways
becoming more, not less, important. Why can't the regulators do
more to rein in these financial institutions? The answer to
that question is complicated. There are several reasons why it's
so difficult to impose reforms in the European financial sector. First,
financial institutions have to be able to compete on a global basis.
Banks in France or Germany always keep an eye on what's
happening in the US or Asia, and adjust their market strategy
accordingly, so that they can compete effectively. And in the U.S., we're seeing
a trend toward the easing of regulations on banks. This would
allow them to take more risks, which would give them an
advantage over European banks. So we need a global solution.
All banks and other financial institutions should
play by the same rules. The second big problem in Europe
is that financial-sector lobbyists have a powerful influence
on the politicians. At the European parliament in
Brussels, there are three times more lobbyists than politicians.
These lobbyists are often recruited, at handsome salaries, from
government and the private sector -- so they know quite well
how the game is played. When politicians, at the national-
or European level, are writing legislation, there's a lot of input
from experts. And when it comes to legislation that affects the
financial sector, the 'experts' are often people who work at banks or
investment companies. Financial institutions consider themselves
quite innovative: they keep coming up with new ways to make
money, and they're often one step ahead of the regulators. Let's be honest: average folks tend
to take the word of experts at face value. That's especially true when it
comes to the financial sector. Most people don't take the time or make
the effort to understand what's really going on. That
needs to change... First of all, we have to take the
mystery out of finance. Bankers and others have to stop using
jargon, so that average people can understand what they're saying and
doing. The financial sector has to become more transparent. Today, more and more people are
taking an alternative approach to finance. They're generally opposed
to the big banks, and they encourage people to learn
how the system works. Little by little, people are trying
to take the mystery out of the financial sector. They're trying
to approach the subject in a way that's more interesting
and less technical. The financial sector affects the lives
of all of us -- our environment, our food, our health-care system,
and our children's education. That's why we need to have a say
in how that sector operates. We have the right to demand
accountability from these people. Why do the Eurocrats and the
politicians in the Brussels bubble behave the way they do? Why do
they make policy decisions that seem completely absurd to us?
They all stick together, and they often don't leave that European
bubble at all, so they have no contact with the outside world.
That's why their policies seem completely detached from reality. The words 'banking and finance'
make a lot of people feel insecure. They don't understand the technical
terms, and they can't talk about it with any level of expertise. But we have no choice. We have to
get involved with the financial sector -- and as quickly as possible.
Future developments could have devastating consequences for the
global economy. For example, there's been a big increase recently
in social inequality. And many middle-class Europeans and
Americans who were hit hard by the last financial crisis
are still angry about it. There's this sense that this is
no longer an economic system that can really maintain the plausible
fiction that we're all in this together, that we're all basically in
the same boat, and that economic growth raises everyone's standard of
living in a way, which is broadly speaking similar. That's just a...
counter to fact as an experience of the last 20 to 30 years. The 2007 financial crisis fueled the
protests and the political anger that are spreading across Europe
today -- because those who caused the crisis actually benefited from it. The huge amount of money that was
pumped into the market... Not this market... This one... did not
stimulate the economy; it just prompted more speculation. People who live in countries like
Greece, Spain, Italy or Ireland are growing increasingly angry --
because of the harsh austerity measures that were imposed there
after the Eurozone debt crisis. Those countries accepted those
measures in return for loans from the ECB and other EU countries
to help them get their economies moving again. So the bank bailout added to the
debt of governments, corporations, and individuals. It also undermined
the confidence of average citizens. That's one of the big lessons of the
global financial crisis. Banks and investment firms took big risks.
They said, 'If it goes well, we'll make a huge profit -- and if it
doesn't, the taxpayers will get stuck with the bill.' The authorities
have to deal with this imbalance, and crack down harder than they
did before. Right now, banks and other financial institutions are still
making risky investments, because they know that they won't
be called to account. That certainly appears to be the case. Bankers hardly ever face criminal
charges, and convictions are few and far between. It seems that society is prepared
to tolerate this kind of behavior. Average people pay their taxes.
But the big banks promote tax- evasion schemes for the wealthy. To a certain extent, it’s been a story
about the elite protecting itself. So most of these products in
themselves were not actually breaking the law, because
they were designed to exploit weaknesses in the law quite
deliberately -- and they were designed to exploit weaknesses
in the regulatory rules as well. But when you look at a, like, a
contract for an asset-backed security in the 1970s, it might have,
like, four or five risk warnings for investors. When you look at a
similar document in, you know, in 2007 just before the crisis, um, it's
now 300 pages long rather than 50 pages long and it might have 60 or
70 risk warnings. So the lawyers, once they figure out that something
might be risky, they'll write this in the contract, basically telling
investors 'watch out.' But the investors never read that; they read
it only once the crisis hits. And the lawyers, of course, have made
sure that they themselves and their clients are protected by
disclosing all the risk factors. They use mathematical models
that are supposed to be 'innovative' -- but they are
actually used to evade taxes and get around regulations. This
is abuse on a grand scale. Once again, we're dealing with a
double standard. And let's be honest: this situation fuels
populism and undermines democracy; it actually
damages democracy. And what do people do when they're
angry, and feel left out of the democratic process? They vote
the rascals out of office, and replace them with politicians who
promise them the world -- but do nothing to promote harmony and
consensus. This in turn leads to instability in the financial
markets, and could trigger a crisis. The current atmosphere of political
instability comes at a time when it's never been more important for the
world to address our biggest challenge: climate change. Some experts say that we have only
ten- to 20 years left to save our planet -- by radically changing
the way we produce and consume energy. These measures could cost
up to one trillion euros a year in Europe alone. Finance is part of the problem in
the climate crisis because finance goes after the assets that produce
the greatest return. And if oil or coal or any of these assets produce
returns, then investors will go and invest in these assets -- and as
share prices increase, others will follow, and the companies can
expand, they have the resources to do so, etc. If we're serious about the climate
change push, we need a 'whatever it takes' moment. We need central
bankers to actually creatively employ the enormous power that's
at their disposal. Finance could easily be part of the solution. Will governments spend as much to
control climate change as they did to bail out the banks? Shouldn't
we demand that they do this? Instead of just buying back
securities at random in financial markets, the European Central
Bank could use its monetary policies to promote activities that
help prevent climate change or reduce social inequality. The EU
member states should encourage the ECB to direct its monetary
policy toward achieving these goals. What if the financial
sector became the driving force behind
this transformation? Some financial experts are getting
on board with these new ideas. A few years ago, Mark Carney --
who was governor of the Bank of England at the time -- gave a
surprising speech. He said he was concerned about risks that people
in the financial sector are taking. But he was even more concerned
that one day, because of global warming, their clients will be hit
hard by climate change and won't be able to pay their debts. He said
that failure to deal with global warming will lead to instability,
so the financial sector has to take action. He added that regulators,
including himself, will keep a close eye on them in future. But measures to limit climate
change will be expensive. One UN official put the cost at 300billion
dollars a year. That amount has doubled in less than two decades.
