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Fixing the financial system

Georgina Peters considers how the system came unglued and what it will take to repair it.

By Georgina Peters 01 September 2009

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While many can debate its comparative severity, few can debate that the world economy has been in a recession since mid-2008.


And while many can debate who’s most to blame for causing the financial crises that have struck so many companies and industries, few can deny that the failure of global financial systems played a huge role in the meltdown.


Will the financial world repair itself and return to normalcy soon? Hélène Rey, a professor of economics at London Business School, minces no words: “Looking forward, I foresee instability in global financial markets.”


Yet the key question may actually be can the financial world repair itself? Stephen Hester, Group Chief Executive of the RBS Group, acknowledges that, while the world’s financial systems didn’t collapse in the middle of the 2008–2009 crises, many people have much to learn if things are to be different in the future.


“It is clear there are important lessons we should all learn – big lessons that will take years. The world financial system is no longer in a position of near collapse.


We are now in a nasty but recognizable recession. Something has worked. It is functioning but not in the way we’d like it to be functioning,” he says, adding what now is all too clear: “We have learned that the financial system does not stand apart from the economy. The financial system is a mirror of the economy. We have all learned about interconnectedness.”


Hard to define


But what is meant by the term “financial systems” and how did they fail?


A short, yet comprehensive, definition is hard to find; one can start by saying that any organization or process that enables currencies or credit to move between lenders and borrowers is part of the system.

But, of course, anything involving trillions of anything is inevitably more than that.


Even online reference tools, like Wikipedia, struggle to simplify what is a gargantuan labyrinth of money on the move: “... the financial system is a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions.”


Yet, it’s precisely that hard-to-define scope of the world’s financial systems that helps to pinpoint the probable reasons those systems failed and helped trigger the current global recession. What went wrong? At least four interconnected problems caused a great portion of today’s financial woes.


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