Memories are life Essay

â€Å"The only real treasure is in your head. Memories are better than diamonds and nobody can steal them from you† by Rodman Philbrick, The Last Book in the Universe. If we think about what life is made up, we can say that memories build life. We save all the important and happy events that occurred in our lives as well as the most sad and worst moments. It is said that the brain is the most powerful part of humans, but as part of the brain, memory is an essential piece of it. As I mentioned before, memories build life, each day we put on practice what we have learned and live. I believe that in life we don’t have anything secure but our memories, once we die we don’t take anything we have right now. When we remember happy moments we have live, it’s like re-living them again and feeling the joy we felt at the moment. I decided to choose the memory as the topic of my Psychology class essay because from a while ago I started to have issues with my memory. At first I thought it was because of the problems that I was going through at the time, and also preparing for college. Time passed and I still was having trouble with remembering stuff, I came to think it was a hereditary health problem because my dad and grandmother never remember something. I feel frustrated because without a memory is like we never have lived, we constantly live through memories. Remembering what we have gone through and manage to take a positive attitude even if the memory brings us negative feelings. In this essay I will cover specific topics about the memory which is â€Å"the retention of information or experience over time as the result of three key processes: encoding, storage, and retrieval†, according to Laura A. King in  Experience Psychology. Throughout the essay I will discuss the basic memory process, also I will talk about the different stages of memory as well as the different types of memory, along with the explanations of when the memory fails (forgetting). In my opinion these three subjects are very essential part to understand how the memory works and find the explanation of why we forget things, which is my case. But also relate these topics to our daily lives. To begin with, I will explain the process of memory so later on I can discuss the different possibilities of why we forget. The first step in the process of memory is called encoding which is the processing information into memory accordingly to a Sparknotes article, Memory. For instance, we might remember where we ate in the morning even if we didn’t try remembering it but in the contrary it is possible that we are going to be able to remember the material in textbooks we covered during elementary school, high school or even more recent in college. It is stated that in the process of memory encoding, we have to pay attention to the information so we can later recall all the information. In the content of Memory, the second step in memory process is storage, the retention of information over time and how this information is represented in memory (King). In this process is often use the Atkinson-Shiffrin theory that is made up of three separate systems: sensory memory- time frames of a fraction of a second to several seconds, short-term memory- time frames up to 30 seconds and long-term memory- time frames up to life time (King). The third and last step of this course is memory retrieval, the process of information getting out of storage. Likewise, I will explain the first stage of memory called sensory memory or immediate memory. As stated in Experience Psychology, the sensory memory holds information from the world in its original sensory form for only an instant, not much longer that a brief time. In this stage of memory the â€Å"five† senses are used to hold the information accurately. In Sensory Memory by Luke Mastin, the stimulus that is detected by our senses has two options, it can either be ignored meaning it would go away at the instance or it can be perceived staying in our memory. As I mentioned before, our senses are being used in the sensory memory stage and have their specific name for example when we perceived the information through our vision it is called  iconic memory also referred as visual sensory memory. The iconic memory holds an image only for about  ¼ of a second. Not only but also, we also have the echoic memory which refers to auditory sensory memory, this function is in charge to hold part of what we listen/hear. For instance, when the professor is dictating a subject, we are trying to write fast so we can hold on all the information given at the moment and not forget what the professor said. Another stage of memory is called the short-term memory (STM), according to a web article Short-Term Memory, of Luke Bastin, the short-term memory is responsible for storing information temporarily and determining if it will be dismissed or transferred on to our third stage called long-term memory. Short-term memory sometimes is associated with working memory, which is a newer concept that the British psychologist Alan Baddeley came up with. Although working memory emphasizes in the brain’s manipulation and how it collects information so we can easily make decisions as well solve problems and mostly understand the information. It said that the working memory is not as passive as the short-term memory but both have limited capacity to retained information. Additionally to this stage, we have the fi nding of George Miller which wrote in his book called The Magical Number Seven, Plus or Minus Two. In this book Miller talks about two different situations. The first kind of situation is called absolute judgment which states that a person should correctly differentiate between very similar items such as shades of green and high/low-pitched tones. The second situation states that a person must recall items presented in a sequence, meaning that a person must retain certain number of chunks in their short-term memory. King also mentions that to improve short-term memory we consider two ways of doing it, chunking and rehearsal. According to King, chunking involves grouping or packing information that exceeds the 7  ± 2 memory span into higher-order units that can be remembered as single units. For example, when the professor is dictating a list of things like: cold, water, oxygen, air, rain and snow, we are likely able to recall all words or even better all six words instead of having a list like: S IXFL AGSG REATA MERI CA. When we have a list like that it will be harder to remember it because none of the six chunk words make sense, but if we re-chunk the letters we get â€Å"Six Flags Great America†, and that way we have better chance to remember it. The second way to improve our short-term memory is by  rehearsal, ac tually there are two types of rehearsal, maintenance rehearsal and elaborative rehearsal. Maintenance rehearsal is the repeating of things over and over; usually we use this type of rehearsal. In the other hand, we have the elaborative rehearsal which is the organizing, thinking about, and linking new material to existing memories. Continuing with the stages of memory, now I will talk about the third stage which is the long-term memory. In the article, What Is Long-Term Memory? by Kendra Cherry, long-term memory (LTM) refers to the continuing storage of information. In difference of the other two stages of memory, LTM memories can last for a couple of days to as long as many years. LTM is divided into types of memory, declarative (explicit) memory and procedural (implicit) memory. Later on I will explain in detail what are these two types of memory. Now that I have gone through the three stages of memory which are sensory memory, short-term memory and long-term memory, I will discuss the different types of memory. The different types of memory rely on the long-term memory section, the first type of memory that I will talk about is explicit memory also known as declarative memory. This type of memory â€Å"is the conscious recollection of information, such as specific facts and events and, at least in humans, i nformation that can be verbally communicated† (Tulving 1989, 2000). Some examples when we use our explicit memory is when we try to remember our phone number, writing a research paper or recalling what time and date is our appointment with our doctor. It said that this process type of memory is one of the most used in our daily lives, as we constant remember the tasks that we have to do in our day. In another article by Kendra Cherry called Implicit and Explicit Memory, Two Types of Long-Term Memory, informs us about two major subtypes that falls into the explicit memory. One is called episodic memories which are memories of specific episodes of our life such as our high school graduation, our first date, our senior prom and so on. The second subsystem of explicit memory is the semantic memory; this type of memory is in charge to recall specific factual information like names, ideas, seasons, days of the month, dates, etc. I can easily remember my quienceaà ±era party, it was May 24, 2008, at this exact moment I can recall what was the first thing I did when I woke up that and also what I did before sleeping but there are episodes on that day that I’m not able to remember. Moreover, I will discuss the second type of memory which is  implicit memory. Stated by King, implicit memory is the memory which behavior is affected by prior experience without a conscious recollection of that experience, in other words things we remember and do without thinking about them. Some examples of our implicit memories are driving a car, typing on a keyboard, brushing our teeth, and singing a familiar song. Within the implicit memory we have three subtypes; the first one is the procedural memory that according to King is a type of implicit memory process that involves memory for skills. The procedural memory process basically is the main base of the implicit memory, since all of us unconsciously do many things throughout the day, like I mentioned before driving a car or simply dress ourselves to go to school, work or wherever we have to go. The other substype of implicit memory is the classical conditioning which involves learning a new behavior via the process of association, it is said that two stimuli are linked together to produce a new learned response. For instance, phobias are a classical conditioning as the Little Albert Experiment result was. I personally I’m more than afraid to spiders, in other words my phobia is called arachnophobia which can be control and learn to overcome the fear and anxiety it gives me every time I see a spider or even think about a spider. The last subsystem of the implicit memory process is the priming, Kings states that priming is the activation of information that people already have in storage to help them remember new information better and faster. Priming it is sometimes called recognition memory; an example of priming is when little kids are learning colors, they associate two things such as apple and color red. To learn the red color they will remember the apple and it w ould be easier for them. Furthermore, I will talk about what I think is the most important part of my essay that is forgetting. As I said at beginning of my essay I have experienced difficulties with my memory, I forget simple things. For instance, in daily bases my mom gives me a message to give my dad or sisters or just asks me to do something for her, I say yes I will do it but later on I totally forget. Before taking this class, I believe that the reason I forget things, it is because I’m distracted at the time and didn’t paid attention so that’s why later I’m not able to remember it. Now that I have taken the class and researched the topic I found reasons of why we forget things, one reason is the retrieval failure, that is the failure process of  accessing stored memories. It is what we do when we have exams; we try to remember what we have learned/study and we just don’t remember anything. Within the retrieval failure we have what is called interference theory, it is the theory that people forget not because memories are lost from storage but because other informati on gets in the way of what they want to remember (King). There are two kinds of interference that can be a possible reason of forgetting, are is called proactive and retroactive. In the proactive interference occurs when the current information is lost because it is mixed up with previously learned, similar information. This happens to me when I try to study two different subjects right after another, I get confused about both subjects and sometimes I even stop studying because I’m not able to focus and understand the material. The second type of retroactive interference is when the new information interferes with the old information memories, an example of it is when at jobs we learned a new task but forget older tasks. Moving forward, we have another possible cause of forgetting is called decay theory. In another article by Kendra Cherry, Explanations for Forgetting, Reason Why We Forget, decay theory is a memory trace that is created every time a new theory is formed. The only problem is that over time this trace disappears. The failure to store is also a possible reason that causes us to forget, this is because encoding failures sometimes prevent information from entering long-term memory (Cherry). In conclusion, I believe that one of the most essential part of the brain is our memory. We can have billions of dollars and buy anything we want but at the end the only thing we are taking of us is what we have live (memories). We need memories in our life not just to drive from A place to B place or to get the right answer to pass an exam but to remember who we are and what people we have by our side. To revive all the moments we encounter happiness and even sadness, â€Å"memory is a way of holding onto the things you love, the things you are, the things you never want to lose† from the television show The Wonder Year.

