Welcome to this Big History course! In this course, renowned scientists and scholars from the University of Amsterdam and beyond will take you on a journey from the Big Bang until today while addressing key questions in their fields. After completing this journey you will have developed a better understanding of how you and everything around you became the way they are today. You will also have gained an understanding of the underlying mechanisms that have helped shape the history of everything and how they wil help shape the future. Last but not least, you will have developed the skill to use this knowledge to put smaller subjects into a bigger perspective with the aid of the little big history approach, which can help you develop some new ideas on these smaller subjects.
How is our international financial system developing?
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From the course by University of Amsterdam
Big History - From the Big Bang until Today
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From the lesson
Human History
Meet the Instructors
Esther QuaedackersLecturer in Big History
Institute for Interdisciplinary Studies - Faculty of Science
Ladies and gentlemen, what I would like to do today is to explain
you the international financial system.
And the international financial system has to deal with how money moves
around the world and what impact this movement of money,
movements of capital a cause of world health?
And since it has major impacts on countries,
they can cause big financial problems for countries.
Look at Greece, look at Europe financial crisis in general.
I would like to give you perspective on this international Financial system.
This is the macro perspective.
In a complementary segment, I will talk about the micro perspective.
And there, I will talk about how banks behave and
how the behavior of banks has affected society and how as society,
we may want to become more resilient vis-a-vis the financial system.
But now the world system, the world financial system.
Let me give you a very simple example and the very simple example is the following.
If you look at China and the US,
China is an upcoming economy has been able to develop its manufacturing
operations enormously has become the manufacturing country of the world.
What does it mean?
It means that China exports a lot and the US on the other hand, imports a lot.
By exporting, China basically creates an enormous pile of money.
They get money from exporting goods.
The United States buys these goods.
So in essence, the US has a shortage.
Buying more than it sells.
China is selling more than it sells.
What does it mean?
China ends up with a lot of money, US dollars and
these US dollars basically have to be invested abroad.
They have to go back where they came from.
They came from the US, so what do you see?
China is not just selling goods to the US, you see that China is investing
the money that it earns, the US dollars to a very large extent in the US.
So, there is a capital flow.
And here, we are today financial system.
Here, we are talking about the financial system.
There's a capital flow from China to the US or
from China to the rest of the world, which is a reflection of the fact that
China has been very successful in setting goals abroad.
Now whenever there are big capital flows in the world,
you see that financial institutions become very important.
They put themselves in the middle, financial institutions.
So, capital flows basically create a great importance to financial institutions.
Now, what do we know about capital flows in general?
We know that capital flows in general,
always go to countries where we available and to interested about.
So what did we see in Spain?
Spanish economy was blooming prior to the Europe crisis.
So Spain has the enormous inflicts of money from abroad,
foreign investors which basically cause an housing bloom in Spain.
Similarly, in Ireland.
Ireland, a lot of foreign investors pushing in capital into Ireland.
A boom in Ireland, a housing boom in Ireland.
A lot of money in the internal economy, basically,
pushing up real estate prices, pushing up construction.
Spain had four million South Americans coming in to help in the construction of
houses.
What does it do, all that activity?
It basically means a lot of money is flowing to Spanish financial
institutions to project developers to the housing market in Spain.
Now debt in itself would be fine, but what do we see?
We see that these foreign investors are overly antigestic and the next moment,
they become more pessimistic.
They think that these house prices in Spain or an island are not sustainable and
they want their money back.
So, they basically pull out the money out of Spain.
What did that mean for Spanish financial institutions?
Spanish financial institutions had invested in the housing boom using this
money that they got from abroad.
The housing market suffers.
House prices start falling when the foreigners want their money back and
who ends up with the losses?
Spanish financial institutions and given that these financial institutions are very
important they need to be rescued by the state, by the government and
the country of Spain was in trouble.
The same story in Ireland.
A lot of money flowing in, an enormous boom in the housing market.
Houses prices at some point start falling.
Foreign investors want their money back.
Our IAS financial institutions are in trouble,
need to be rescued by the Irish government and why?
Because of financial sector is of critical importance, so, they call me at night.
So we end up always rescuing financial institutions, look also at
the Netherlands where we have rescued ABN Amro number of we have rescued ING and
we have rescued Aegon, the three largest financial institution in the country.
So, what does this tell us?
It tells us that capital flows.
In the case of Spain and Ireland caused by overenthusiastic foreign investors,
typically always end up in problems.
Let me give you one more example and this is just to make sure that you really
understand this whole issue of capital flows, because capital flows
is the key microeconomic issue that we need to resolve In the future and
that we have not resolved.
The Greek country, the Greece became part of the Eurozone.
Once it became part of the Eurozone, it could basically borrow money at very
low rates, because investors thought Greece is part of the Eurozone.
And essentially, the Eurozone will guarantee Greece and they actually did.
The Eurozone did guarantee Greece.
What did it mean?
It meant that Greece could certainly borrow money at very low interest rates.
In the period 202 when the joint 208, 209,
Greece could borrow at German interest rates money.
That had never happened before in history,
because people before lending money to Greece and hoping that Greece would
repay the money had always been troublesome in the history of Greece.
However, Greece being part of the Eurozone.
Investors felt confident that they would get the money back.
So, what they will do?
They were willing to lend money.
What did it mean for Greece?
It meant that for the first time in history, they could borrow money more or
less in an early limited way and that's what he did.
And he didn't have any institution, domestic institution controlling all
the spending of money which is really meant, because it was not necessary in
the past, because Greece could never borrow a lot of money.
But only after being part of Eurozone, they could.
We didn't check this whole process of capital flows getting into,
because all this borrowing by Greece meant a capital flow from investors to Greece.
We didn't control that and what did we end up with at the end?
That Greece ended up with debts, debts that it could not repay and
we got the Greek crisis with respect to the Eurozone.
So we have explained Spain, Ireland, Greece,
the disequilibrium between China and the US with capital flows.
Capital flows is the big issue of our time.
So, what are the measures that we try to take?
In the Eurozone, obviously,
we try to get some controls on how much each individual country can borrow.
We try to get controls that they don't borrow too much and
cause all these capital flows that in the end, they cannot repay.
But in a sense, Spain and Ireland, the government of Spain and
Ireland were not irresponsible.
There were debts by overenthusiastic foreign investors.
Basically, investments by these overenthusiastic
foreign investors that led an housing boom in Spain and Ireland.
It was not the government.
The government had more or less in balance budget was much better in
terms of its budget than countries like France and Germany even.
So we need to control private investors, as well.
So if internally in countries, there is a new boom.
We have to find a way to control this boom, which is always in the good time.
Booms happen in good times to control these booms.
And now, see the big dilemma that governments are in.
Can we in good times,
when the housing market is basically holding along, house prices go up.
Who is going to put a stop to this over intergism about a housing market?
Who is going to tell the people in the good time?
No, you cannot borrow money.
It's irresponsible if you borrow more.
It will push up house prices even more.
And in the end, this may end in tragedy.
So, we need to control how much you can borrow for your house.
You see how difficult this political process is.
Capital flows require measures by governments
in good periods when there may not be any support in parliament or
among the population to control the capital flows.
So there's the macro story about a financial sector and
this macro story about a financial sector has to be complimented, even micro story.
How do financial institutions behave?
How can we make us less dependent?
How can we make ourselves less dependent of financial institutions?
That's the item in the complimentary in
the second part of this short lecture.
Thank you.
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