The Tell-Tale Heart

The Tell-Tale Heart In his narrative poem The Tell-Tale heart, Edgar Allen Poe tells the story of an insane madman who is in love with an old man’s eye. The story begins with the madman telling us how he loves the old man but wants to kill him because of his eye. The old man’s eye is like none other and resembles a vulture’s eye. And Poe instills his poem with the same despair experienced by the narrator by using characteristics that are typical of gothic literature such as, High Emotion, Mysterious Atmosphere’s, and Spooky Visions. One gothic element that Poe uses throughout The Tell-Tale Heart is high emotion.This is first apparent when the old man heard someone in the room. The old man sprung up terrified and said â€Å"Who is there? † alert as can be the old man stayed up and put out a terrified groan. The horrific groan of the old man contributes to the high emotion feel of the story. The other gothic element Poe uses throughout The Tell-Tale H eart is a mysterious atmosphere. This was first noticeable when the madman crept into the old man’s room and said â€Å"The room was black as pitch with thick darkness† And within the room the madman had to carry with him a lantern to see clearly.The pitch black room certainly contributes to the mysterious feel of the story. The fact that the old man is asleep and lives in a creepy place makes the story have a mysterious atmosphere. More Gothic elements Poe uses throughout The Tell-Tale Heart are Omens, Portents, and Visions that the mad man haves. These first appeared at the beginning when the mad man said: â€Å"I made up my mind to take the life of the old man, and rid myself of the eye forever. † The mad man was having vision of killing the old man.The mad man started hearing a loud unbearable ringing in his ears after he buried the body under the floor and the cops came in. All of these examples certainly contribute the omens, portents, and visions occurrin g in this narrative. Tell-Tale Heart is a classic story about a mad man who stalks and kills someone because of his eye. The madman was so in love with this eye that he would be willing to take the life of an innocent old man. Deep down inside the madman’s conscious wouldn’t let him live.The madman thought everything was going to be okay but the only person that wouldn’t let him go on was himself. As the cops where talking he got an annoying ring in his head and it wouldn’t stop until he came clean. It is not surprising that this narrative poem ends on such an unhappy note, because Poe places that tone throughout the poem. By using things that are typical of gothic literature like High emotion, Mysterious Atmospheres, and Crazy Visions, Poe creates a poem that is wrapped in Mystery. The Tell-Tale Heart The Tell-Tale Heart In his narrative poem The Tell-Tale heart, Edgar Allen Poe tells the story of an insane madman who is in love with an old man’s eye. The story begins with the madman telling us how he loves the old man but wants to kill him because of his eye. The old man’s eye is like none other and resembles a vulture’s eye. And Poe instills his poem with the same despair experienced by the narrator by using characteristics that are typical of gothic literature such as, High Emotion, Mysterious Atmosphere’s, and Spooky Visions. One gothic element that Poe uses throughout The Tell-Tale Heart is high emotion.This is first apparent when the old man heard someone in the room. The old man sprung up terrified and said â€Å"Who is there? † alert as can be the old man stayed up and put out a terrified groan. The horrific groan of the old man contributes to the high emotion feel of the story. The other gothic element Poe uses throughout The Tell-Tale H eart is a mysterious atmosphere. This was first noticeable when the madman crept into the old man’s room and said â€Å"The room was black as pitch with thick darkness† And within the room the madman had to carry with him a lantern to see clearly.The pitch black room certainly contributes to the mysterious feel of the story. The fact that the old man is asleep and lives in a creepy place makes the story have a mysterious atmosphere. More Gothic elements Poe uses throughout The Tell-Tale Heart are Omens, Portents, and Visions that the mad man haves. These first appeared at the beginning when the mad man said: â€Å"I made up my mind to take the life of the old man, and rid myself of the eye forever. † The mad man was having vision of killing the old man.The mad man started hearing a loud unbearable ringing in his ears after he buried the body under the floor and the cops came in. All of these examples certainly contribute the omens, portents, and visions occurrin g in this narrative. Tell-Tale Heart is a classic story about a mad man who stalks and kills someone because of his eye. The madman was so in love with this eye that he would be willing to take the life of an innocent old man. Deep down inside the madman’s conscious wouldn’t let him live.The madman thought everything was going to be okay but the only person that wouldn’t let him go on was himself. As the cops where talking he got an annoying ring in his head and it wouldn’t stop until he came clean. It is not surprising that this narrative poem ends on such an unhappy note, because Poe places that tone throughout the poem. By using things that are typical of gothic literature like High emotion, Mysterious Atmospheres, and Crazy Visions, Poe creates a poem that is wrapped in Mystery.