The Theory of Financial Intermediation:

THE THEORY OF FINANCIAL INTERMEDIATION: AN ESSAY ON WHAT IT DOES (NOT) EXPLAIN by Bert Scholtens and Dick van Wensveen SUERF – The European Money and Finance Forum Vienna 2003 CIP The Theory of Financial Intermediation: An Essay On What It Does (Not) Explain by Bert Scholtens, and Dick van Wensveen Vienna: SUERF (SUERF Studies: 2003/1) ISBN 3-902109-15-7 Keywords: Financial Intermediation, Corporate Finance, Assymetric Information, Economic Development, Risk Management, Value Creation, Risk Transformation. JELclassificationnumbers: E50,G10,G20,L20,O16  © 2003 SUERF, ViennaCopyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyright holder(s); the same applies to whole or partial adaptations. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take l egal or other action for this purpose. THE THEORY OF FINANCIAL INTERMEDIATION AN ESSAY ON WHAT IT DOES (NOT) EXPLAIN+ by Bert Scholtens* Dick van Wensveen†  Also read: Theories Seen in OjtAbstract This essay reflects upon the relationship between the current theory of financial intermediation and real-world practice. Our critical analysis of this theory leads to several building blocks of a new theory of financial intermediation. Current financial intermediation theory builds on the notion that intermediaries serve to reduce transaction costs and informational asymmetries. As developments in information technology, deregulation, deepening of financial markets, etc. end to reduce transaction costs and informational asymmetries, financial intermediation theory shall come to the conclusion that intermediation becomes useless. This contrasts with the practitioner’s view of financial intermediation as a value-creating economic process. It also conflicts with the continuing and increasing economic importance of financial intermediaries. From this paradox, we conclude that current financial intermediation theory fails to provide a satisf actory understanding of the existence of financial intermediaries. We wish to thank Arnoud Boot, David T. Llewellyn, Martin M. G. Fase and Robert Merton for their help and their stimulating comments. However, all opinions reflect those of the authors and only we are responsible for mistakes and omissions. * Associate Professor of Financial Economics at the University of Groningen; PO Box 800; 9700AVGroningen;TheNetherlands(correspondingauthor). †  Professor of Financial Institutions at the Erasmus University of Rotterdam; PO Box 1738; 3000 DR Rotterdam; The Netherlands, (former Chairman of the Managing Board of MeesPierson).We present building blocks for a theory of financial intermediation that aims at understanding and explaining the existence and the behavior of real-life financial intermediaries. When information asymmetries are not the driving force behind intermediation activity and their elimination is not the commercial motive for financial intermediaries, the question arises which paradigm, as an alternative, could better express the essence of the intermediation process. In our opinion, the concept of value creation in the context of the value chain might serve that purpose.And, in our opinion, it is risk and risk management that drives this value creation. The absorption of risk is the central function of both banking and insurance. The risk function bridges a mismatch between the supply of savings and the demand for investments as savers are on average more risk averse than real investors. Risk, that means maturity risk, counterparty risk, market risk (interest rate and stock prices), life expectancy, income expectancy risk etc. , is the core business of the financial industry.Financial intermediaries can absorb risk on the scale required by the market because their scale permits a sufficiently diversified portfolio of investments needed to offer the security required by savers and policyholders. Financial intermediaries are not just agents wh o screen and monitor on behalf of savers. They are active counterparts themselves offering a specific product that cannot be offered by individual investors to savers, namely cover for risk. They use their reputation and their balance sheet and off-balance sheet items, rather than their very limited own funds, to act as such counterparts.As such, they have a crucial function within the modern economy. TABLE OF CONTENTS 1. Introduction7 2. The Perfect Model9 3. Financial Intermediaries in the Economy11 4. Modern Theories of Financial Intermediation15 5. Critical Assessment21 6. An Alternative Approach of Financial Intermediation31 7. Building Blocks for an Amended Theory37 8. A New Research Agenda41 References45 Appendix A53 Tables 1. Share of Employment in Financial Services in Total Employment (percentages)12 2. Share of Value-Added in Financial Services in GDP (percentages)12 3.Financial Intermediary Development over Time for About 150 Countries (percentages)12 4. (Stylized) Conte mporary and Amended Theory of Financial Intermediation38 SUERF56 SUERF Studies57 1. Introduction When a banker starts to study the theory of financial intermediation in order to better understand what he has done during his professional life, he enters a world unknown to him. That world is full of concepts which he did not, or hardly, knew before and full of expressions he never used himself: asymmetric information, adverse selection, monitoring, costly state verification, moral hazard and a couple more of the same kind.He gets the uneasy feeling that a growing divergence has emerged between the micro- economic theory of banking, as it took shape in the last three decades, and the everyday behavior of bankers according to their business motives, expressed in the language they use. This essay tries to reflect on the merits of the present theory of financial intermediation, on what it does and does not explain from both a practical and a theoretical point of view. The theory is impres sive by the multitude of applications in the financial world of the agency theory and the theory of asymmetric information, of adverse selection and moral hazard.As well as by their relevance for important aspects of the financial intermediation process, as is shown in an ever-growing stream of economic studies. But the study of all these theories leaves the practitioner with the impression that they do not provide a satisfactory answer to the basic question; which forces really drive the financial intermediation process? The current theory shows and explains a great variety in the behavior of financial intermediaries in the market in their relation to savers and to investors/entrepreneurs.But as far as the authors of this essay are aware, it does not, or not yet, provide a satisfactory answer to the question of why real-life financial institutions exist, what keeps them alive and what is their essential contribution to (inter)national economic welfare. We believe that this question cannot be addressed by a further extension of the present theory, by the framework of the agency theory and the theory of asymmetric information. The question goes into the heart of the present theory, into the paradigm on which it is based.This paradigm is the famous classical idea of the perfect market, introduced by Marshall and Walras. Since then, it has been the leading principle, the central point of reference in the theory of competition, the neoclassical growth theory, the portfolio theory and also the leading principle of the present theory of financial intermediation. Financial intermediaries, according to that theory, have a function only because financial markets are not perfect. They exist by the grace of market 7 8Introduction imperfections.As long as there are market imperfections, there are intermediaries. As soon as markets are perfect, intermediaries are redundant; they have lost their function because savers and investors dispose of the perfect information needed to find each other directly, immediately and without any impediments, so without costs, and to deal at optimal prices. This is the general equilibrium model a la Arrow-Debreu in which banks cannot exist. Obviously, this contrasts with the huge economic and social importance of financial intermediaries in highly developed modern economies.Empirical observations point at an increasing role for financial intermediaries in economies that experience vastly decreasing information and transaction costs. Our essay goes into this paradox and comes up with an amendment of the existing theory of financial intermediation. The structure of this paper is as follows. First, we introduce the foundations of the modern literature of financial intermediation theory. From this, we infer the key predictions with respect to the role of the financial intermediary within the economy.In Section 3, we will investigate the de facto role of financial intermediaries in modern economies. We discuss views on the theoretical relevance of financial intermediaries for economic growth. We also present some stylized facts and empirical observations about their current position in the economy. The mainstream theory of financial intermediation is briefly presented in Section 4. Of course, we cannot pay sufficient attention to all developments in this area but will focus on the basic rationales for financial intermediaries according to this theory, i. . information problems, transaction costs, and regulation. Section 5 is a critical assessment of this theory of financial intermediation. An alternative approach of financial intermediation is unfolded in Section 6. In Section 7, we present the main building blocks for an alternative theory of financial intermediation that aims at understanding and explaining the behavior of real-life financial intermediaries. Here, we argue that risk management is the core issue in understanding this behavior.Transforming risk for ultimate savers and lenders and ris k management by the financial intermediary itself creates economic value, both for the intermediary and for its client. Accordingly, it is the transformation and management of risk that is the intermediaries’ contribution to the economic welfare of the society it operates in. This is – in our opinion – the hidden or neglected economic rationale behind the emergence and the existence and the future of real-life financial intermediaries.In Section 8, we conclude our essay with a proposal for a research agenda for an amended theory of financial intermediation. 