A Permanent Crisis by Marc Chesney

Author:Marc Chesney
Language: eng
Format: epub
ISBN: 9783030005184
Publisher: Springer International Publishing

Over-the-Counter Transactions

Most financial transactions are not conducted on organised markets but rather over-the-counter.7 These are contracts between two financial players, the modalities of which are known only to them. Lack of transparency is the result, and in conjunction with the complexity of the financial system, it increases the risks of transmission of crises or financial shocks.8 This situation allows systemic banks, involved in large-scale over-the-counter transactions , to keep their status and privileges and especially to continue to extract an economic rent or a guaranteed flow of income. In fact, the more a bank is susceptible of bringing down others in its fall, the more it increases its systemic nature, which allows it to benefit from a public guarantee financed by the taxpayer. Society is thus taken hostage.

Furthermore, in order to be operational, the invisible hand of Adam Smith obligatorily requires a market economy on which aggregate supply and demand intersect in such a way that prices and volumes can be set at equilibrium in a transparent manner. In addition to the lack of transparency, over-the-counter transactions are incompatible with the existence of such an economy.

As to derivatives often dealt with over the counter, the problem is more serious. Their prices mainly result from complex formulae or algorithms and therefore have only a remote connection to supply and demand.9 With the development of over-the-counter transactions on derivatives, the risk is always less predictable and less measurable. It becomes opaque and diffuse, which has its effects on the economy and society.

Currencies are also essentially traded over-the-counter. FOREX is the most important financial market in the world, with average daily volumes of close to $5 trillion.

We are therefore faced with the paradox of an economy prone to entrepreneurial spirit and the risk-taking associated with it, and that at the same time has never issued so many derivatives or “hedging products” as now. These products are traded at such a scale that they generate a systemic risk for the global economy as well as for human society and nature.

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