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

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Business environment - Essay Example The UK is experiencing an increasingly ageing population which means that there will be a corresponding rise in demand for products targeted to this demography such as medicines, fashion and accommodation (Gillespie, 2007). On the converse, companies will experience increased costs in the form of pension payments to staff that are living longer. One strategy that firms are using to tackle the rising pension costs is to tap into this labour pool of older employees, by keeping them on the job longer. Of note also it that the ageing labour is being replaced by UK high net immigration trend that is the largest in Europe (Walayat, 2010). Economy Watch (2010). The Economy of the UK, GB, British Isles (or Whatever You Want to Call It!). [Online]. 30 June 2010. Economy Watch. Available from: http://www.economywatch.com/world_economy/united-kingdom/. [Accessed: 2 January 2012]. Elliot, L. (2011). George Osborne given stark warning on cuts’ impact. [Online]. 12 September 2011. The Guardian. Available from: http://www.guardian.co.uk/business/2011/sep/12/george-osborne-warning-cuts-impact. [Accessed: 2 January 2012]. Walayat, N. (2010). UK Population Growth and Immigration Trend Forecast 2010 to 2030. [Online]. 2 August 2010. The Market Oracle. Available from: http://www.marketoracle.co.uk/Article21565.html. [Accessed: 2 January 2012]. Weldon, D. (2011). The really big question in UK economic policy: What are low gilt yields telling us? [Online]. 20 December 2011. ToUChstone blog: A public policy blog from the TUC. Available from: http://touchstoneblog.org.uk/2011/12/the-really-big-question-in-uk-economic-policy-what-are-low-gilt-yields-telling-us/. [Accessed: 2 January

The Role of Financial and Accounting Management Essay

The Role of Financial and Accounting Management - Essay Example The income statements are prepared to measure the net income of the organization during a specific period. It compares the revenues and expenses related to the specified period for the purpose of measuring the performance of the firm in terms of profitability, costs incurred and revenues generated. Using this statement, the managers are enabled to compare the previous periods’ results with that of the current period and measure the performance of the firm on the basis of the differences that occurred. For instance, an increase in expenses may help the managers analyze the situations that resulted in excess expenditure. The possible reasons may include increased losses due to poor working conditions, poor employee performance, change of material, increase in production and sales or so on. Hence, the statement of comprehensive income helps in measuring the performance of the business with its own past performance and provides help to the managers with the identification of risk elements that are affecting the performance of the firm. Ratio analysis is another important measure that helps in the measurement of the performance within the organization by comparing the current period’s results with the past results. The statement of changes in equity also helps in the measurement of the changes that occurred in the owner’s equity and the trends that are seen in the contributed capital and retained earnings of the firm. An increase or decrease in the equity shows the performance of the firm over a period of time.

Discuss the development of Chinese tea art from the Tang dynasty until Essay

Discuss the development of Chinese tea art from the Tang dynasty until recent times in China or overseas - Essay Example Despite the increasing market share of modern drinks such as soft drinks and alcohol drinks, tea has never lost its popularity, especially in recent years, when people are increasingly aware of the importance of organic foods and drinks, tea is being considered one of the most natural and healthy drinks which is promoted by more and more people around the world† (Wang 2011, p. 13). At the beginning tea was used for phytotherapy and mainly on the territory of churches. Monks started drinking tea because they liked its sedative effect and also to demonstrate the respect for nature. Chinese tea ceremony was also born as a result of respect for nature and the necessity of peace and was held as a part of religious ceremonies. The interesting fact is that for many centuries the philosophies of Confucianism, Daoism and Buddhism were mixed in the magic Chinese tea ceremony. Later Chinese people learned to value the pleasure they received from tea-drinking and its social meaning. Tea ce remony has turned from a religious ritual into the important part of social, cultural and traditional events (Baldwin et al, 2006). Chinese people has enjoyed tea-drinking for more than 4000 years. According to the legend, Yan Di, one of the three ancient rulers, tasted all the kinds of herbage to find methods of treatment. Once, when he was poisoned by some kind of herbage, the drop of water from manuka appeared in his mouth and saved him. Tea was applied as a medicine for long. During the rule of Chow dynasty it had religious status. In spring and in autumn people ate the leaves of manuka instead of vegetables (Wang, 2000). With the popularization of Buddhism in Northern and Southern dynasty, its dewy effect was used by monks for meditation. Tea as a drink was thriving during the rule of Tang dynasty and became a popular product in shops. The appearance of a book about tea became one of the most important events of this