2. The Perfect Model Three pillars are at the basis of the modern theory of finance: optimality, arbitrage, and equilibrium. Optimality refers to the notion that rational investors aim at optimal returns. Arbitrage implies that the same asset has the same price in each single period in the absence of restrictions. Equilibrium means that markets are cleared by price adjustment – through arbitrage â€⠀œ at each moment in time.In the neoclassical model of a perfect market, e. g. the perfect market for capital, or the Arrow-Debreu world, the following criteria usually must be met: –no individual party on the market can influence prices; – conditions for borrowing/lending are equal for all parties under equal circumstances; –there are no discriminatory taxes; –absence of scale and scope economies; –all financial titles are homogeneous, divisible and tradable; – there are no information costs, no transaction costs and no insolvency costs; –all market parties have ex ante nd ex post immediate and full information on all factors and events relevant for the (future) value of the traded financial instruments. The Arrow-Debreu world is based on the paradigm of complete markets. In the case of complete markets, present value prices of investment projects are well defined. Savers and investors find each other because they have perfect inform ation on each others preferences at no cost in order to exchange savings against readily available financial instruments.These instruments are constructed and traded costlessly and they fully and simultaneously meet the needs of both savers and investors. Thus, each possible future state of the world is fully covered by a so-called Arrow-Debreu security (state contingent claim). Also important is that the supply of capital instruments is sufficiently diversified as to provide the possibility of full risk diversification and, thanks to complete information, market parties have homogenous expectations and act rationally.In so far as this does not occur naturally, intermediaries are useful to bring savers and investors together and to create instruments that meet their needs. They do so with reimbursement of costs, but costs are by definition an element – or, rather, characteristic – of market imperfection. Therefore, intermediaries are at best tolerated and would be elim inated in a move towards market perfection, with all intermediaries becoming 9 10The Perfect Model redundant: the perfect state of disintermediation. This model is the starting point in the present theory of financial intermediation.All deviations from this model which exist in the real world and which cause intermediation by the specialized financial intermediaries, are seen as market imperfections. This wording suggests that intermediation is something which exploits a situation which is not perfect, therefore is undesirable and should or will be temporary. The perfect market is like heaven, it is a teleological perspective, an ideal standard according to which reality is judged. As soon as we are in heaven, intermediaries are superfluous. There is no room for them in that magnificent place.Are we going to heaven? Are intermediaries increasingly becoming superfluous? One would be inclined to answer both questions in the affirmative when looking to what is actually happening: Incre asingly, we have to make do with liberalized, deregulated financial markets. All information on important macroeconomic and monetary data and on the quality and activities of market participants is available in ‘real time’, on a global scale, twenty-four hours a day, thanks to the breathtaking developments in information and communication technology.Firms issue shares over the Internet and investors can put their order directly in financial markets thanks to the virtual reality. The communication revolution also reduces information costs tremendously. The liberalization and deregulation give, moreover, a strong stimulus towards the securitization of financial instruments, making them transparent, homogeneous, and tradable in the international financial centers in the world. Only taxes are discriminating, inside and between countries. Transaction costs are still there, but they are declining in relative importance thanks to the cost efficiency of ICT and efficiencies of scale.Insolvency and liquidity risks, however, still are an important source of heterogeneity of financial titles. Furthermore, every new crash or crisis invokes calls for additional and more timely information. For example, the Asia crisis resulted in more advanced and verifiable and controllable international financial statistics, whereas the Enron debacle has put the existing business accounting and reporting standards into question. There appears to be an almost unstoppable demand for additional information. 3. Financial Intermediaries in the EconomySo, we are making important progress in our march towards heaven and what happens? Is financial intermediation fading away? One might think so from the forces shaping the current financial environment: deregulation and liberalization, communication, internationalization. But what is actually happening in the real world? Do we really witness the demise of the financial institutions? Are the intermediaries about to vanish from planet E arth? On the contrary, their economic importance is higher than ever and appears to be increasing.This is the case even during the 1990s when markets became almost fully liberalized and when communication on a global scale made a real and almost complete breakthrough. The tendency towards an increasing role of financial intermediation is illustrated in Tables 1 and 2 that give the relative contribution of the financial sector to the two key items of economic wealth and welfare in most nations, i. e. GDP and labor. These tables show that, even in highly developed markets, financial intermediaries tend to play a substantial and increasing role in the current economy.Furthermore, Demirguc-Kunt and Levine (1999) among others, conclude that claims of deposit money banks and of other financial institutions on the private sector have steadily increased as a percentage of GDP in a large number of countries (circa 150), rich and poor, between the 1960s and 1990s. The pace of increase is not declining in the 1990s. This is reflected in Table 3. In the 1960s, Raymond Goldsmith (1969) gave stylized facts on financial structure and economic development (see appendix A). He found that in the course of economic development, a country’s financial system grows more rapidly than national wealth.It appears that the main determinant of the relative size of a country’s financial system is the separation of the functions of saving and investing among different (groups of) economic units. This observation sounds remarkably modern. Since the early 1990s, there has been growing recognition for the positive impact of financial intermediation on the economy. Both theoretical and empirical studies find that a well-developed financial system is beneficial to the economy as a whole. Basically the argument behind this idea is that the efficient allocation of capital within an economy fosters economic growth (see Levine, 1997).Financial intermediation can affect economic growth by acting on the saving rate, on the fraction of saving channeled to investment or on the social marginal productivity of investment. In general, financial development will be positive for economic growth. But some improvements in risk-sharing and in the 11 12Financial Intermediaries in the Economy credit market for households may decrease the saving rate and, hence, the growth rate (Pagano, 1993). Table 1: Share of Employment in Financial Services in Total Employment (percentages) Source: OECD, National Accounts (various issues)Table 2: Share of Value-Added in Financial Services in GDP (percentages) Source: OECD, National Accounts (various issues) Table 3: Financial Intermediary Development over Time for About 150 Countries (percentages) Source: Demirguc-Kunt and Levine (1999, Figure 2A) 1970 1980 1985 1990 1995 2000 Canada 2. 4 2. 7 2. 9 3. 0 3. 2 3. 1 France 1. 8 2. 6 2. 9 2. 8 2. 7 2. 8 Germany 2. 2 2. 8 3. 0 3. 1 3. 3 3. 3 Japan 2. 4 3. 0 3. 2 3. 3 3. 4 3. 5 Switzerland â€⠀œ – 4. 6 4. 8 4. 8 4. 9 United Kingdom – 3. 0 3. 5 4. 6 4. 4 4. 4 United States 3. 8 4. 4 4. 7 4. 8 4. 8 4. 8 1970 980 1985 1990 1995 2000 Canada 2. 2 1. 8 2. 0 2. 8 2. 9 3. 1 France 3. 5 4. 4 4. 8 4. 4 4. 6 4. 8 Germany 3. 2 4. 5 5. 5 4. 8 5. 8 5. 7 Japan 4. 3 4. 5 5. 5 4. 8 5. 6 5. 3 Netherlands 3. 1 4. 0 5. 3 5. 6 5. 5 5. 8 Switzerland – – 10. 4 10. 3 13. 1 12. 8 United States 4. 0 4. 8 5. 5 6. 1 7. 2 7. 1 1960s 1970s 1980s 1990s Liquid liabilities/GDP 32 39 47 51 Claims by deposit money banks on private sector/GDP 20 24 32 39 Financial Intermediaries in the Economy13 There are different views on how the financial structure affects economic growth exactly (Levine, 2000). The bank-based view holds that bank-based systems – particularly at early stages of economic development – foster economic growth to a greater degree than market-based systems. ? The market-based view emphasizes that markets provide key financial services that stimulate innovation and long-run growth. ? The financial services view stresses the role of banks and markets in researching firms, exerting corporate control, creating risk management devices, and mobilizing society’s savings for the most productive endeavors in tandem.As such, it does regard banks and markets as complements rather than substitutes as it focuses on the quality of the financial services produced by the entire financial system. ? The legal-based view rejects the analytical validity of the financial structure debate. It argues that the legal system shapes the quality of financial services (for example La Porta et al. , 1998). The legal-based view stresses that the component of financial development explained by the legal system critically influences long-run growth.Political factors have been introduced too, in order to explain the relationship between financial and economic development (see Fohlin, 2000; Kroszner and Strahan, 2000; Rajan and Zingales, 2000). From empir ical research of the relationship between economic and financial development, it appears that history and path-dependency weigh very heavy in determining the growth and design of financial institutions and markets. Furthermore, idiosyncratic shocks that surprise institutions and markets over time appear to be quite important.Despite obvious connections among political, legal, economic, and financial institutions and markets, long-term causal relationships often prove to be elusive and appear to depend upon the methodology chosen to study the relationship. 1 But it is important to realize that efficient financial intermediation confers two important benefits: it raises 1 For example, see Berthelemy and Varoudakis, 1996; Demetriades and Hussein, 1996; Kaplan and Zingales, 1997; Sala-i-Martin, 1997; Fazzari et al. , 1988; Levine and Zervos, 1998; Demirguc-Kunt and Levine, 1999; Filer et al, 1999; Beck and Levine, 2000; Beck et al. 2000; Benhabib and Spiegel, 2000; Demirguc-Kunt and Mak simovic, 2000; Rousseau and Wachtel, 2000; Arestis et al. , 2001; Wachtel, 2001. 14Financial Intermediaries in the Economy the level of investment and savings, and it increases the efficiency in the allocation of financial funds in the economic system. There is a structural tendency in the composition of national wealth represented in financial titles in many countries, especially the Anglo Saxon, towards the substitution of bank held assets (bank loans etc. ) by securitized assets held by the public (equity, bonds) (Ross, 1989).This substitution is often interpreted as a proof of the disintermediation process (e. g. Allen and Santomero, 1997). However, this substitution does not imply that bank loans are not growing any more. To the contrary, they continue to grow, even in the U. S. where the substitution is most visible (see Boyd and Gertler, 1994; Berger et al. , 1995). Therefore, this substitution may not be interpreted as a sign of a diminishing role of banking in general. This is because it is the banks that play an essential role in the securitized instruments.They initiate, arrange and underwrite the floating of these instruments. They often maintain a secondary market. They invent a multitude of off-balance instruments derived from securities. They provide for the clearing of the deals. They are the custodians of these constructions. They provide stock lending and they finance market makers in options and futures. Thus, banks are crucial drivers of financial innovation. Furthermore, it is still an unsolved question of how the off-balance instruments should be counted in the statistics of national wealth.Their huge notional amounts do not reflect the constantly varying values for the contracting parties. Banks are moving in an off-balance direction and their purpose is increasingly to develop and provide tradable and non-tradable risk management instruments. And other kinds of financial intermediaries play an increasingly important role in the same dir ection, both in securitized and non-tradable instruments, both on- and off-balance: insurance companies, pension funds, investments funds, market makers at stock exchanges and derivative markets.These different kinds of financial intermediaries transform risk (concerning future income or accidents or interest rate fluctuations or stock price fluctuations, etc. ). Risk transformation and risk management is their job. Thus, despite the globalization of financial services, driven by deregulation and information technology ,and despite strong price competition, the financial services industry is not declining in importance but it is growing. This seems paradoxical. It points to something important which the modern financial intermediation theory, and the neo-classical market theory on which it is based, do not explain.Might it be the case that it overlooks something crucial? Something that is to be related to information production but that is, so far, not uncovered by the theory of fin ancial intermediation? 