In the course of the past few years an insufficiently controlled financial system equipped with wrong incentives has pushed forward a problematic development which resulted first in the financial crisis and finally in the most severe crisis of the real economy since the Second World War.
The reaction of most states – to counteract the crisis with public expenses and income reductions – has shown that the costs of combating the crisis are now born by the public.
- How must the financial system of the 21st century look like in order to be able to support a sustainable and fair economic development in the best possible way?
- How could the financial system be restored into its actual function, namely as a means for smoothly functioning real economic cycles?
- How can future wrong developments be prevented?
- Which institutional frameworks are required for that purpose at national, European and global levels? Which special role can and shall the EU play in this context?
Money and the Financial system – Money an ingenious invention
In order to finance their terraced house Mr. and Mrs Little concluded a credit contract ten years ago. Thanks to an inheritance the Little family could repay the credit in 2003 ahead of schedule.
This is only one of the many advantages of money compared to natural means of exchange. Those who need money can lend it – under certain conditions. And if you invest money it can multiply. For this reason the remaining funds of the inheritance of the Klein family – about 20,000 Euros should be placed in a safe and profitable way. A long-time friend of the family recommended them at that time real estate fund certificates. For lack of time and knowledge Anne and Johnny Little took only occasionally care of their investments.
The great shock came in autumn 2008: At that time the Little family was also made aware of the US real estate bubble. From the media they learned that they had financed with their real estate certificates the mortgages of US-American house owners who couldn’t repay their credits any more. A glance into their portfolio confirmed the fears of the Little family. The value of their certificates was reduced to half. Still: The Little family was quite lucky under the circumstances. They only had to get over the loss of about 10,000 Euros, whereas for example many US Americans have lost their homes. In any case the Little family has lost its confidence in financial investments. But, Mr. Little asked himself, what would have been the alternatives?