Some in the financial sector now realize the threat posed
by climate change. There's a whole new branch of
finance developing, which is trying to take a much more responsible
vision of finance. And they're doing that partly because some bankers
believe in it, partly because many of their clients are demanding that,
and they want to basically reshape the image of finance in the 21st
century, but also because people are realizing that issues like the
environment could have big impacts on the prices of assets going
forward, and the financial system has to get ready. You can say, being cynical, that
that's just a kind of cynical game, and people are doing greenwashing
and pretending to embrace these ideas. Or you can say, actually,
revolutions happen when more people think it's dangerous to
stand aside than to get involved. So what if we're wrong, and the
financial sector is not our enemy? It could turn out to be an important
ally as we meet the challenges of tomorrow. And what role can
individuals play in all of this? It's not enough to know how much a
100 euro investment will yield at ten-percent a year. People have to
study the financial system, and learn how it works. They need to
learn that banks play a key role, just like the money that we invest
with those banks. People will have to take an active part in a
democratic debate about the future of the financial system. Find out more about which markets
your bank invests in. Take a look at your bank's ethics
policies -- and if they don't match your values, switch banks. That's
pretty easy to do these days. It's crucial to improve people's
understanding of the financial sector. Many don't realize that
if they don't know how the system works, they can't invest
their money properly. What's the best way for people
to educate themselves about the world of finance? The textbooks
aren't much better than they were 20 years ago. But today, there are
other ways to learn -- like a visit to this interactive museum in Paris.
What do these economics students think about the current state of
the financial sector? Would they consider a career in finance? Each domino corresponds to one
player in the economic cycle. If one of them falls, it can knock down the others.
This white domino represents the financial regulators. They can put a stop to
this chain reaction. The memories of the crisis have
definitely dampened down some of the crazy extremes and taught a new
generation of financiers to be a bit more cautious. Every educational program should
include courses on deontology and ethics -- and not just theoretical
principles, but analysis of specific financial scandals. You could cite
examples of conflicts of interest, and ask: 'What would
you do in this case? The financial sector needs to
improve its record on dealing with issues of ethics. And it also has
some catching up to do when it comes to gender equality. Inès, could you see yourself
working as a trader? It looks exciting, but it's
not a job for a woman. Do you think women can't
make such decisions? They can. Can you imagine making
those kinds of decisions? I could, but I wouldn't want to work
with people who don't share my values. Traditionally, financial trading
floors have been dominated by men, mostly white men. And that tends to
lead to an excess of testosterone, and risk-taking, and potentially
negative behaviors. But aside from that, having just one type of person
on trading desks means that you have again tunnel vision. But the
good news is there are more women coming up through finance,
and that is definitely to be celebrated. It may be one thing
that helps to give a slightly more balanced perspective to
finance in the coming years. 98-percent of the world's banks
are run by men. But more and more women are breaking through the
glass ceiling, and moving into the top ranks of global finance -- like ECB President Christine Lagarde
and US Treasury Secretary Janet Yellen. Now, that alone won't
revolutionize the financial world -- but we can hope... It's not likely that the world could
handle a new financial crisis right now. There are two options: we can
continue to widen the gap that separates average people from
financial institutions; or we can return the financial world to its
rightful place -- where it can help us to build the society that we want. But we can't do that without bankers
-- and we have to get involved. Oh, no. What do you see? Ok... What do you see? What do I see? What's
this, a crystal ball? So I'm a psychic now? What do you see in that? At the moment, my thumb. What do I see? Hmm...
Over how many years? I see a wonderful future. I think
we're way too pessimistic. I see people rebelling against the
financial system -- because they no longer want it to destroy
our present and our future. The system will continue, the
inequalities will increase, and so will the protests. All this will not
encourage progressive forces in our societies. I also see a world where technology
companies may end up providing the next big shift of finance -- and
frankly, what people at Facebook and Apple do next are
gonna be crucial. What I see is a storm. What I see
is... is tide. What I see is weather. What I see is that constant churning.
And those are natural images -- and they're unhelpful
because they're natural. But of course, they press in on us in the
age of the Anthropocene. And in relation to that, financial crises
are relatively small events.
Not worth the time really - It’s very generic and doesn’t really touch the GME topic. It is informativ though
Great insights from this video! I like green Crayola sticks!