4. Modern Theories of Financial Intermediation In order to give firm ground to our argument and to illustrate the paradox, we will first review the doctrines of the theory of financial intermediation. 2 These are specifications, relevant to the financial services industry, of the agency theory, and the theory of imperfect or asymmetric information.Basically, we may distinguish between three lines of reasoning that aim at explaining the raison d’etre of financial intermediaries: information problems, transaction costs and regulatory factors. First, and that used in most studies on financial intermediation, is the informational asymmetries argument. These asymmetries can be of an ex ante nature, generating adverse selection, they can be interim, generating moral hazard, and they can be of an ex post nature, resulting in auditing or costly state verification and enforcement. The informational asymmetries generate market imperfections, i. . deviations from the neoclassical framework in Section 2. Many of these imperfections lead to specific forms of transaction costs. Financial intermediaries appear to overcome these costs, at least partially. For example, Diamond and Dybvig (1983) consider banks as coalitions of depositors that provide households with insurance against idiosyncratic shocks that adversely affect their liquidity position. Another approach is based on Leland and Pyle (1977). They interpret financial intermediaries as information sharing coalitions.Diamond (1984) shows that these intermediary coalitions can achieve economies of scale. Diamond (1984) is also of the view that financial intermediaries act as delegated monitors on behalf of ultimate savers. Monitoring will involve increasing returns to scale, which implies that specializing may be attractive. Individual households will delegate the monitoring activity to such a specialist, i. e. to the financial intermediary. The households will put their deposits with the i ntermediary. They may withdraw the deposits in order to discipline the intermediary in his monitoring function.Furthermore, they will positively value the intermediary’s involvement in the ultimate investment (Hart, 1995). Also, there can be assigned a positive incentive effect of short-term debt, and in particular deposits, on bankers (Hart and Moore, 1995). For example, Qi (1998) and Diamond and Rajan (2001) show that deposit finance can create 2 We have used the widely cited reviews by Allen, 1991; Bhattacharya and Thakor, 1993; Van Damme, 1994; Freixas and Rochet 1997; Allen and Gale, 2000b; Gorton and Winton, 2002, as our main sources in this section. 15 6Modern Theories of Financial Intermediation the right incentives for a bank’s management. Illiquid assets of the bank result in a fragile financial structure that is essential for disciplining the bank manager. Note that in the case households that do not turn to intermediated finance but prefer direct finance, t here is still a â€Å"brokerage† role for financial intermediaries, such as investment banks (see Baron, 1979 and 1982). Here, the reputation effect is also at stake. In financing, both the reputation of the borrower and that of the financier are relevant (Hart and Moore, 1998).Dinc (2001) studies the effects of financial market competition on a bank reputation mechanism, and argues that the incentive for the bank to keep its commitment is derived from its reputation, the number of competing banks and their reputation, and the competition from bond markets. These four aspects clearly interact (see also Boot, Greenbaum and Thakor, 1993). The â€Å"informational asymmetry† studies focus on the bank/borrower and the bank/lender relation in particular. In bank lending one can basically distinguish transactions-based lending (financial statement lending, asset- based lending, credit scoring, etc. ) and relationship lending.In the former class information that is relatively easily available at the time of loan origination is used. In the latter class, data gathered over the course of the relationship with the borrower is used (see Lehman and Neuberger, 2001; Kroszner and Strahan, 2001; Berger and Udell, 2002). Central themes in the bank/borrower relation are the screening and monitoring function of banks (ex ante information asymmetries), the adverse selection problem (Akerlof, 1970), credit rationing (Stiglitz and Weiss, 1981), the moral hazard problem (Stiglitz and Weiss, 1983) and the ex post verification problem (Gale and Hellwig, 1985).Central themes in the bank/lender relation are bank runs, why they occur, how they can be prevented, and their economic consequences (Kindleberger, 1989; Bernanke, 1983; Diamond and Dybvig, 1983). Another avenue in the bank/lender relationship are models for competition between banks for deposits in relation to their lending policy and the probability that they fulfill their obligations (Boot, 2000; Diamond and Raja n, 2001). Second is the transaction costs approach (examples are Benston and Smith, 1976; Campbell and Kracaw, 1980; Fama, 1980).In contrast to the first, this approach does not contradict the assumption of complete markets. It is based on nonconvexities in transaction technologies. Here, the financial intermediaries act as coalitions of individual lenders or borrowers who exploit economies of scale or scope in the transaction technology. The notion of transaction costs encompasses not only exchange or monetary transaction costs (see Tobin, 1963; Towey, 1974; Fischer, 1983), but also search costs and monitoring and auditing costs (Benston and Smith, 1976). Here, the role of Modern Theories of Financial Intermediation17 he financial intermediaries is to transform particular financial claims into other types of claims (so-called qualitative asset transformation). As such, they offer liquidity (Pyle, 1971) and diversification opportunities (Hellwig, 1991). The provision of liquidity is a key function for savers and investors and increasingly for corporate customers, whereas the provision of diversification increasingly is being appreciated in personal and institutional financing. Holmstrom and Tirole (2001) suggest that this liquidity should play a key role in asset pricing theory.The result is that unique characteristics of bank loans emerge to enhance efficiency between borrower and lender. In loan contract design, it is the urge to be able to efficiently bargain in later (re)negotiations, rather than to fully assess current or expected default risk that structures the ultimate contract (Gorton and Kahn, 2000). With transaction costs, and in contrast to the information asymmetry approach, the reason for the existence of financial intermediaries, namely transaction costs, is exogenous. This is not fully the case in the third approach.The third approach to explain the raison d’etre of financial intermediaries is based on the regulation of money production and of saving in and financing of the economy (see Guttentag and Lindsay, 1968; Fama, 1980; Mankiw, 1986; Merton, 1995b). Regulation affects solvency and liquidity with the financial institution. Diamond and Rajan (2000) show that bank capital affects bank safety, the bank’s ability to refinance, and the bank’s ability to extract repayment from borrowers or its willingness to liquidate them.The legal-based view especially (see Section 3), sees regulation as a crucial factor that shapes the financial economy (La Porta et al. , 1998). Many view financial regulations as something that is completely exogenous to the financial industry. However, the activities of the intermediaries inherently â€Å"ask for regulation†. This is because they, the banks in particular, by the way and the art of their activities (i. e. qualitative asset transformation), are inherently insolvent and illiquid (for the example of deposit insurance, see Merton and Bodie, 1993).Furthermore, mo ney and its value, the key raw material of the financial services industry, to a large extent is both defined and determined by the nation state, i. e. by regulating authorities par excellence. Safety and soundness of the financial system as a whole and the enactment of industrial, financial, and fiscal policies are regarded as the main reasons to regulate the financial industry (see Kareken, 1986; Goodhart, 1987; Boot and Thakor, 1993).Also, the financial history shows a clear interplay between financial institutions and markets and the regulators, be it the present-day specialized financial supervisors or the old-fashioned sovereigns (Kindleberger, 1993). Regulation of financial intermediaries, especially of banks, is costly. There are the direct costs of administration and of employing the supervisors, and 18Modern Theories of Financial Intermediation there are the indirect costs of the distortions generated by monetary and prudential supervision.Regulation however, may also gene rate rents for the regulated financial intermediaries, since it may hamper market entry as well as exit. So, there is a true dynamic relationship between regulation and financial production. It must be noted that, once again, most of the literature in this category focuses on explaining the functioning of the financial intermediary with regulation as an exogenous force. Kane (1977) and Fohlin (2000) attempt to develop theories that explain the existence of the very extensive regulation of financial intermediaries when they go into the dynamics of financial regulation. Thus, to summarize, according to the modern theory of financial intermediation, financial intermediaries are active because market imperfections prevent savers and investors from trading directly with each other in an optimal way. The most important market imperfections are the informational asymmetries between savers and investors. Financial intermediaries, banks specifically, fill – as agents and as delegated monitors – information gaps between ultimate savers and investors. This is because they have a comparative informational advantage over ultimate savers and investors.They screen and monitor investors on behalf of savers. This is their basic function, which justifies the transaction costs they charge to parties. They also bridge the maturity mismatch between savers and investors and facilitate payments between economic parties by providing a payment, settlement and clearing system. Consequently, they engage in qualitative asset transformation activities. To ensure the sustainability of financial intermediation, safety and soundness regulation has to be put in place. Regulation also provides the basis for the intermediaries to enact in the production of their monetary services.All studies on the reasons behind financial intermediation focus on the functioning of intermediaries in the intermediation process; they do not examine the existence of the real-world intermediaries as s uch. It appears that the latter issue is regarded to be dealt with when satisfactory answers on the former are being provided. Market optimization is the main point of reference 3 The importance of regulation for the existence of the financial intermediary can best be understood if one is prepared to account for the historical and institutional setting of financial intermediation (see Kindleberger, 1993; Merton, 1995b).Interestingly, and illustrating the crucial importance of regulation for financial intermediation, is that there are some authors who suggest that unregulated finance or ‘free banking’ would be