Ever notice that movies and books tend to portray financiers as evil and powerful monsters, bent on destroying all that decent folks hold dear for the sake of a fast buck? In his best-selling 1987 novel Bonfire of the Vanities,^[11] for example, Tom Wolfe depicts Wall Street bond trader Sherman McCoy (played by Tom Hanks in the movie version)^[12] as a slimy “Master of the Universe”: rich, powerful, and a complete butthead. Bashing finance is not a passing fad; you may recall the unsavory Shylock character from Shakespeare’s play The Merchant of Venice.^[13] And who could forget Danny DeVito^[14] as the arrogant little donut-scarfing “Larry the Liquidator” juxtaposed against the adorable old factory owner Andrew Jorgenson (played by Gregory Peck)^[15] in Other People’s Money.^[16] Even the Christmas classic It’s a Wonderful Life^[17] contains at best a dual message. In the film, viewers learn that George Bailey, the lovable president of the local building and loan association (a type of community bank) played by Jimmy Stewart, saved Bedford Falls from the clutches of a character portrayed by Lionel Barrymore, actress Drew Barrymore’s grand-uncle, the ancient and evil financier Henry F. Potter. (No relation to Harry, I’m sure.) That’s hardly a ringing endorsement of finance.^[18]

Truth be told, some financiers have done bad things. Then again, so have members of every occupational, geographical, racial, religious, and ethnic group on the planet. But most people, most of the time, are pretty decent, so we should not malign entire groups for the misdeeds of a few, especially when the group as a whole benefits others. Financiers and the financial systems they inhabit benefit many people in wealthier countries. The financial system does so much good for the economy, in fact, that some people believe that financiers are brilliant rocket scientists or at least “the smartest guys in the room.”^[19] This positive stereotype, however, is as flawed as the negative one. While some investment bankers, insurance actuaries, and other fancy financiers could have worked for NASA, they are far from infallible. The financial crisis that began in 2007 reminds us, once again, that complex mathematical formulas are less useful in economics (and other social sciences) than in astrophysics. Financiers, like politicians, religious leaders, and, yes, college professors, have made colossal mistakes in the past and will undoubtedly do so again in the future.

So rather than lean on stereotypes, this chapter will help you to form your own view of the financial system. In the process, it will review the entire system. It’s well worth your time and effort to read this chapter carefully because it contains a lot of descriptive information and definitions that will help you later in the text.