Spiegel Online: The Destructive Power of Financial Markets

“Speculators are betting against the euro, banks are taking incalculable risks and the markets are in turmoil. Three years after the Lehman Brothers bankruptcy, the financial industry has become a threat to the global economy again. Governments missed the chance to regulate the industry, and another crash is just a matter of time.”

It is not just speculation that leads to destruction. It is also inadequate regulation, and excessive borrowing by governments for unsustainable spending. Nevertheless, good article (Via Spiegel Online):

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There is no calm in sight for the global economy. Sharp declines on the stock market and crises have become an everyday reality. This raises the question of why the financial markets are so erratic. They have developed into a permanent threat to the global economy. But what can be done to avert this risk?

It cannot be a coincidence that the number and scope of disruptions have increased with the expansion of the financial industry. The Asian financial crisis in the 1990s was followed by the bursting of the Internet bubble at the turn of the millennium. When Lehman Brothers went bankrupt in 2008, the financial world suddenly found itself on the brink of collapse. Now that the euro is at risk, and millions of people are afraid of their currency collapsing. A number of countries, including the United States, are groaning under debt burdens that run into the trillions.

Incalculable Risk

Naturally the financial industry — all those who trade in securities, currencies, money and the products derived from them, known as derivatives — is not responsible for all the crises in the global economy. Politicians also share some of the blame, for having accumulated too much debt and given the banks too much leeway. But without the destructive power of the banks, hedge funds and other investment companies, the world would not be where it is today — at the edge of an abyss.

The financial industry grew rapidly, as did the sums of money with which its players speculated on the prices of stocks, commodities and government bonds. The products they developed to turn money into even more money became more and more complex. At the same time, the risks they were willing to accept became incalculable.

The sector’s high salaries tend to attract the best and brightest university graduates. The members of this youthful elite don’t devise new products that make people’s lives better, nor do they found new companies that further progress. Instead, these young financial wizards invest a great deal of money and effort to develop sophisticated financial products, the sole purpose of which is to generate more profit for both their employers and, ultimately, for themselves — sometimes at the expense of other market players or even their customers.

Many things that happen on Wall Street and in London’s financial district are “socially useless,” says Lord Adair Turner, chairman of Britain’s Financial Services Authority (FSA). The values that are created there are often not real or of any use to society, Turner adds. Paul Volcker, the former chairman of the US Federal Reserve, once remarked that the only truly useful financial innovation in the past 20 years is the cash machine.

Once upon a time, the sole purpose of banks was to supply the economy with money. They were service providers, sources of energy for the economy, so to speak, but nothing more. But now the financial industry has largely disconnected itself from the manufacturing economy, transforming its role from subservient to dominant in the process.

The potential upshot of this shift became evident less than three years ago. The banks had excessively foisted mortgages on Americans without paying much attention to their customers’ ability to repay these loans. They packaged the risks into new financial products and sold them on. But apparently very few people understood how these products actually worked. When the subprime bubble finally burst, it dragged down the entire financial industry with it. The major financial firms found themselves on the brink of bankruptcy and were forced to appeal to the government for help.

————- some good quotes from the article (courtesy of Big Picture blog) ————–

– The truth is that the financial markets are controlling the politicians.

– The markets take advantage of every weakness and every rumor to speculate against one country after the next.

– Stock markets are currently in turmoil. Even the most experienced equity traders cannot remember a time when prices fluctuated as widely from day to day — and often even within a single day — as they have in recent weeks.

– But without the destructive power of the banks, hedge funds and other investment companies, the world would not be where it is today — at the edge of an abyss.

– Many things that happen on Wall Street and in London’s financial district are “socially useless,” says Lord Adair Turner, chairman of Britain’s Financial Services Authority (FSA).

– Flassbeck believes that the crises in the globalized economy have “a common root, namely the inability of economists to correctly interpret the world.”

-Of all people, it was an academic specializing in literary studies who managed to most accurately analyze the insanity of the financial markets and the impotence of economists.

– When Deutsche Börse decided to move from Frankfurt to the nearby town of Eschborn, the town saw a rapid increase in the demand for air-conditioned basement space, where so-called high-frequency traders, as well as banks, set up their state-of-the-art supercomputers.

– The traders at Deutsche Bank are apparently more clued into who holds Greece’s government bonds than the Greeks themselves.

– Speculation has always existed in economic history, but never to such an extent as today.

– German Chancellor Angela Merkel knows that there is more at stake than the stability of the economy and overcoming a temporary weakness. “This type of crisis cannot be allowed to repeat itself in the foreseeable future,” Merkel said, “otherwise it will be extremely difficult to guarantee political stability, and not only in Germany.”

– Following the near-collapse of the markets, then-German President Horst Köhler characterized the financial markets as a “monster.”

– Jochen Sanio, head of Germany’s banking regulatory agency, believes it is highly likely that the next crisis will emanate from this largely unregulated realm of hedge funds and other financial players.

– When asked whether it is possible to make future crises unlikely, Hilmar Kopper, the former CEO of Deutsche Bank and current chairman of the supervisory board of HSH Nordbank, replies with a simple “no.” According to Kopper, more huge financial bubbles could happen in the future.