highly desirable, as it would be stable and inflation-free. Proponents of this view are, among others, White, 1984; Selgin, 1987; Dowd, 1989. Modern Theories of Financial Intermediation19 in case of the functioning of the intermediaries. The studies that appear in most academic journals analyze situations and conditions under which banks or other intermediaries are making markets less imperfect as well as the impediments to their optimal functioning.Perfect markets are the benchmarks and the intermediating parties are analyzed and judged from the viewpoint of their contribution to an optimal allocation of savings, that means to market perfection. Ideally, financial intermediaries should not be there and, being there, they at best alleviate market imperfections as long as the real market parties have no perfect information. On the other hand, they maintain market imperfections as long as they do not completely eliminate informational asymmetries, and even increase market imperfections when their risk aversion creates credit crunches.So, there appears not to be a heroic role for intermediaries at all! But if this is really true, why are these weird creatures still in business, even despite the fierce competition amongst themselves? Are they truly dinosaurs, completely unaware of the extinction they will face in the very near future? This seems highly unlikely. Section 3 showed and argued that the financial intermediaries are alive and kicking. They have a crucial and even increasing role within the real-world economy. They increasingly are linked up in all kinds of economic transactions and processes.Therefore, the next section is a critical assessment of the modern theory of financial intermediation in the face of the real-world behavior and impact of financial institutions and markets. 5. Critical Assessment Two issues are of key importance. The first is about why we demand banks and other kinds of financial intermediaries. The answer to this question, in our opinion, is risk management rather than informational asymmetries or transaction costs. Economies of scale and scope as well as the delegation of the screening and monitoring function especially apply to dealing with risk itself, rather than only with information.The second issue that matters is why banks and other financial institutions are willing and able to tak e on the risks that are inevitably involved in their activity. In this respect, it is important to note that financial intermediaries are able to create comparative advantages with respect to information acquisition and processing in relation to their sheer size in relation to the customer whereby they are able to manage risk more efficiently. We suggest Schumpeter’s view of entrepreneurs as innovators and Merton’s functional perspective of financial intermediaries in tandem are very helpful in this respect.One should question whether the existence of financial intermediaries and the structural development of financial intermediation can be fully explained by a theoretical framework based on the neo-classical concept of perfect competition. The mainstream theory of financial intermediation, as it has been developed in the past few decades, has – without any doubt – provided numerous valuable insights into the behavior of banks and other intermediaries and their managers in the financial markets under a broad variety of perceived and observed circumstances.For example, the â€Å"agency revolution†, unleashed by Jensen and Meckling (1976), focussed on principal-agent relation asymmetries. Contracts and conflicts of interest on all levels inside and outside the firm in a world full of information asymmetries became the central theme in the analysis of financial decisions. Important aspects of financial decisions, which previously went unnoticed in the neo- classical theory, could be studied in this approach, and a â€Å"black box† of financial decision making was opened. But the power of the agency heory is also her weakness: it mainly explains ad hoc situations; new models based on different combinations of assumptions continuously extend it. 4 In nearly all 4 To this extent, one can draw a striking parallel with the traditional Newtonian view of the natural world. The planetary orbits round the Sun can be explained very well with the Newtonian laws of gravitation and force. Apparent anomalies in the orbital movement of Neptune turned out to be caused by the influence of an hitherto unknown planet (Pluto).Its (predicted) astronomical 21 22Critical Assessment financial decisions, information differences and, as a consequence, conflicts of interest, play a role. Focussed on these aspects, the agency theory is capable of investigating nearly every contingency in the interaction of economic agents deviating from what they would have done in a market with perfect foresight and equal incentives for all agents. However, the applications from agency theory have mainly anecdotal value; they are tested in a multitude of specific cases.But the theory fails to evolve into a general and coherent explanation of what is the basic function of financial intermediaries in the markets and the economy as a whole. Various researchers interested in real world financial phenomena have pointed out that banks in particular do make a difference. They come up with empirical evidence that banks are special. For example, Fama (1985) and James (1987) analyze the incidence of the implicit tax due to reserve requirements. Both conclude that bank loans are special, as bank CDs have not been eliminated by non-bank alternatives that bear no reserve requirements.Mikkelson and Partch (1986) and James (1987) look at the abnormal returns associated with announcements of different types of security offerings and find a positive response to bank loans. Lummer and McConnel (1989) and Best and Zhang (1993) have confirmed these results. Slovin et al. (1993) look into the adverse effect on the borrower in case a borrower’s bank fails. They find Continental Illinois borrowers incur significant negative abnormal returns during the bank’s impending failure. Gibson (1995) finds similar results when studying the effects of the health of Japanese banks on borrowers.Gilson et al. (1990) find that the likelihood o f a successful debt restructuring by a firm in distress is positively related to the extent of that firm’s reliance on bank borrowing. James (1996) finds that the higher the proportion of total debt held by the bank, the higher the likelihood the bank debt will be impaired, and so the higher the likelihood that it participates in the restructuring. Hoshi et al. (1991) for Japan and Fohlin (1998) and Gorton and Schmid (1999) for Germany also find that in these countries, banks provide valuable services that cannot be replicated in capital markets.Current intermediation theory treats such observations often as an anomaly. But, in our perspective, it relates rather to the insufficient explanatory power of the current theory of financial intermediation. observation was regarded as an even greater victory for Newtonian theory. However, it took Einstein and Bohr to reveal that this theory is only a limit case as it is completely unable to deal with the behavior of microparticles (s ee Couper and Henbest, 1985; Ferris, 1988; Hawking, 1988). Critical Assessment23The basic reason for the insufficient explanatory power of the present intermediation theory has, in our opinion, to be sought in the paradigm of asymmetrical information. Markets are imperfect, according to this paradigm, because the ultimate parties who operate in the markets have insufficient information to conclude a transaction by themselves. Financial intermediaries position themselves as agents (â€Å"middlemen†) between savers and investors, alleviating information asymmetries against transaction costs to a level where total savings are absorbed by real investments at equilibrium real interest rates.But in the real world, financial intermediaries do not consider themselves agents who intermediate between savers and investors by procuring information on investors to savers and by selecting and monitoring investors on behalf of savers. That is not their job. They deal in money and in risk, n ot in information per se. Information production predominantly is a means to the end of risk management. In the real world, borrowers, lenders, savers, investors and financial supervisors look at them in the same way, i. . risk managers instead of information producers. Financial intermediaries deal in financial services, created by themselves, mostly for their own account, via their balance sheet, so for their own risk. They attract savings from the saver and lend it to the investor, adding value by meeting the specific needs of savers and investors at prices that equilibrate the supply and demand of money. This is a creative process, which cannot be characterized by the reduction of information asymmetries.In the intermediation process the financial intermediary transforms savings, given the preferences of the saver with respect to liquidity and risk, into investments according to the needs and the risk profile of the investor. It might be clear that for these reasons the views of Bryant (1980) and of Diamond and Dybvig (1983) on the bank as a coalition of depositors, of Akerlof (1970) and Leland and Pyle (1977) on the bank as an information sharing coalition, and of Diamond (1984) on the bank as delegated (†¦ monitor, do not reflect at all the view of bankers on their own role. Nor does it reflect the way in which society experiences their existence. Even with perfect information, the time and risk preferences of savers and investors fail to be matched completely by the price (interest rate) mechanism: there are (too many) missing markets. It is the financial intermediary that somehow has to make do with these missing links. The financial intermediary manages risks in order to allow for the activities of other types of households within the economy.One would expect that the theory of the firm would pay ample attention to the driving forces behind entrepreneurial activity and could thus explain in more general terms the existence of financial intermedia tion as an entrepreneurial 24Critical Assessment activity. However, this is not the focus of that theory. The theory of the firm is preoccupied with the functioning of the corporate enterprise in the context of market structures and competition processes.In the wake of Coase (1937), the corporate enterprise is part of the market structure and can even be considered as an alternative for the market. This view laid the foundation for the transaction cost theory (see Williamson, 1988), for the agency theory (Jensen and Meckling, 1976), and for the theory of asymmetric information (see Stiglitz and Weiss, 1981 and 1983). Essential in the approaches of these theories is that the corporate enterprise is not treated as a â€Å"black box†, a uniform entity, as was the case in the traditional micro-economic theory of the firm.It is regarded as a coalition of interests operating as a market by itself and optimizing the opposing and often conflicting interests of different stakeholders (clients, personnel, financiers, management, public authorities, non-governmental organizations). The rationale of the corporate enterprise is that it creates goods and services, which cannot be produced, or only at a higher price, by consumers themselves. This exclusive function justifies transaction costs, which are seen as a form of market imperfection.The mainstream theory of the firm evolved under the paradigm of the agency theory and the transaction costs theory as a theory of economic organization rather than as a theory of entrepreneurship. A separate line of thinking in the theory of the firm is the dynamic market approach of Schumpeter (1912), who stressed the essential function of entrepreneurs as innovators, creating new products and new distribution methods in order to gain competitive advantage in constantly