Byzantine up to the Early Reniassance Essay Example | Topics and Well Written Essays - 750 words

Byzantine up to the Early Reniassance - Essay Example Their paintings thus entailed naturalism and reality (Lahti 10). These artists comprised Donatella, Masaccio, Giotto, Brunelleschi, among others. Their art sought to refute global gothic style diffusing during that era. Scientific relations also comprised a feature of their paintings. Their art exemplified lots of skill and prowess. The art entailed lots of influence emanating from Roman Catholic. Another feature eminent throughout the images would be use of extra light and color in paintings. This exemplifies that the paintings depicted a higher quality compared to those produced in premature renaissance. Artist enjoyed lots of funding from wealthy families and religious persons. The sponsors chipped in coupled with the target of developing the sculptures and painters while portraying their skill. Multiple Choice Questions 1) Donatella encompassed a Florentine A) Painter b) Drawer c) Singer d) Ruler 2) Renaissance expounds a practice enveloping A) Eastern Rome B) Central Rome C) Wes tern Rome d) Europe 3) Early Renaissance entailed artists that refuted art that was a) Gothic b) Natural C) realistic d) Revolutionized 4) Artists during early renaissance included a) Brunelleschi b) Leonardo da Vinci c) Michelangelo D) Raphael First Image (1427) Figure 1: The Holy Trinity, Florence. Retrieved from http://www.italian-renaissance-art.com/Masaccio.html The painting above encompasses an esteemed masterpiece during 1427. This entails one of Massacio’s works. This entails a Holly Trinity painting for Novella church that encompasses its situation in Florence. Unlike prior painting, this painting entails depictions of revolutionized art. One indispensable feature would be improved use of light. The painting differs from earlier ones with reference from the ideology that the latter just showed lines. The lines showed demarcations that unveiled different partitions of a drawing. More so, the image encompasses relations to Roman Catholic convictions (Lahti 15). This dr aws explanations from the ideology that Roman Catholic entailed a distinct religious culture. Another similarity to images and arts of this era entails their refutation to Gothic styles. This expounds that Massacio refuted the diffusing ideologies of Goth existing during that duration. Therefore, he sought making art that depicted reality and naturalism. In addition, the painting depicts human bodies in a rational manner. This draws basing from the ideology that earlier paintings comprised of images that entailed no clarity. The imager also entails depictions of societal beliefs. This exemplifies that this art correlates to Eastern Rome’s catholic beliefs. Second image (1415-1416) Figure 2: â€Å"St. George† Retrieved from http://www.italian-renaissance-art.com/Donatello.html The image above depicts a sculptor that owes its making to a renowned Florentine. Donatella encompassed a sculptor that made history in Rome. His art entails illuminations of sculptures that depic ted lots of humanism. The sculpture above represents Saint George. Unlike the belief by Catholics that saints ought to depict solemnity, Donatella refuted those arguments by making Saint George appear serious and prepared to combat the enemy. Similarities between Masaccio and Donatella’s images The images depict lots of realism (Lahti 20). This gains explanations from the ideology that they entail real features comprising a being’

