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 and the creativity of those working in the financial marketplace, the financial system has rapidly evolved to better perform its traditional roles and meet new challenges. This rapid pace of change is unlikely to slow in the future, requiring all of us to learn how to adapt to a dynamic financial marketplace.
Chapter 1 Functions and Roles of the Financial System in the Global Economy What’s in This Chapter? Key Topics Outline Learning Objectives in This Chapter • You will understand the functions performed and the roles played by the system of financial markets and financial institutions in the global economy and in our daily lives. • You will discover how important the money and capital markets and the whole financial system are to increasing our standard of living, generating new jobs, and building our savings to meet tomorrow’s financial needs. How the Financial System Interfaces with the Economy The Importance of Savings and Investment The Nature of Financial Claims and Money and Capital Markets Functions of the Money and Capital Markets: Savings, Wealth, Liquidity, Credit, Payments, Risk Protection, and Setting Public Policy Perfect and Efficient Markets The Dynamic Financial System: Key Trends Under Way
Chapter 1 Functions and Roles of the Financial System in the Global Economy
Introduction to the Financial System
This book is devoted to the study of the financial system—the collection of markets, institutions, laws, regulations, and techniques through which bonds, stocks, and other securities are traded, interest rates are determined, and financial services are produced and delivered around the world. The financial system is one of the most important creations of modern society. Its primary task is to move scarce loanable funds from those who save to those who borrow to buy goods and services and to make...