developing and changing markets.In this approach, markets and enterprises are in a continuous process of â€Å"creative destruction† and the entrepreneurial function is pre-eminently dynamic. Basic inventions are more or less exogenous to the economic system; their supply is perhaps influenced by market demand in some way, but their genesis lies outside the existing market structure. Entrepreneurs seize upon these basic inventions and transform them into economic innovations. The successful innovators reap large short-term profits, which are soon bid away by imitators.The effect of the innovations is to disequilibrate and to alter the existing market structure, until the process eventually settles down in wait for the next (wave of) innovation. The result is a punctuated pattern of economic development that is perceived as a series of business cycles. Financial intermediaries, the ones that mobilize savings, allocate capital, manage risk, ease transactions, and monitor firms, are essential for economic growth and development. That is what Joseph Schumpeter argued early in this century.Now there is evidence to support Schumpeter’ s view: financial services promote development (see King and Critical Assessment25 Levine, 1993; Benhabib and Spiegel, 2000; Arestis et al. , 2001; Wachtel, 2001). The conceptual link runs as follows: Intermediaries can promote growth by increasing the fraction of resources society saves and/or by improving the ways in which society allocates savings. Consider investments in firms. There are large research, legal, and organizational costs associated with such investment.These costs can include evaluating the firm, coordinating financing for the firm if more than one investor is involved, and monitoring managers. The costs might be prohibitive for any single investor, but an intermediary could perform these tasks for a group of investors and lower the costs per investor. So, by researching many firms and by allocating credit to the best ones, intermediaries can improve the allocation of society’s resources. Intermediaries can also diversify risks and exploit economies of scale .For example, a firm may want to fund a large project with high expected returns, but the investment may require a large lump-sum capital outlay. An individual investor may have neither the resources to finance the entire project nor the desire to devote a disproportionate part of savings to a single investment. Thus profitable opportunities can go unexploited without intermediaries to mobilize and allocate savings. Intermediaries do much more than passively decide whether to fund projects. They can initiate the creation and transformation of firms’ activities.Intermediaries also provide payment, settlement, clearing and netting services. Modern economies, replete with complex interactions, require secure mechanisms to settle transactions. Without these services, many activities would be impossible, and there would be less scope for specialization, with a corresponding loss in efficiency. In addition to improving resource allocation, financial intermediaries stimulate individ uals to save more efficiently by offering attractive instruments that combine attributes of depositing, investing and insuring.The securities most useful to entrepreneurs – equities, bonds, bills of exchange – may not have the exact liquidity, security, and risk characteristics savers desire. By offering attractive financial instruments to savers – deposits, insurance policies, mutual funds, and, especially, combinations thereof – intermediaries determine the fraction of resources that individuals save. Intermediaries affect both the quantity and the quality of society’s output devoted to productive activities. Intermediaries also tailor financial instruments to the needs of firms.Thus firms can issue, and savers can hold, financial instruments more attractive to their needs than if intermediaries did not exist. Innovations can also spur the development of financial services. Improvements in computers and communications have triggered financial inn ovations over the past 20 years. Perhaps, more important for developing countries, growth can increase the demand for financial services, sparking their adoption. 26Critical Assessment In translating these concepts to the world of financial intermediation, one ends up at the so-called functional perspective (see Merton, 1995a).The functions performed by the financial intermediaries are providing a transactions and payments system, a mechanism for the pooling of funds to undertake projects, ways and means to manage uncertainty and to control risk and provide price information. The key functions remain the same, the way they are conducted varies over time. This looks quite similar to what Bhattacharya and Thakor (1993) regard as the qualitative asset transformation operations of financial intermediaries, resulting from informational asymmetries.However, in our perspective, it is not a set of operations per se but the function of the intermediaries that gives way to their presence in t he real world. Of course, we are well aware of the fact that in the real-world the everyday performance of these different functions can be experienced by clients as – to quote Boot (2000) – †an annoying set of transactions†. The key functions of financial intermediaries are fairly stable over time. But the agents that are able and willing to perform them are not necessarily so. And neither are the focus and the instruments of the financial supervisors.An insurance company in 2000 is quite dissimilar in its products and distribution channels from one in 1990 or 1960. And a bank in Germany is quite different from one in the UK. Very different financial institutions and also very different financial services can be developed to provide the de facto function. Furthermore, we have witnessed waves of financial innovations, consider swaps, options, futures, warrants, asset backed securities, MTNs, NOW accounts, LBOs, MBOs and MBIs, ATMs, EFTPOS, and the distribut ion revolution leading to e-finance (e. . see Finnerty, 1992; Claessens et al. , 2000; Allen et al. , 2002). From this, financial institutions and markets increasingly are in part complementary and in part substitutes in providing the financial functions (see also Gorton and Pennacchi, 1992; Levine, 1997). Merton (1995a) suggests a path of the development of financial functions. Instead of a secular trend, away from intermediaries towards markets, he acknowledges a much more cyclical trend, moving back and forth between the two (see also Rajan and Zingales, 2000).Merton argues that although many financial products tend to move secularly from intermediaries to markets, the providers of a given function (i. e. the financial intermediaries themselves) tend to oscillate according to the product-migration and development cycle. Some products also move in the opposite direction, for example the mutual fund industry changed the composition of the portfolios of US households substantially, that is, from direct held stock to indirect investments via mutual funds (Barth et al. , 1997). In our view, this mutual Critical Assessment27 und revolution in the US – and elsewhere – is a typical example of the increasing role for intermediated finance in the modern economy. Thus, in our opinion, one should view the financial intermediaries from an evolutionary perspective. They perform a crucial economic function in all times and in all places. However, the form they have changes with time and place. Maybe once they were giants, dinosaurs so to say, in the US. Nowadays, they are no longer that powerful but they did not lose their key function, their economic niche.Instead, they evolved into much smaller and less visible types of business, just like the dinosaurs evolved into the much smaller omnipresent birds. Note that most of the theoretical and empirical literature actually refers to banks (as a particular form of financial intermediary) rather than to all finan cial institutions conducting financial intermediation services. However, the bank of the 21st century completely differs from the bank that operated in most of the 20th century. Both its on- and off-balance sheet activities show a qualitatively different composition.That is, away from purely interest related lending and borrowing business towards fee and provision based insurance-investment-advice-management business. At the same time, the traditional insurance, investment and pension funds enter the world of lending and financing. As such, financial institutions tend to become both more similar and more complex organisations. Thus, it appears that the traditional banking theories relate to the creation of loans and deposits by banks, whereas this increasingly becomes a smaller part of their business.This is not only because of the changing composition of their income structure (not only interest-related income but also fee-based income). Also it is the case because of the blurring borders between the operations of the different kinds of financial intermediaries. Therefore, we argue first that the loan and the deposit only are a means to an end – which is acknowledged both by the bank and the customer – and that the bank and the non-bank financial intermediary increasingly develop qualitatively different (financial) instruments to manage risks.Questioning whether informational asymmetry is the principal explanatory variable of the financial intermediation process – what we do – does not imply denial of the pivotal role information plays in the financial intermediation process. On the contrary, under the strong influence of modern communication technologies and of the worldwide liberalization of financial services, the character of the financial intermediation process is rapidly changing. This causes a – until now only relative – decrease in traditional 28Critical Assessment forms of financial intermediation, namely in on-balance sheet banking.But the counterpart of this process – the increasing role of the capital markets where savers and investors deal in marketable securities thanks to world wide real time information – would be completely unthinkable without the growing and innovating role of financial intermediaries (like investment banks, securities brokers, institutional investors, finance companies, investment funds, mergers and acquisition consultants, rating agencies, etc. ). They facilitate the entrepreneurial process, provide bridge finance and invent new financial instruments in order to bridge different risk preferences of market parties by means of derivatives.It would be a misconception to interpret the relatively declining role of traditional banks, from the perspective of the financial sector as a whole, as a general process of disintermediation. To the contrary, the increasing number of different types of intermediaries in the financial markets and their increasing importance as financial innovators point to a swelling process of intermediation. Banks reconfirm their positions as engineers and facilitators of capital market transactions.The result is a secular upward trend in the ratio of financial assets to real assets in all economies from the 1960s onwards (see Table 3). It appears that informational asymmetries are not well-integrated into a dynamic approach of the development of financial intermedation and innovation. Well-considered, information, and the ICT revolution, plays a paradoxical role in this process. The ICT revolution certainly has an excluding effect on intermediary functions in that it bridges informational gaps between savers and investors and facilitates them to deal directly in open markets.This function of ICT promotes the exchange of generally tradable, thus uniform products, and leads to the commoditizing of financial assets. But the ICT revolution provokes still another, and essentially just as revolutionary, effect , namely the customizing of financial products and services. Modern network systems and product software foster the development of ever more sophisticated, specific, finance and investment products, often embodying option-like structures on both contracting parties which are developed in specific deals, thus â€Å"tailor made†, and which are not tradable in open markets.Examples are specific financing and investment schemes (tax driven private equity deals), energy finance and transport finance projects, etc. They give competitive advantages to both contracting parties, who often are opposed to public knowledge of the specifics of the deal (especially when tax aspects are involved). So, general trading of these contracts is normally impossible and, above all, not aimed at. (But imitation after a certain time lag can seldom be prevented! Informational data (on stock prices, interest and exchange rates, commodity and energy prices, Critical Assessment29 macroeconomic data, etc. ) are always a key ingredient of these investment products and project finance constructions. In this respect, information is attracting a pivotal role in the intermediation function because it is mostly the intermediation industry, not the ultimate contract parties that develop these new products and services. The function of information in this process, however, differs widely from that in the present intermediation

