The current state of the world financial system

Carlos Zilio, PROSSEGUIR, 1970, felt-tip pen on paper, 50x35


How and why the world of finance constitutes an ultra-parasitic universe that enjoys unwavering protection

In the development of the pandemic in Europe, the financial system received little media attention. It was only at the end of February, beginning of March, that a very sharp fall in stock markets made the main headlines in newspapers and television stations. In fact, between February 20th and March 9th, we saw a drop in quotations between 23% and 30%, according to the financial square. We now know that it was thanks to the intervention of the Fed (Central Bank of the United States). Today, his support for financial investors is undiminished. On June 12, the Fed lowered key interest rates on its loans to 0% and announced unlimited purchases of Treasuries.[I]. On June 18, the ECB [European Central Bank] subsequently announced that it would lend Eurozone banks €1,31 trillion at the rate of -1%. In April 2019, I concluded an article for Against: “the political issue that may arise in one or more European countries, depending on the circumstances, is a new bailout of the banks by the State and the “socialization of losses” at the expense of wage earners, as occurs in such cases”[ii].

There we are. the economic newspaper Les Echos points out that, as far as the ECB is concerned, the amount is a record for a program called TLTRO (Targeted Long Term Refinancing Operation [Long-term targeted refinancing operation]): “The offer is particularly attractive. The institutions that adhered to these loans will pay a negative interest rate. In other words, the ECB will pay banks to lend to their customers. And the level of this remuneration, -1%, is totally unprecedented. For this, banks must maintain their credit to the economy at pre-pandemic levels. A condition that should be easily met thanks to government guarantees to allow companies to weather the crisis.”

The announced objective is to strengthen the lending capacity of banks, especially to SMEs [Small and Medium Enterprises], but “several institutions could choose to invest part of these funds at -1% in government bonds that offer a positive return, including those of the Italy"[iii]. In short, it is about restoring the profitability of banks and their ability to pay dividends to their shareholders.

But things are not as simple as that. By contrast, the IMF's quarterly report on global financial stability, the Global Financial Stability Report [Global Financial Stability Report], from April 2020, and the article published on the IMF economists blog give the idea of ​​an unprecedented situation of the institutions – central banks and the IMF – revealed by the pandemic, confronted by an equally unprecedented situation of ungovernability and separation between markets and the “real economy”, starting with stock exchanges. The two main long-term systemic trends that were discussed in the preceding articles will help to understand its roots.

The long-term context: endless financial accumulation and continued falling interest rates

The first is the worldwide movement that saw global financial assets grow at a pace well above world GDP. I've talked about this in several articles published by Against. It results from the specific mechanism of accumulation of money capital/loan capital as opposed to the “real accumulation of capital” that Marx discusses in the three chapters called “Money Capital and Real Capital” of the fifth section of Book III[iv]. At the time of Marx's study, the movement is linked to the economic cycle: part of the capital accumulated by industrial capitalists in the expansion phase seeks to be valued as loan capital in the period of crisis and recession. He adds, somewhat laconically, that the accumulation of money capital may be “the result of phenomena which accompany real accumulation, but differ entirely from it”[v].

What was a conjunctural fact in the XNUMXth century has become a systemic process in the case of contemporary capitalism, born, first, from “North-South” imperialist relations, then from the institutional mechanisms for transforming wages into monetary capital through systems of retirement by capitalization and then nourished by the issuance of private debt securities and, increasingly, public debt in the central capitalist countries. We are dealing with virtual withdrawal rights from current and future surplus value, direct, in the case of shares and bonds issued by companies, indirect, in the case of public debt securities. They represent capital for those who hold them and await a return, but they are fictitious capital from the point of view of the movement of capital as a whole.[vi].

The McKinsey Global Institute has calculated that stocks measured by their market capitalization, corporate and government bonds, and bank deposits increased from 100% to 200% of world GDP between 1990 and the 2007-2009 global economic and financial crisis.

Figure 1. Growth of global financial assets and world GDP 1990-2010 (left axis and in red, global financial assets as % of world GDP; right axis, their value in trillions of dollars, with 2011 exchange rates) Source: McKinsey Global Institute, Financial Globalization, Retreat or Reset? 2013

O McKinsey Global Institute stopped publishing its estimates. On the other hand, the website Visual capitalist published data in May showing that the movement continued[vii]. Stocks measured by their market capitalization ($89,5 trillion) and public and private debt securities ($253,0 trillion, of which 27,4% are state debt) reached a total of $342,5 trillion of dollars, 95,5 trillion in bank deposits (not counting the 35,2 trillion in narrow monetary aggregates), for a total of 438,2 trillion dollars, which was 225 trillion dollars in 2012, an increase of 98%. In addition, there are also 280,6 trillion in real estate assets.

