Global Financial System
ros57395_ch01.qxd
12/21/04
2:45 PM
Page 1
Part 1 The Global Financial System in Perspective
Try to imagine living in a world in which there are no financial institutions, no financial markets, and no financial assets. In such a world, there would be no opportunity to borrow against future income in order to purchase a home or an automobile, or to finance an education. Nor would you be able to save some of your current income (and, thereby, accumulate wealth over time) to handle the future expenses of a growing family or retirement. Businesses could not come up with the resources needed to produce the goods and services you like to consume. There would be no way to acquire insurance against sickness and death. Even the simple act of buying food would become extremely difficult, requiring you to barter simply to survive. The financial system has emerged to fill these and many other critical needs that require some separation in time between the use of resources (such as capital and labor), the production of goods and services, and the actual consumption of those goods and services desired. Financial markets and institutions deal with these issues and provide for the smooth functioning of modern economies, enabling resources to find their way to their most highly valued use. In so doing, the financial system dramatically enhances the efficiency of the economy and raises our standard of living. In order to set the stage for our study of the global financial system, Part One of Money and Capital Markets takes up essential topics—the linkage between financial and nonfinancial markets, the mechanism by which financial assets are created, valued, and traded, and the critical importance of public and private information in determining the value of a financial asset. Finally, any study of the financial system would be hopelessly ill-informed if it were not conducted against the backdrop of the fastpaced, ever-changing world of finance. Spurred on by technology
12/21/04
2:45 PM
Page 1
Part 1 The Global Financial System in Perspective
Try to imagine living in a world in which there are no financial institutions, no financial markets, and no financial assets. In such a world, there would be no opportunity to borrow against future income in order to purchase a home or an automobile, or to finance an education. Nor would you be able to save some of your current income (and, thereby, accumulate wealth over time) to handle the future expenses of a growing family or retirement. Businesses could not come up with the resources needed to produce the goods and services you like to consume. There would be no way to acquire insurance against sickness and death. Even the simple act of buying food would become extremely difficult, requiring you to barter simply to survive. The financial system has emerged to fill these and many other critical needs that require some separation in time between the use of resources (such as capital and labor), the production of goods and services, and the actual consumption of those goods and services desired. Financial markets and institutions deal with these issues and provide for the smooth functioning of modern economies, enabling resources to find their way to their most highly valued use. In so doing, the financial system dramatically enhances the efficiency of the economy and raises our standard of living. In order to set the stage for our study of the global financial system, Part One of Money and Capital Markets takes up essential topics—the linkage between financial and nonfinancial markets, the mechanism by which financial assets are created, valued, and traded, and the critical importance of public and private information in determining the value of a financial asset. Finally, any study of the financial system would be hopelessly ill-informed if it were not conducted against the backdrop of the fastpaced, ever-changing world of finance. Spurred on by technology
References: to Explore Duca, John V. “The Democratization of America’s Capital Markets.” Economic and Financial Review, Federal Reserve Bank of Dallas, Second Quarter 2001, pp. 10–19. Hilgert, Mariann A.; Jeanne M. Hogarth; and Sondra G. Beverely. “Household Financial Management: The Connection between Knowledge and Behavior.” Federal Reserve Bulletin, July 2003, pp. 309–22. Peach, Richard, and Charles Steindel. “A Nation of Spendthrifts? An Analysis of Trends in Personal and Gross Savings.” Current Issues in Economics and Finance, Federal Reserve Bank of New York, September 2000. Valderrame, Diego. “Financial Development, Productivity and Economic Growth.” FRBSF Economic Letter, Federal Reserve Bank of San Francisco, June 27, 2003.