K. 332 First Movement Analysis

Mozart Sonata No. 12 in F Major K. 332 First Movement Rachel Gilmore MTC 461. 001 November 26, 2012 The first movement of Mozart’s piano Sonata No. 12 in F Major is written fairly typically in the very structured sonata form. Historically is follows the main guidelines that were understood for the form. Harmonically, is progresses like expected. There are a few surprises here and there, but they are typical for Mozart’s compositions, especially his sonatas of the 18th century. In all, it makes a very interesting piece of work, especially with so much contrast within it.The formal structure of the first movement is sonata form. Not only is this evident in the title but it is very clear after an analysis of the piece has been done. Sonata form is incredibly structured and has specific sections and parts that must be present in order for it to be a true sonata. These sections are split relating to key mostly. All of the required parts are present in this work with the expe cted key changes, deeming it sonata form. The piece starts with the exposition, excluding the optional introduction that can be added if a composer so chooses.This exposition is the first ninety-three measure of the movement. The end is marked with a repeat sign. In the sonata, the exposition is repeated, so this follows normal sonata formatting. All parts of the exposition are included in this sonata; theme 1, a transition, theme 2, a bridge, a closing theme, and a codetta are all present. These sections within the exposition modulate just as they are supposed to, further showing that this piece is in sonata form. The first theme is in the tonic key of F Major. The transition modulates from the tonic key to the dominant key, C Major, which is typical for a transition.Theme 2 stays in the dominant key, as does the bridge, closing theme, and codetta. The next section of music is the development. It is not very long in comparison to the exposition and the coming development, lasting o nly thirty-nine measures. It behaves just like a normal development should. It modulates a few times and does so very often and quite quickly. In this development, Mozart chose to use a sequence of new material, repeating it at different pitch levels to change keys. Some material from the first theme group and the bridge is also used.There is no false return of the first theme group, but this is most likely because the development was so short in comparison. But, the material developed from the bridge in the exposition is used to transition the end of the development into the recapitulation. The recapitulation is also standard of sonata form. Every section of the exposition should return, only with no modulations. The Recapitulation should remain entirely in the original tonic key that should have been set up by the development. The first theme group returns in the tonic key of F Major.The transition also returns and stays in the tonic key. The second theme group also comes back, st aying in the tonic key as well. The same is true of the bridge, returning in F Major only. Next, the closing theme group returns also in the original key. And lastly, the codetta returns, continuing to stay in the tonic key. The form of this sonata by Mozart matches what was typical of the sonata form in the 18th century. There was a specific way what sonatas were to be composed, one that helps analysts of the present study this classical form.But, there are some things that Mozart included that were innovative and surprising for the times. These include harmonies that differ slightly from what were common, and motivic sequences that were quite originative. The motivic sequences other composers included in their sonatas during this time were fairly simple. Listeners liked to hear something they could easily remember, something that could get stuck in their heads, that they could hum for days or weeks after they first heard it. This usually resulted in music that contained few melodi c ideas that were played with and developed.Mozart, however, began to make a trend in the later part of the 18th century of having several tuneful sequences throughout his sonatas. The No. 12 F Major sonata is a great example. The first movement in itself has seven different melodic devices. The harmony tends to stay within the realm of normal for the 1700’s. There are places, though, where Mozart again drifts from common practices. Mozart was fairly well known for his inventive bridge sections during the expositions of his sonatas. In these bridge sections, Mozart would begin a theme on v (minor), ?III, III, VI, or V that eventually creates the false sense of having transposed to the dominant V key. Often Mozart would proceed to the tonic sounding V with an augmented sixth chord. He does just this in Sonata number 12, as shown in the example on the top of the next page in measures sixty-four through sixty-seven. VI7 ii7 V7 Ger+6 V Mozart begins a harmony on a Major sixth ch ord and leads into a V with a seventh chord, giving a dominant to tonic feel.He further gives this effect by leading into another V with the augment sixth German chord that has been filled out with a perfect fifth and a major third above the A? bass. Though the augmented sixth chord is voiced unorthodoxly, it gives the same effect. The chord structure of this work is very functional. Cadence points are fairly clear and the phrases are usually of a typical length. Most of the phrases are four measures long. A few exceptions to this rule exist in the work. They show up in a few different ways including elided cadences and extended harmony.Some of the phrases elide into each other giving the effect that they are in some cases longer than four measures and in other cases, shorter. An example of this is in measures fifty-five through fifty-seven, shown at the top of the next page. The first measure shown harmonizes a V7 chord in the key of C Major. The next measure harmonizes the I chord that finishes the imperfect authentic cadence begun in the phrase. But this tonic chord also acts as the beginning harmony for the next phrase continued in the last measureV7 I V7 shown in the example with a V7 chord, and also the beginning of the bridge. So this cadence point has been elided and includes the same measure in not only two separate phrases but also two separate parts of the exposition, theme 2 and the bridge. The same type of cadences happens several other times throughout the first movement. There are also several phrases that have been extended through the use of harmony. The second cadence point of the bridge, measure sixty-seven, is the end of a phrase that started in measure sixty.This phrase lasts so long because the harmony has been heavily and easily lengthened through the progressive use of secondary dominants and seventh chords. This is illustrated in the example below. i iv7V7/III V7/VI VI7 ii7 V7 Ger+6 V Some interesting harmony occurs at several of the p hrase points within the exposition and the development. Half cadences end on the dominant V chord. But there are several cases in this sonata where a cadence point is reached, and there is another, weaker dominant in the place of the V chord.In the transition section of the exposition, there are two half cadences that occur one right after the other where a weaker dominant occurs. The first one uses a viio chord instead of a V. At the end of the next phrase, an augmented sixth chord is used, the German augmented sixth with an augmented fourth and minor third. Also, in the development, a III chord is used instead of the V during a harmonization the parallel minor key. This is quite unorthodox, especially for the times, but has the same effect within the context of the music surrounding it as using the usual dominant V chord.Most interestingly, there is a lot of contrast in within the music. Mozart was something of an innovator of contrast within a musical piece of his time. He played around with contrasting the works as they were published (composing a fast and exciting piece just after having printed a slow one) and also with dynamics, melodies, rhythms, and other musical devices within the works themselves. Sonata No. 12 is no exception. Throughout the first movement, Mozart goes back and forth between fast moving piano parts that require up and down motion on the scale to blocked chords in both hands.He also takes advantage of contrasting dynamics. Sections will go immediately from being the dynamic of piano into a next section that is marked forte with no crescendo, and vice versa. He also used rhythmic contrast. One section might be quarters and eights squarely on the beat and then be promptly followed by a section that features dotted rhythms or triplets regularly. These contrasts were very interesting for the audiences of the 18th century to hear because it was outside of what was expected. Below is an example of contrasting rhythmic sections.The first m ovement of this F Major sonata by Mozart follows the basic sonata form. There are some discrepancies along the way, even concerning basic harmonic music theory, but the outlining format still remains. The contrast makes it an interesting piece of music to analyze and hear. And the harmony is, for the majority, what is expected of basic progressions. Bibliography Balthazar, Scott L. â€Å"Tonal and Motivic Process in Mozart’s Expositions,† The Journal of Musicology 16, no. 4 (1998): 421-466, http://www. jstor. org. steenproxy. sfasu. edu:2048/stable/pdfplus/763978. pdf. Hepokoski, James. Beyond the Sonata Principle,† Journal of the American Musicological Society 55, no. 1 (2002): 91-154, http://www. jstor. org. steenproxy. sfasu. edu:2048/stable/pdfplus/10. 1525/jams. 2002. 55. 1. 91. pdf? acceptTC=true. Kamien, Roger and Wager, Nephtali. â€Å"Bridge Themes within a Chromaticized Voice Exchange in Mozart Expositions,† Music Theory Spectrum 19, no. 1 (1997) : 1-12, http://www. jstor. org. steenproxy. sfasu. edu:2048/stable/pdfplus/745996. pdf. King, A. Hyatt. Mozart in Retrospect: Studies in Criticism and Bibliography. London: Oxford University Press, 1955. Landon, H. C.Robbins and Mitchell, Donald, eds. The Mozart Companion. New York: W. W. Norton & Company, Inc. , 1956. Marshall, Robert L. , ed. Mozart Speaks: Views in Music, Musicians, and the World. New York: Schirmer Books, 1991. Ratner, Leonard. â€Å"Harmonic Aspects of Classic Form,† Journal of the American Musicological Society 2, no. 3 (1949): 159-168, http://www. jstor. org. steenproxy. sfasu. edu:2048/stable/pdfplus/829717. pdf. Zaslaw, Neal and Cowdery, William, eds. The Complete Mozart: A guide to the Musical Works of Wolfgang Amadeus Mozart. New York: W. W. Norton & Company, 1990.

