Sozialalmanach - Caritas Luxembourg

The financial system’s contribution
to overcome the crisis?
G I L B E R T M c N E I L L
Foreword
In a nutshell, we shall not overcome the crisis without the contribution of the financial
system. The financial system is at the core of all economic activities. It deals in money, as
opposed to other activities that deal in commodities, be they goods or services.
The financial system is the conduit by which savers (providers of money) and investors
(users of money) are brought together. It is the conduit by which physical exchanges of
commodities can take place between buyers and sellers. In other words, the financial sector,
by dealing in money, allows all economic transactions to happen, be it at the local, national
or international level. Remove the availability of money through the financial system and
economies collapse.
The financial system is a global system composed of a multiple set of specialized markets
serving as financial intermediaries. Banks and other financial services providers operate
across countries (or “national jurisdictions”) in the financial centers that are located in
them. The financial centers constitute an interconnected network through which funds,
and unfortunately financial shocks, are transmitted from one country to the next.
The global financial crisis originated in the United States in its New York financial center.
The collapse of the value of the physical assets underpinning the value of money held in
financial assets by banks (initially the value of real estate held in the form of mortgages
that were converted into sophisticated debt products like Credit Default Swaps) triggered
the financial crisis by making the large banks insolvent. From New York, bank insolvency
spread throughout the United States and around the world through the “toxic assets” that
had been placed there.
Banks literally ran out of money and the ability to extend credit or make money
available to households and non-financial businesses. In fact banks, when shored up with
huge amounts of cash injections by governments, kept essentially the money themselves to
improve their balance sheets. Governments had and have no legal recourse to force banks
to extend credit.
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