Finance Roll

What is going on to the global financial market? This probably is the question being asked most frequently in the mean time. I am not an economist. But I do really concern about the current financial crisis and the economy like the other people. I want to understand the current situation. I want to see the complete picture. Therefore, I try to understand and analysis the whole event in a simplified way, and prepare to express my idea in laymen text.

Let's start thinking from the ground up
 
In the society, reasonably, trades among people are negotiated by the participants as a fair exchange of goods and services. However, it is not easy to match the same values of different goods and services every time. Therefore, money appeared. What is money? It is a recognized medium of exchange, agreed by all the participants. In other words, it is an IOU or a credit for the seller and a debt for the buyer. For example, A sells goods in the market. When B comes to buy the goods from A, B gives an IOU to A as an exchange. With that IOU, A can buy goods back from B or other parties with the equal value. The IOU is the money. It gives people a flexible way in trading.
 
As money is a credit that is widely accepted as a medium of exchange, therefore, we need a central place to have the control on money, such as to standardize the appearance, to control the amount of money supply to the market, etc. This is the government, or the Federal Reserve. Having a central control is very important, because this can enable us to measure the value of a good or service against another, based on what each sells for in the market. How many bottles of beer are equivalent in value to a pair of sport shoes can only be determined in the market place. Once again, money is credit. Every dollar of credit is matched by an equal amount of debt. You work hard and get paid with an IOU worth the amount $1000. Then you can use this to exchange for goods and services.
 
As you can see the importance of money, immediately, maybe the next question you will ask is: Why not print more money? Will our country be wealthier in that way? This is a good question. It should be explained by an example. Let's suppose the government suddenly print out a huge amount of money, and then give every person a certain amount of that money. What would people do with that extra money? Some people will use that to pay the debt, some will save the money up, and some will spend that. Let's assume some people are going to buy a notebook from Dell. If the supply of notebook remains unchanged, but the demand suddenly increased, then obviously Dell will raise the price accordingly. On opposite, if Dell wants to keep the price unchanged, then they need to manufacture more notebooks. However, there are many limitations to increase the productivity, such as the increase of costs of labors, materials and transportation, etc. When the maximum capacity of production is arrived, then the price of the notebook will increase unavoidably.
 
So, similar to all other goods and services, print more money will only cause the raise of prices, which is inflation. Finally, the supply and demand will back to the point of equilibrium again. Therefore, money is just a medium of exchange, it is a tool. The responsibility of the government or the Federal Reserve is to keep the supply of money in a reasonable balance with the needs of producers and the availability of goods and services. You can imagine that this is a very complicated work and required a wide range of knowledge in the economy and finance area.
 
Next, let's think about the bank
 
What is bank? A bank is a business that provides financial services, usually for profit. The basic services provided by a bank include receiving deposits of money, lending money and processing transactions. A bank accepts deposits from customers like you and in turn makes loans based on those deposits. Every fee you pay to your bank enables them to reinvest in themselves, giving them more money to loan to the others. Banks are in business to make a profit. Their profit generally comes from the difference in interest paid to depositors and the interest earned on loans. Making loans helps banks make money.
 
Banks will offer other financial services to make additional profit, services provided usually include:
* Taking deposits from their customers and issuing checking and savings accounts to individuals and businesses
* Loans to individuals and businesses
* Home loan
* Cashing cheques
* Mutual Funds
* Signature Guarantees
* Facilitating money transactions such as wire transfers and cashiers checks
* Issuing credit cards, ATM cards, and debit cards
* Selling insurance products or investment products
* Stock broking
* Storing valuables, particularly in a safe deposit box
* Cashing and distributing bank rolls
* Consumer & commercial financial advisory services
* Pension & retirement planning