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Hope Springs
Learning Objective
How can knowledge of the principles of money and banking help you to achieve your dreams?
Of course, sometimes things go right, especially when one knows what one is doing. Henry Kaufman,[7] who as a young Jewish boy fled Nazi persecution in the 1930s, is now a billionaire because he understood what made interest rates (and as we’ll see, by extension, the prices of all sorts of financial instruments) rise and fall. A little later, another immigrant from Central Europe, George Soros, made a large fortune correctly predicting changes in exchange ratesexchange rateThe price of one currency in terms of another..[8] Millions of other individuals have improved their lot in life (though most not as much as Kaufman and Soros!) by making astute life decisions informed by knowledge of the economics of money and banking. Your instructor and I cannot guarantee you riches and fame, but we can assure you that, if you read this book carefully, attend class dutifully, and study hard, your life will be the better for it.
The study of money and banking can be a daunting one for students. Seemingly familiar terms here take on new meanings. Derivatives refer not to calculus (though calculus helps to calculate their value) but to financial instruments for trading risks. Interest is not necessarily interesting; stocks are not alive nor are they holding places for criminals; zeroes can be quite valuable; CDs don’t contain music; yield curves are sometimes straight lines; and the principal is a sum of money or an owner, not the administrative head of a high school. In finance, unlike in retail or publishing, returns are a good thing. Military-style acronyms and jargon also abound: 4X, A/I, Basel II, B.I.G., CAMELS, CRA, DIDMCA, FIRREA, GDP, IMF, LIBOR, m, NASDAQ, NCD, NOW, OTS, r, SOX, TIPS, TRAPS, and on and on.[9]
People who learn this strange new language and who learn to think like a banker (or other type of financier) will be rewarded many times over in their personal lives, business careers, and civic life. They will make better personal decisions, run their businesses or departments more efficiently, and be better-informed citizens. Whether they seek to climb the corporate ladder or start their own companies, they will discover that interest, inflation, and foreign exchange rates are as important to success as are cell phones, computers, and soft people skills. And a few will find a career in banking to be lucrative and fulfilling. Some, eager for a challenging and rewarding career, will try to start their own banks from scratch. And they will be able to do so, provided they are good enough to pass muster with investors and with government regulators charged with keeping the financial system, one of the most important sectors of the economy, safe and sound.
One last thing. This book is about Western financial systems, not Islamic ones. Islamic finance performs the same functions as Western finance but tries to do so in a way that is sharia-compliant, or, in other words, a way that accords with the teachings of the Quran and its modern interpreters, who frown upon interest. To learn more about Islamic finance, which is currently growing and developing very rapidly, you can refer to one of the books listed in Suggested Readings.
Stop and Think Box
Gaining regulatory approval for a new bank has become so treacherous that consulting firms specializing in helping potential incorporators to navigate regulator-infested waters have arisen and some, like Nubank,[10] have thrived. Why are regulations so stringent, especially for new banks? Why do people bother to form new banks if it is so difficult?
Banking is such a complex and important part of the economy that the government cannot allow anyone to do it. For similar reasons, it cannot allow just anyone to perform surgery or fly a commercial airliner. People run the regulatory gauntlet because establishing a new bank can be extremely profitable and exciting.
