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.