Finance, Financial Systems

Finance is the branch of economics that studies financial markets, systems, and institutions. The process of globalization has increasingly rendered these areas internationally interdependent. The basic function of financial systems is to allow a flow of funds from lenders (those who enjoy considerable financial wealth but do not have productive investment prospects of their own) to borrowers (those who need to collect more funds to pursue their own investments). Globalization has pushed this flow of capital and wealth beyond national boundaries, often putting into contact lenders and borrowers from opposite sides of the world.

Supporters of globalization have argued that this internationalization of finance is beneficial to national economies as well as to the individual savers and investors. Yet, it has also altered the structure of financial systems, making their link to national priorities progressively tenuous. Thus, globalization has presented newer risks and challenges for those who operate within financial systems or are dependent on them. One major change that the globalization of finance has engineered is the emergence of a transnational capitalist class who own and manage financial resources associated with international banks, currency traders, and insurance and financial corporations. In turn, this has led to the so-called depersonalization of capital, the process that gradually separates financial capital from single individuals and their families in favor of larger conglomerates. Of course, globalization has not abolished the rich, but the holding and expansion of their wealth is closely linked to the performance of global investments and of money markets. Larger corporations that are not easily traced back to individual owners are increasingly moving funds, often for speculative purposes.

A more positive image of financial globalization is given by those theorists who stress the opportunities created for borrowers. Gerd Häusler has succinctly summarized the differences in the options available to a manufacturer who wants to build a new factory before and after the advent of globalization. Until as recently as the second half of the 20th century, the manufacturer seeking a loan would be restricted to asking its local bank. Thanks to the process of globalization, it can now look for the loan around the world to take advantage of lower interest rates, borrowing money in foreign rather than domestic currency, issuing stocks or bonds in domestic or international markets, or selling equities to a foreign company. Häusler points out that the manufacturer also has a better choice when it comes to financial products designed to protect the company from possible risks.

Financial systems have key roles in capitalist economies. First, they contribute to channel funds toward the most productive forms of investments as they help to identify the most profitable projects and then fund them. Second, they allow individuals, companies, and governments to expand their spending beyond their current incomes. Through credit markets, families can borrow against their future income. Through equity markets, firms can increase their capital against their future projects, and, through debt markets, governments can release bonds against their future revenues.