The financial crisis: The need for a new system

Thèmes abordés

Public debt, monetary stability, economic crisis, financial crisis, money, monetary creation, création monétaire, crise financière, réformes financières, réforme du système financier

Résumé du document

This thesis is about our monetary and financial system. It starts focusing on the monetary creation, which is the basis of our financial system. After defining the monetary creation process, it is about its control, which has been transferred from the States to the Central Banks to the commercial banks. It explores the reasons of this changes and the situation it created, particularly regarding the public debts that started at this time and which kept on growing ever since. After defining this problem, it explores the possibility for a Central Bank to finance the State's investments at zero interest rate, like it was the case when they had this right. This study will show that this model is viable, and would allow the collectivity to pay back the public debt and lower the taxes at the same time.
After this, this thesis will go over the financial crisis the world has been through the past couple of years, finding its reasons. It highlights the conjectural causes that started it, and also the structural reasons, that can be retrieved in the past crises this financial world has been through those past decades. It will explain how today's financial system is, by nature, unstable. The successive waves of deregulation that has blown over the liberal economies we are living in made it this way. This will lead us to analyze what are the actual problems in our financial and monetary system, and where some reforms need to be started in order to make our financial world more stable and more reliable.
Finally, it offers concrete direction to take in order to meliorate it. This starts with the idea of a Central bank, in every State and monetary union, which would be given (back) the monetary creation control. Today, commercial banks, which today control it, are responsible for the economic stability, without bearing this charge. This Central bank would have the economic stability as charge, and would be the only establishment allowed to create money. It would have the possibility to finance the State's investment at no interest rate. The banking industry would be split up in three independent entities that would be deposit, lending and investment, this in order to strengthen the banking system. In addition to that, stock markets have to be more regulated, passing intraday quotation to day to day, banishing trading softwares and forbidding banks to speculate for themselves. Those reforms would take time to implement and would face many interests, but at the end, they would benefit the collectivity.

Extraits

[...] This means that under the State's solvency to a lien debt. We will return to this point later. France will apply it the banking principle, provided they can ensure the convertibility of gold tickets issued. From 1848, the Bank of France received the monopoly of issuing banknotes. A threshold issue will first be imposed on the issuing institution before moving to a minimum of 35% in cash reserves of its sight liabilities (notes and deposits on the liabilities of its balance sheet). [...]

[...] Then Fisher U.S. economist formalizes the quantity theory of money (QTM) as follows: MV = PT with the money supply the P prices, quantities traded T and V the velocity of money circulation (number of payments that each monetary unit conducts an average during the year). You can read the formula as follows: the value of transactions x = amount of monetary units multiplied by the number of payment methods x V). In these conditions, the level of M determines the price level P. [...]

[...] From a couple of decade, the economic and finance world is going on a deregulation trend. This deregulation is based on the idea that markets are the best solution to maximize resources allocation and therefore the States should not interfere with the market or the less the better. It is in this global idea that the monetary creation power has been entirely given to commercials banks and taken from Central Banks and States' control. This is how from 1973 in France the State had to borrow the money it needed from commercial banks instead of being able to borrow it from the Banque de France, like it was possible before. [...]

[...] We remain in the approach to funding zero-rated strictly reserved for public investment, by admitting that the risk of non-repayment is null. On the other hand, we have to face the risk of excessive use of this power of monetary creation. As we saw earlier, inflation is the main threat this configuration powers. Also, the 43 establishment of its needs will therefore have to be more or less in line with the anticipation of future growth of GDP and other economic expectations such that balances budgets or simply crossing the country economic. [...]

[...] declares bankruptcy, and is placed under the protection of Chapter 11 of the Federal law . At the last moment, markets have hoped the resumption of Lehman Brothers Bank Of America (as JP Morgan Chase had recovered Bear Stearns 6 months earlier), but finally the big bank will prefer saving Merrill Lynch, it also about to go bankrupt on 15 September. Lehman Brothers stock price was on 5 June 1994 with a highest point at $ 85.80 in February 4th 2007. [...]