The second long-term trend is the continued drop in interest rates.

Source: Federal Reserve Bank of Saint-Louis Economic Research.

The policies (the term “unorthodox”, used for a long time, gradually disappeared from the analyses) of massive money creation and permanent support to banks, followed by the Fed and other central banks, contributed to this fall. The research department of the Natixis group even estimated that they would explain two thirds of the fall in rates from 2009[viii]. But economists at the Bank for International Settlements (BIS) in Basel categorically insisted that this was not enough to explain the slump, as it had started in 1995. In this slump, they say, it is impossible to “unravel what is secular and what is what is cyclical, and, in what is cyclical, the respective importance of monetary and non-monetary factors”.[ix]. In fact, the main causes of the long fall in rates in the debt security markets are to be found in the distribution of productivity gains controlled by the relationship between capital and labor, the dimension of technological change and the blockage of the accumulation mechanisms they create. The growth of current and future surplus value of virtual drawing rights constituting fictitious capital declines. Lack of profitable investment opportunities results in capital supply greater than demand[X]. Rates can only go down. In response, investors increased year after year what we call, from the beginning of the 2010s, risk appetite, or appetite for risk (risk appetite) and turned to the micro-profit opportunities offered by artificial intelligence.

the irruption of big date and the algorithms

High Frequency Trading (NAF) high-frequency trading, HFT) were the first “automatic trading” modality based on statistical decision that manages the big data financial. These virtual market traders use complex algorithms to simultaneously analyze multiple markets and execute orders based on their condition. Although the NAF transaction speed was still 20 milliseconds in the early 2010s, it increased to 113 microseconds in 2011.

Non-experts in financial markets discovered the NAF on May 6, 2010. While European markets opened with a slight pullback on concerns from Greece, on Wall Street, with no warning sign or apparent reason, the Dow Jones index lost almost 10% in a few minutes[xi]. After investigation, the US regulatory authorities (SEC [Securities and Exchange Commission] and CFTC [Commodity Futures Trading Commission]) questioned the technique of buying and selling assets based on algorithms. Studying the so-called “e-mini” contracts of the S&P 500 [Standard & Poor's 500], the researchers found that NAF traders earned an average profit of $1,92 per transaction performed by large institutional investors, and an average of $3,49 per transaction performed by retail investors[xii].

The NAF were followed by what we called “robo-investing” [“investment robot”], which represented, in 2019, according to the The Economist,[xiii], 35% of market capitalization on Wall Street, 60% of institutional investors' assets, and 60% of bond purchases and sales in US markets. This management takes different forms. In stock markets, the most common is the ETF (Exchange traded fund [in Portuguese, “index fund”, a type of exchange-traded investment fund that tracks a particular benchmark index]). As they are programmed to follow the fluctuations of a reference index, without seeking a better performance than the market average, they are called “passive management”. In particular, it is in the management of private portfolios that we find completely automated online investment platforms, called “adviser robots”. Exchange-traded index funds (exchange traded funds) automatically track stock and bond indices. As of October 2019, these devices managed $4,3 trillion in US stocks, surpassing, for the first time, the sums managed by humans. Software called smart-beta isolates one statistical characteristic – volatility, for example – and focuses on securities that exhibit it. As algorithms have proven their effectiveness for equities and derivatives, they are also developing in debt markets.

Fund managers read reports and meet with companies in accordance with strict insider trading and disclosure laws designed to control what is in the public domain and ensure that everyone has equal access. Today, an almost infinite amount of new data and the ever-increasing power of algorithms are creating new ways to value investments. They have more up-to-date information about companies than is available to their boards of directors. So far, the growth of computer capabilities has democratized finance by reducing costs. A typical Exchange Traded Fund (FNB) makes 0,1% per year, compared to perhaps 1% for an active fund. We can buy ETFs over the phone. An ongoing price war means transaction costs have collapsed and markets as a whole are more liquid than ever.[xiv].

O The Economist, sand asks if ETFs are a threat to financial stability[xv]. “Computers can distort asset prices, as many algorithms run simultaneously on securities with a certain characteristic, and then suddenly abandon them. Regulators fear that liquidity will evaporate as markets crash. But that is to forget that humans are perfectly capable of causing harm themselves and that computers can help manage risk. However, a series of “flash-crashs” [sudden and deep crashes] and strange incidents occurred, including the sterling crash in October 2016 and a fall in debt prices in December 2018. These incidents could be more serious and frequent as computers become more powerful”.

