9th Conference European Sociological Association

RN09 Economic Sociology

2009-09-03 09:00:00 2009-09-03 10:30:00 Thursday, 3 September 09:00 - 10:30 Social Impact of the Crisis Building AA, AA.229

Financial octopus: emergence and development of the present financial crisis

Present financial crisis has its origins in a finance-led society and its repercussions to the economic and social world are an evidence of the financial leverage. Financial world is more close to daily life than we can sometimes suppose. It is imbricated in the social actors's everyday life's and is not a distant or esoteric bunch of slang words. We define financial system as an octopus, silently structuring society.
To avoid being trapped in fascination of the object, we firstly describe and produce a brief architecture of financial system concerning the identification of the diverse markets (capital, stocks, bonds, derivatives, other); social actors involved (from investment banks to regulatory institutions, and core participants inside institutions); and flows (inter-markets and intra-market between institutions).
Bearing this architecture in mind, we look closer to the derivatives market. There is empirical evidence of a numerous growth of financial instruments which led specifically to the development of derivatives market (mortgage-backed securities (MBS) and collateralized debt obligations (CDO)). These instruments are based on securitization and collateralization, aiming to spread risk through markets, countries and agents. Structured vehicles of investment (SVI) were created to develop and trade these instruments, allowing investment banks and hedge funds to take more risky and leveraged positions.
As these strategies seem to be circumscribed to the financial sphere, it should be emphasized that they led to an increased access of credit and products to a broader population. The housing market is one example of the influence of the financial market in the real economy. In this context subprime is, paradoxically, an example of both financial leveraged benefiting households and latter contributing to the failure of the financial system.
We observed the last decades with strong evolution of financial derivatives markets. However, financial crises have succeeded, showing the vulnerability of the system and the gap between financial enrichment and real economy evolution.
This exploratory analysis, describing the financial markets octopus, concludes that the origins of the crises are based on the real. Financial markets are not an esoteric branch of economics, but are an overly integrated system through and inside daily economics and social life.