Alex Floate, a member of our Emerging Fellows program examines the globalized face of finance in his first blog post in 2019. The views expressed are those of the author and not necessarily those of the APF or its other members.
Finance touches anything that involves cash or credit. In public or private transactions. Whether it is to purchase individual or collective assets. For many people however, the word finance has become synonymous with the ability to get a new TV or car with a low-down payment. Although consumer lending for immediate desires is a part of finance it also includes investing, borrowing, insurance and the management of national monetary systems.
Our modern financial system began over 2,000 years ago with merchants granting credit to customers to enable them to purchase their products. Early banks in Renaissance Italy extended and aided these transactions and created innovations such as insurance. During the industrial age, finance evolved again to adapt to the capital-intensive nature of modern industry. Governments also found it possible to advance the common good by using these markets to raise money to invest in modern infrastructure and advance the public good.
Today, finance is globalized, heavily reliant on technology and intertwined with nearly every aspect of modern life. Nothing exemplifies a volatile, uncertain, complex and ambiguous environment better than modern finance. Every country with a treasury or banking system is integrated into a broader system that it can affect and be affected by events and decisions made by others a continent away. Major institutions, with stakeholders scattered across the globe look for advantages and profit in new markets and by leveraging the latest technology. Governments may seek to control their own economies for the good of their citizens but are often at the mercy of self-interest built into the system as profit seekers bid up, or crash asset prices and currency exchanges.
Recent events (global recession, Brexit, self-inflicted trade wars) will eventually be footnotes in history, but several themes from the aftermath provide insight for the future. One is that seemingly isolated events can move through global systems, even if those events are not seemingly connected. Another is that financial markets are resilient thanks to the various interests, both private and public, that will seek to revitalize the economy. However, increasingly this has been accomplished by turning private losses into public debt. The hardest lesson we learned is that even after a disaster caused largely by the financial industry itself, nothing really changes. The industry itself has eschewed any and all attempts at real reforms that would reign in practices that create greater risk in the markets.
The biggest change in the last 50 years has been the growth of finance as an industry unto itself. Separated from the purposes of providing credit for purchasers, capital for industry and risk management for all. The financial industry created a means for trading financial instruments themselves, such as derivatives of stocks, currency swaps and commodities that bear little relation to the actual hard assets. This has introduced additional complexity and volatility. Yet it has provided greater rewards to those who can access, manipulate and profit from these specialized financial markets. It is also seen as contributing to the widening wealth gap in many nations. Within this context, we must ask if finance has ceased being the servant of economic enterprise, and instead has become its’ master, and what part it will play in our mutual future.
© E Alex Floate 2019