The current state of the world financial system

In April, the IMF published its first quarterly report for 2020, the Global Financial Stability Report [Global Financial Stability Report]. The director of the Department of Money and Capital Markets posted the general outline of the first-hand June report on his blog[xvi]. He recalls that, if the financial system came to the attention of the general public only at the beginning of March, the situation was very tense for weeks. Thus: “in mid-February, when investors began to fear that the epidemic was turning into a worldwide pandemic, stock prices fell sharply from the excessive levels they had reached. In credit markets, credit spreads have soared, especially in risky segments such as high-yield bonds, leveraged loans and private debt, whose issuance has virtually stopped. Oil prices fell due to weakening global demand and the lack of agreement between OPEC+ countries on production cuts, which further reduced risk appetite. This market volatility has led to a flight to quality assets and safe haven bond yields have plummeted.”[xvii]. Emerging countries suffered a terrible capital flight.

Source: Financial Times

These are mainly very vulnerable African countries, which have suffered the greatest reversal in the flow of portfolio investments ever recorded by emerging countries, both in dollar amounts and as a percentage of their GDP. The speed with which speculative capital moves reflects the fear of speculative funds in the face of the situation.

The IMF is happy because “central banks, as a whole, mobilized to prevent the health crisis from becoming a financial hurricane. Either by lowering its interest rates, by increasing its financial asset purchase program, by implementing lines of credit swap exchange between them or granting credit and liquidity facilities”. The configuration that economists mainstream call, in a counter-intuitive term, moral hazard (moral hazard), “when an entity (in this case a bank or a pension fund) is encouraged to increase its exposure to risk because it knows that it will not bear all the costs”, goes back to the doctrine of “too big to fail” [“too big to break”], such as rescuing the Continental Illinois National Bank in 1983[xviii], and has not stopped expanding since then, with the Lehmann Brothers, in September 2008, the only exception. The IMF recognizes that, in 2020, moral hazard fully played its role and issued the following warning: “the unprecedented use of unconventional tools has undoubtedly cushioned the blow of the pandemic to the world economy and reduced the immediate danger to the financial system world, which was his intended goal. However, policy makers must be aware of the possible unforeseen consequences, such as the continued increase in financial vulnerabilities in an environment of easy financial conditions. The expectation of continued support from central banks could turn already extensive asset valuations into vulnerabilities, especially in a context where financial systems and private sectors have exhausted their reserves during the pandemic”.

Central banks did their job of rescuing banks, pension funds and other investors so well that, since the crash at the end of February, risky asset prices have recovered, starting with equities. Financial markets experience an unprecedented dissociation between price movements and the reality of economic activity, marked by the drop in GDP and the rapid growth of unemployment. And this is demonstrated by the sharp rise in US stock indexes and the drop in consumer confidence, two indicators that have historically developed together, “raising questions about the sustainability of the recovery, were it not for the central bank’s push”[xx].

Source: Bloomberg Finance LP; and IMF staff calculations

The dissociation between the economic situation and the level of actions is valid for other countries. In France, for example, while GDP has already fallen by 8% and unemployment reached its highest level since 1996, with the destruction of 500 jobs in May, the CAC 40 [main index of the Paris Stock Exchange] rose from 3.755 points in March 18 to 5.198 points on June 6, a recovery of 864 points compared to February 20.

The IMF's treatment of climate change

There is a chapter in the April report that has nothing to do with the pandemic. He is dedicated to climate change[xx]. commissioned by Network for Greening the Financial System[xxx], strongly demonstrates the IMF's concern for investors. Therefore, I will quote it more extensively. The IMF notes that, in view of “climate trends, financial stability authorities fear that the financial system is not prepared to face this potentially large increase in physical risk, as well as the transition risk due to political, technological, legal and economic changes. market changes that will occur during the transition to a low-carbon economy”. He continues, “first, a climate risk can turn into a disaster if it occurs in an area of ​​great exposure and high vulnerability. Such a disaster would affect households, non-financial corporations and the public sector through the loss of physical and human capital, causing economic disruption that could be significant. Financial sector companies are exposed to these shocks through their underwriting activities (insurers), their lending activities (mainly banks) and the securities portfolios affected (all financial corporations).

