Over the course of the twentieth century, the financial markets required to finance the economy gradually freed themselves from state control to become a globalized and highly speculative place for acquiring wealth (sometimes fraudulently). Because a framework of global regulation is lacking, speculative bubbles burst with increasing frequency, giving rise to crises in succession, with profound economic and social consequences.

The main role of financial actors (banks, investment funds, etc.) is to collect the savings of economic agents (households, companies, states) to pump them back into the economy. Economic actors issue certificates of ownership (shares) or credit instruments (bonds) which serve to finance company investments, consumer credit, household property purchases, and sometimes state budget deficits. In exchange, financial investors receive dividends (deducted from company earnings) and interest, which is (partly) paid back to savers.

From finance in the service of the economy…

All these actors come together in a primary market where companies’ capital shares and credit instruments are issued. To sell on these assets (shares, bonds, currency, raw materials, or other by-products such as swaps, options, futures, etc., which enable investors to insure against the risk of their assets depreciating), investors then turn to the secondary market (or aftermarket), where financial investors buy and sell previously issued securities. All of this constitutes what are commonly called financial markets where, via traders, the buyers and holders of financial products meet and where the price of these is set, according to bid-and-offer price (stock exchanges) or, more rarely, by mutual agreement. Over 100,000 billion dollars (a hundred times more than 30 years ago) are exchanged each year on the stock markets alone. Although the primary market is essential for financing the economy, the secondary market, where most transactions take place, only exists for financial actors’ own needs. However, the crises that plague it due to speculative behavior (which is not always easy to distinguish from “normal” investment) significantly affect the real economy.

… to financialization of the economy

Stock exchanges already existed in the Middle Ages, but they began to be used in the Netherlands to finance companies (such as the Dutch East India Company) in the seventeenth century. The system became widespread during the Industrial Revolution and soon encouraged speculative behavior on the part of investors. The first crisis with global repercussions occurred following the crash of the New York Stock Exchange in 1929. Initially a financial crisis, it soon became an economic, social, and political one (Great Depression), forcing the Roosevelt government to impose severe restrictions on financial activities in the United States (as part of the New Deal from 1933-1938) and at international level (1944 Bretton Woods agreements).

The ending of the Bretton Woods system in the 1970s (which brought about the expansion of the currency market), followed by the liberalization policies of the 1980s, conducted by Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States (then followed by all other countries) opened up the present phase of financial deregulation, giving greater power to financial actors, who took precedence over economic actors. This deregulation, amplified by the development of new information and telecommunications technologies, created a financial world fully integrated in time (functioning 24/7 and with financial markets organized in real-time networks) and space (global ubiquity of capital). The greater complexity of financial by-products and advances in computer science (notably permitting high-frequency automated trading) led to ever more frequent speculative bubbles which, when they burst, affect the entire financial and economic system: Mexico (1994), Asia (1997-1998), Russia (1998), Argentina (2001), subprime crisis (2008).

Market capitalization and GDP, 1980-2017

Source: World Bank,

Comment: Market capitalization represents the value of companies quoted on the stock exchange. It is supposed to reflect the future profits of these companies, as forecast by financial actors. The amounts indicated by these graphs show that stock market capitalization is totally disconnected from the real economy. At the same time, these developments in the stock market have a very clear impact on the real economy, which is blatant during periods of crises and crashes.

Major financial centers, March 2018

Source: The Global Financial Centres Index (GFCI 23), march 2018,

Comment: The Global Financial Centres Index is calculated by two think tanks (one based in London and one Chinese) which combine hundreds of international sub-indicators and surveys. In addition to the index, which is rather undiscriminating, the global/international/local category is more informative about the importance of places in the eyes of financial actors: stock exchanges are concentrated in North America, Europe, and Eastern Asia; London, New York, Hong Kong, Singapore and Tokyo are the principal ones.

Economic and social fallout

States are incapable of imposing financial governance on a global scale, nor do they all necessarily wish to do so, but they depend on markets for their financing. States (particularly those in financial difficulties like Greece, Italy, and countries of the South) therefore now see rules imposed on them that have been defined by financial actors, whose major preoccupation is to ensure (thanks to ratings awarded by ratings agencies) that borrowers reimburse their debts.

Public debt, 2017

Source: International Monetary Fund (IMF), World Economic Outlook Database, April 2018

The power gained by financial actors over political actors has amplified the social consequences (unemployment) as well as the economic consequences (recession) of financial crises, especially as insolvent banks that have become too big to fail without bringing the whole financial system down with them are saved by taxpayers via the state in the name of the general interest. Financial markets, which increasingly function over the shorter term, impose immediate public deficit reductions, whereas the problems (particularly those linked to public debt) are in fact often structural and require long-term solutions so as not to upset the social and economic balances ensured by the redistribution of public resources. In Europe, a vicious circle has taken hold: fiscal austerity espoused by governments leads to recession; this in turn increases the difficulties for states since their tax revenues diminish, forcing them to reduce their spending still further. Particularly in Greece, decision-makers who focused on the state of public finances imposed solutions that had wide-ranging social and political consequences (increased poverty, the rise of populist and radical parties); they failed to address the country’s structural problems, which were the weakness of its institutions and the corruption of political elites.

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