European Perspectives on the Recession
Edited by David Howden
Chapter 1: Institutional Illusion and Financial Entrepreneurship in the European Debt Scheme
Gabriel A. Giménez-Roche While the ongoing public debt crisis reveals the very bad condition of the public finances of the European PIGS nations (Portugal, Ireland, Greece and Spain), the misbehavior of certain private financial institutions – such as Deutsche Bank and Goldman Sachs (Chambers and Ridley, 2010) – has come under increasing scrutiny by public officials. These accusations are of the same nature as those made in the past against the financial players who did not respect the flawed rules of the financial game played by governments, central banks and the banking system in general. In spite of any misbehavior by a financial institution, it should be remembered that financial markets are essentially markets where capital funds are transferred, usually via bank intermediation, from net-saving individuals to net-borrowing individuals. Capital losses should thus be limited to the funds of the individuals engaging in only this kind of exchanges. The same is valid for futures and derivatives markets. In futures markets, although there is a financial operation involved, it only consists of a sales and acquisition operation without any actual creation of wealth sprouting from it. Although one party to a financial contract can be a loser while the other is a winner, the economy as a whole should not be either gaining or losing. Yet financial markets move more funds in volume than the world’s total funds, a most disturbing fact if one remembers that financial markets are primordially derived from the goods markets.1 If the volume of financial transactions surpasses...
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