In turn, financial institutions can be equally exposed to operational risks (in cases where their structures, systems and personnel are directly affected by an event) or to liquidity risk (if a disaster triggers a large withdrawal of deposits from customers ). Insurers play a particular role in absorbing shocks. The supply of insurance concentrates the impact of the disruption in this sector and reduces it to other economic agents. Governments often play an important buffer role by providing certain forms of insurance, as well as assistance and support in the aftermath of a disaster. Pressure on government balance sheets after a disaster could have implications for financial stability, given the close link between governments and banks in many economies. (...) Major disasters could expose financial institutions to market risk if they result in a sharp drop in stock prices, due to the widespread destruction of assets and the production capacity of companies or a drop in demand for their products”.

Ungovernability of part of the global financial system and “uncorrelated” markets

The article published on the IMF blog admits, surprisingly for its frankness, a “governance system enmeshed in its contradictions”. In fact, if “banks were imposed, by the international agreement on liquidity ratios known as Basel III, equity requirements and even the beginning of control of their leveraged loans, this shifted the leveraged credit market to the unregulated sector. , allowed CLOs to prosper (collateralized Loan Obligations [Collateralized Loan Obligations]: Debt securities issued by a securitization vehicle) and increased the trading volume of highly speculative investment funds. The limits of the parallel financial system (that of shadow banking) are even more difficult to trace than in 2008”.

Chapter 2 of Global Financial Report describes, to the extent of its possibilities, “the financial ecosystem of high-risk corporate credit markets, in which the role of non-banking financial institutions has grown and the system has become more complex and opaque”. To give you a sample of this, I leave the first subheading in English, Rapid Growth of Risky Credit Has Raised Red Flags [The rapid growth of risky credit has raised red flags]. Potential vulnerabilities include “lower credit quality for borrowers, more flexible underwriting rules, liquidity risks in investment funds and increased interconnection. Although banks have become safer, we do not know the links that institutional investors have with the banking sector that could cause them losses in the event of market disturbances”. Central banks have “few instruments to deal with credit and liquidity risks in global capital markets”, while “risk appetite has spread to emerging markets”. Portfolio consolidations have stabilized and some countries have returned to modest inflows”.

The conclusion is in the World Economic Outlook (WEF) published in early July. It states that “according to the new projections, world GDP is expected to contract by 4,9% in 2020, that is, 1,9 percentage points more than forecast in the PEM of April 2020. The Covid pandemic -19 had a larger-than-expected negative impact on activity in the first half of 2020, and the recovery is expected to be slower than expected. In 2021, world growth is expected to reach 5,4%. Globally, therefore, 2021 GDP is expected to be around 6,5 percentage points below the level projected in January 2020, before the Covid-19 pandemic. The negative impact on low-income households is particularly severe, and could jeopardize the considerable progress that has been made in reducing extreme poverty around the world since the 90s.” And to insist once more: “the extent of the recent improvement in the financial markets appears to be uncorrelated with the change in the economic outlook, as indicated in the update of the Global Financial Stability Report (GFSR)”[xxiii].

*Francois Chesnais is a professor at the University of Paris XIII. Author, among other books, of financial globalization (Shaman).

Translation: Fernando Lima das Neves

Originally published in Cahiers & revue La Brèche




[ii]            Network for Greening the Financial System is a group of central banks and supervisory authorities. Consulting the internet, we realized that the Bundesbank and the Banco from France present it in very different ways. For the first, the group expressed concern that the financial risks associated with climate change are not fully reflected in the valuation of assets and called for these risks to be integrated into the financial stability control ( ). For the latter, the group's objective is to help bolster the global response needed to achieve the Paris Agreement's goals and reinforce the financial system's role in managing risk and mobilizing capital for green and low-carbon investments in the broader context of ecologically sustainable development ( ).





[vii]            Peter Hördahl, Jhuvesh Sobrun and Philip Turner, low long-term interest rates as a global phenomenon, BIS Working paper No. 574 August 2016.

[viii]           This use of supply and demand is theoretically legitimate. In Chapter XXII of Book III, which deals with the determination of the interest rate level, Marx writes that “interest-bearing capital, even if it is an economic category absolutely different from the commodity, becomes, as we have seen, a commodity”. sui generis; hence the interest becomes its price, which, like the market price of a common commodity, is fixed, in each case, by supply and demand. (...) The general rate of profit derives its determination from causes different and far more complex than those that fix the market rate of interest, which is established directly and immediately by the relationship between supply and demand”. The capital, book III, Editions Sociales, volume 7, page 33

[ix] ,_2010_Flash_Crash

[X]    March 13, 2020.


[xii]          VIEW and the list of the best ranked in



[xv]             Executive Summary:





[xx]           Marx, The capital, livre III, Editions Sociales t.8, page 139.

[xxx]             Ibid., page 168.

[xxiii]           For a longer presentation, see my April 26, 2019 article:

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