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The Rogerian - Research Paper Example After completing the essay, I have acquired a balanced perspective regarding the two positions. The only difficulty I found in the writing of the assignment is reconciling the two views and giving a balanced position without being biased. This was only possible after considering the weaknesses and strengths of the each side. This was difficult because initially, I had my bias. In this assignment, I have enjoyed acting like a judge in trying to take a position that ensures justice to the disputing sides. I also enjoyed the additional knowledge I got from the advocates of both sides. I have also enjoyed learning about the topic because I have an interest in children rights. As I already said, I have an interest in children rights. We have never discussed his topic in another course. However, the topic concerns me as a scholar and as an advocate of children’s rights. No, you are, however, welcome to request any suggestions for improvements. THE ESSAY Terminating Parental Rights T erminating parental rights is a legal action that involves taking away parental right that a person has towards a child or children. In some cases, only one parent may have his or her rights terminated if there is sufficient ground for such an end. Sometimes, the real parents of the child are denied this right, and the child is put under the care of a foster parents. A person whose parental rights have been terminated has no responsibility over a child. Moreover, they do not owe disciplinary actions to that child, or any other form of child support. The termination of parental rights renders the parents or the parent affected to be strangers to the child, and they are not allowed to contact such a child (Dane County Juvenile Court 3). A parent is the best person who can look out for their children naturally and without complains. In fact, courts are extremely reluctant to terminate parental right until they have enough bases to do that because of this natural right. However, it is i nevitable to terminate the rights of a parent to his or her child if it has been proved that he or she is overly abusive to the child. In some cases, a child is better off under the care of different people such as relatives or foster parents (Barone, Weitz and Witt 396). Regardless of the justifications in favour of such an action, this experience can be psychologically damaging to both parties. This is because children and parents have a biological bond that cannot be replaced by placing children under the care of different people. Terminating of parental rights is an activity that has recently escalated in the United States. The act is justified because it has been considered to help vulnerable children hope for quality lives. Terminating parental rights is an activity that takes place voluntarily or involuntarily. Voluntary termination takes place when both parents agree to give up their parental right. This is, for instance, for the sake of adoption. If parents cannot meet the needs of a child and they want the child to be adopted, it is required that they terminate their parental rights in order to give the foster parents full rights and responsibilities over the child (Genty 5). Involuntary termination, however, happens when a parent has subjected the child to some unacceptable conditions such as sexual abuse and child labor (Schmidt 19). It is, however, challenging to separate a child from their parents. Terminating par

Changes in the international system and the right to choose Essay

Changes in the international system and the right to choose - Essay Example However there are groups and cultures that do not feel this way and do not adhere to these norms contesting that human rights agendas reflect western civilization. Women's rights are surrounded by much debate when it comes to cultural values and norms. A historical cultural tradition in some African countries has been the practice of female circumcision. When women were asked why they practiced this they said because it had always been done, most claimed because it is this act that makes them a woman and that without the act being performed on them they would not be a complete woman, this meant that they may not be desirable for marriage in later life. If this practice was stopped females would have to redefine themselves within their community and culture. On the one hand the introduction of a liberal rights culture in defense of gender-based violence into these communities would greatly challenge cultural identity and their social framework, however on the other hand just because it has always been done this way does not mean that women want it this way so highlights conflicts within cultures as well as between them. Having a women's rights culture enables women to have some freedom of choice and choose which set of values and norms they wish to accept. So contestation exists within cultures on the grounds of human rights when it comes to women's rights and it exists not only in developing nations. The Christian right in the US are pro-life and lobby vehemently to state and federal government opposing women's rights to choose, yet the protestors live in one of the most liberal nations in the globe. It must also not be forgotten that the US only abolished segregation in 1965 and that from 1876 until abolition the Jim Crow Laws mandated a 'separate but equal' status for black Americans ("Jim Crow laws" 2007). Another example of a contestation is reformist Muslims as whilst they wish to incorporate liberal rights including equality for all individuals through reinterpreting the Quran the holy texts state that men and women are not equal (Zubaida, 2004). The Shari'a, Islamic law, is fundamental to all Muslims but for reformists the problems lie with the historical context within which its religious laws are written. The issue that many Muslims have is that liberal rights cultures are secularized and therefore implicate their cultural identity because of the fundamental need of Islam to live by the Shari'a. Global rights, in this case women's rights, only become powerful at the local level, when groups and individuals from one particular cultural identity wish to change their way of lives. The liberal model of the international system is concerned with the individual who seek to serve their own self interest. Moravcsik argues that in the international system the quest for self interest is competitive therefore there will be some who are more dominant than others (Brown, 2004). Consequently if states are similar in their values and norms the world will have less tension than if divided on ideals. For Moravcsik the international system has the ability to change as state behaviour reflects what individual's

Identity theft Essay Example | Topics and Well Written Essays - 750 words

Identity theft - Essay Example Identity theft has become an increasing problem globally in recent years, causing millions of people undue emotional and financial trauma, while costing society a great deal of money. The heartache caused has limited access to critical services and credit availability for millions of honest and hardworking citizens globally, but particularly in the United States. It is a serious issues that must be tackled. The aim of the short paper is to introduce the seriousness of this problem and to present possibly research questions that should be explored to better introduce society to various methods to limit the risk of becoming a victim of identity theft. Problem Statement The problem is that identity theft is destroying the financial security and freedom of countless individuals world wide. As honest, hardworking people have their identities stolen, they are subject to a loss of credit, difficulty in terms of employment, and encounters problems of various sorts with law authorities. Such victims must prove that their identity was stolen, often causing a great deal of anguish in the process. Local and national governments are currently taking measures to prevent identity theft, but the problem seems to be growing. There are five major types of identity theft being practiced today: 1) Criminal identity theft, 2) Financial identity theft, 3) Identity cloning, 4) Medical identity theft, and 5) Child identity theft. This proposed research study will examine each of these areas to help the reader understand the warning signs and avoid becoming a victim of such types of identity theft. In short, identity cloning involves one person taking on (stealing) the identity of another for the express purpose of hiding their own identity for one reason or the other. This is a bit different than other forms of identity theft, as financial information is not typically involved, causing the stolen identity to often go undetected for a long time (Anderson, Durbin, & Salinger, 2008, p. 1 71) . Criminal identity theft involves one person committing a criminal act, getting arrested, and then telling law enforcement officials that they are a different person (Harrison, 2007, p. 84). Conversely, synthetic identity theft refers to identities that are almost entirely made up. Most commonly this occurs by using a real social security number, but a different name or date of birth to make it more difficult to track (Ciechanowicz, 2010, p. 41). Medical identity theft involves one person seeking out medical care, not in their name, but in the name of another person. There are many reason why an individual might perpetrate this type of crime, including a lack of insurance on the part of the person (Agrawal & Budetti, 2012, p. 459). Finally, child identity theft involves just what its name implies. The criminal here commonly steals the social security number of a child, and then opens line of credit and commits other unlawful behavior using the stolen identity. This crime is par ticularly difficult to detect because children typically do not realize their identity has been stolen until well into adulthood (Dwan, 2004, p. 16). Relevance and Significance As demonstrated to this point, identity theft is a serious issue that must be tackled. It affects nearly everyone in society, either directly or indirectly. Even if a person is not a victim themselves, they pay the price in other ways. An individual who has fallen victim to any of the major types of