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1.2: Hope Springs

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    Learning Objectives
    • How can knowledge of the principles of money and banking help you to achieve your dreams?

    Of course, sometimes things go right, especially when one knows what one is doing. Henry Kaufman,[1] who as a young Jewish boy fled Nazi persecution in the 1930s, is now a billionaire because he understood what made interest rates (and as we’ll see, by extension, the prices of all sorts of financial instruments) rise and fall. A little later, another immigrant from Central Europe, George Soros, made a large fortune correctly predicting changes in exchange rate.[2] David did not become uberwealthy trading financial derivatives for a Wall Street firm, but he did earn enough money to retire at the age of forty. Instead of missing the early years of his two children’s lives in a maze of meetings and dying early from a heart attack, David spends his days raising his kids and living healthily.

    Millions of other individuals have improved their lot in life by making astute life decisions informed by knowledge of the economics of money and banking. Over several decades, Henri leveraged his knowledge of the financial system by regularly buying low and selling high. A confirmed bachelor, he died of cancer at a relatively young age but felt blessed that he was able to share his substantial nest egg with online microlender Kiva[3] and several other worthy charities. Songho doesn’t earn much tutoring Korean, but he is single and frugal so he can save a little each month in conservative (low risk) investments that he will one day use to aid his aging parents or to bring his brother and niece to America. Aesha, a single mom and nurse, can’t afford to invest, let alone retire, but she uses her knowledge of the financial system to minimize her borrowing costs, thus freeing up resources that she uses to send Kelton to a private school that provides him with a far better educational experience than his public school did. Your instructor and I cannot guarantee you riches and fame, but we can assure you that, if you read this book carefully, attend class dutifully, and study hard, your life will be the better for it.

    The study of money and banking can be a daunting one for students. Seemingly familiar terms here take on new meanings. Derivatives refer not to calculus (though calculus helps to calculate their value) but to financial instruments for trading risks. Interest is not necessarily interesting; stocks are not alive nor are they holding places for criminals; zeroes can be quite valuable; CDs don’t contain music; yield curves are sometimes straight lines; and the principal is a sum of money or an owner, not the administrative head of a high school. In finance, unlike in retail or publishing, returns are a good thing. Military-style acronyms and jargon also abound: 4X, A/I, Basel II, B.I.G., CAMELS, CRA, DIDMCA, FIRREA, GDP, IMF, LIBOR, m, NASDAQ, NCD, NOW, OTS, r, SOX, TIPS, TRAPS, and on and on.[4]

    People who learn this strange new language and who learn to think like a banker (or other type of financier) will be rewarded many times over in their personal lives, business careers, and civic life. They will make better personal decisions, run their businesses or departments more efficiently, and be better-informed citizens. Whether they seek to climb the corporate ladder or start their own companies, they will discover that interest, inflation, and foreign exchange rates are as important to success as are cell phones, computers, and soft people skills. And a few will find a career in banking to be lucrative and fulfilling. Some, eager for a challenging and rewarding career, will try to start their own banks from scratch. And they will be able to do so, provided they are good enough to pass muster with investors and with government regulators charged with keeping the financial system, one of the most important sectors of the economy, safe and sound.

    One last thing. This book is about Western financial systems, not Islamic ones. Islamic finance performs the same functions as Western finance but tries to do so in a way that is sharia-compliant, or, in other words, in a way that accords with the teachings of the Quran and its modern interpreters, who frown upon interest. To learn more about Islamic finance, which is currently growing and developing very rapidly, you can refer to one of the books listed in Suggested Readings.

    Stop and Think

    Gaining regulatory approval for a new bank has become so treacherous that consulting firms specializing in helping potential incorporators to navigate regulator-infested waters have arisen and some, like Nubank,[5] have thrived. Why are regulations so stringent, especially for new banks? Why do people bother to form new banks if it is so difficult?

    Banking is such a complex and important part of the economy that the government cannot allow just anyone to do it. For similar reasons, it cannot allow just anyone to perform surgery or fly a commercial airliner. People run the regulatory gauntlet because establishing a new bank can be extremely profitable and exciting.

    • Not everyone will, or can, grow as wealthy as Henry Kaufman, George Soros, and other storied financiers, but everyone can improve their lives by understanding the financial system and their roles in it.






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