Ch.8 Finance Flashcards
FINANCE (a primer)
a term for matters regarding management, creation, and study of money and investments.
Deals with why an individual company or government acquires the money needed – called capital and how they spend or invest that money.
intermediary
A person who acts as a link between people in order to try to bring about an agreement or reconciliation; a mediator.
David Korten
argues that the global financial system which used to serve the needs of productive investment (raising capital for production and creation of value) has become a parasite that serves the interest of extractive investment, which extracts and concentrates wealth.
Extractive investment creates wealth or buying power without creating value (delinked from value). It both feeds of economic and financial instability and creates it.
Four developments contributed to the transformation of the financial system:
- US financed its expansion with dollars, which are now on the balance sheets of foreign banks, not subject to regulations and reserve requirements of US Federal Reserve.
- Computerization and globalization melded markets into a single global system where large transactions can be executed instantaneously.
- Investments decisions (and funds) became concentrated in a relatively small number of hands.
- Investment horizons have shortened dramatically because due to competition fund managers need to produce fast results–this leads managers to abandon productive investment opportunities that take time in favor of quick speculative investments
two common ways to create money without creating value:
pyramiding debt
bidding up asset values.
BIDDING UP ASSETS VALUES
The price of stock or asset is normally determined by demand for it, but in an economy wash with money it is often influenced by the speculator’s expectation that other speculators will continue to push the price up. The price goes up, fuelled by expectations, until the bubble bursts—buying power of individuals changes rapidly without change in underlying value (or productive capacity) of real goods.
PYRAMIDDING DEBT
If US buys a bond worth 1000$ from a person A, who puts the check in the bank, the bank can loan 900$ to person B (90%). If person B puts it in a bank, that bank can lend 810$ to person C, and so on. The initial 1000$ is pyramided into 10,000 (banks can expect 720$ in interest on the 9,000)
Causal Claim in The money game
FINANCE THEORY
Fund mobilization -> Productive investment -> Economic growth - > Society better off
Causal Claim in The money game THE MONEY GAME
Money delinked from value -> Speculative/
unproductive investment -> Economic instability -> Economy, society & nature harmed
High frequency trading
is a primary form of algorithmic trading in finance.
Use of sophisticated technological tools and computer algorithms to rapidly trade securities.
What is Value?
Impact:
effect on economic behaviour of other players (short-term focus, buying back stock)
Finance was not originally viewed as productive sector (facilitator) of the economy (not in GDP)
Finance was not originally viewed as productive sector (facilitator) of the economy (not in GDP)
value creation
the ways in which different types of resources (human, physical, and intangible) are established and interact to produce new goods and services. By “value extraction” I mean activities focused on moving around existing resources and outputs, and gaining disproportionately from ensuing trade.
Mazzucato
Eventually, “Intellectually impoverished view” of value creation became assumed as true