Philosophy metaphysics Essay Example for Free

Philosophy metaphysics Essay In order to clearly answer the first question, it is important first to answer the question – â€Å"what is the soul for Aristotle† and as such give an account of how he views substance and separability. Aristotle posits in de Anima that the soul is the substance in the sense which corresponds to the definitive formula of a things essence. That means that it is â€Å"the essential whatness’ of a body of the character just assigned. (Book II, 412b). As such, the soul is the essence of being and the essence of being is its substance. By being, Aristotle refers to the thing itself while by essence he refers to the primary essence of the thing itself wherein one is treated as the subject in its own right i. e. the good itself is treated as the essence of the good. It can be deduced then, using hypothetical syllogism that if soul is the essence of a being and the essence of being is its substance, then the soul is the substance of a being. He argued further that whatever is has a being, whatever has a being has a substance – this as the grounding of his epistemology. Hence, whatever is has a substance. This implies then that being is identical to substance. If such is the case, then using the principle of excluded middle, being is also identical to soul. Now, let us elucidate the concept of separability. Aristotle first distinguished the difference between the body and the soul. The body as he stated corresponds to what exists in potentiality, it being the subject or matter of a possible actuality. Soul, on the other hand, is a substance (actuality) in the sense of the form of a natural body having life potentially within it; it is the actuality of the body. Aristotle, Book II, 421b) As he delineates the dissimilarity between the body and soul, one should not be mislead in regarding the two as separate entities. They are at some point seems to be separate for in the former we are talking about a corporeal body in its spatio-temporal existence while in the latter we are talking of an incorporeal body transcending in the spatio-temporal world. However, their separability in terms of space and time does not mean they are separate as whole – that is an entity having life. As Aristotle argues â€Å"the soul is inseparable from its body, or at any rate that certain parts of it are (if it has parts) for the actuality of some of them is nothing but the actualities of their bodily parts†. (Aristotle, Book II, 413a). He argues further that â€Å"body cannot be the actuality of the soul; it is the soul which is the actuality of a certain kind of body. Hence the soul cannot be without a body, while it cannot be a body; it is not a body but something relative to a body. That is why it is in a body and a body of a definite kind†. (Book I, 421a). It can be deduced then that soul and the body are inseparable with each other. It is because the essence of both their existence lies in the interdependency of their telos – the soul actualizing the potential life in the body while the body providing an entity for the soul to actualize itself in the material world. Since the soul is the actuality of natural body, then naturally it would have certain functions which it can actualize. Aristotle has identified these functions to be the following: (1. ) powers of self-nutrition or the nutritive function; (2. powers of sensation which includes the sensory and appetitive function; (3. ) the power of movement and rest or the locomotive function and (4. ) the power of thinking. With these functions, he posited a psychic power of hierarchy. He claimed that of the psychic powers mentioned above, some kinds of beings posses all of these, some possess less than all while others posses only one. As such, evidently, the plants possess the p ower of self-nutrition wherein they can grow up or down and increase or decrease in all direction as long they can find nutrients in the soil. It is through their own means that they continue tolive. Even though the plants possess only one function of the soul, it is a great wonder how they continuously subsist on their own. Next is the power of sensation, which is possessed by all animals. All animals possessed the power of sensation because they all have the primary form of sense, which is touch. Aristotle defended and further elaborated this notion in de Anima. To wit: if any order of living things has the sensory, it must also have the appetitive; for appetite is the genus of which desire, passion, and wish are the species; now all animals have one sense at least, viz. ouch, and whatever has a sense has the capacity for pleasure and pain and therefore has pleasant and painful objects present to it, and wherever these are present, there is desire, for desire is just appetition of what is pleasant. (BookII, 414b) From the arguments stated above, it can be evidently inferred not just how Aristotle proven that all animals possess at least one sense, the touch, but also how he sci entifically deduced that all animals by virtue of their sensory function, possess appetitive function, too. From all these animals, there are some which possessed the power of locomotion, advancing them to a higher stratum. These are animals which can execute any kind of movements together with the capacity to halt such movement. Lastly, the human beings possessed all of the above-mentioned functions placing them on the top of the hierarchy. They posses the power of thinking, which is the essential feature of the human beings and which separates them apart from all other species. Analyzing the theoretical framework Aristotle succumbed to, it can be construed then that for him every being has a soul. This is evidently manifested in his attempt to prove the groundings of his epistemology extending his claim to the psychic hierarchy wherein he posited that every kind of living thing – any entity for that matter possesses certain function/s of the soul It should be put in mind, however, that even Aristotle posited the different functions of the soul; they are in essence, inseparable. An example of this is the function of nutrition (by eating) which human beings in particular do in order to properly and clearly think. The latter being also a function of the soul. Evidently, every function of the soul is interconnected with each other especially in the case of the Homo sapiens, who possessed all the enumerated functions of the soul. Aristotle notions of intellect can be rooted in his conception of knowledge – in his epistemology. It is from his conception of knowledge arises his other assertions on how he views the world. It is common sensical then to claim that his conception of the mind or any other things transcending from their spatio-temporal existence, his metaphysics, is grounded on his epistemology. As such, it is with utmost importance to first answer how Aristotle regards the nature of knowledge and how does one able to acquire knowledge so as to provide an answer on his notion of intellect. Knowledge for him can only be found within the material world – that is things, which are intelligible by senses. It is then through our experience with this objects in their spatio-temporal existence that we come to know them. He mentioned the processes of how we can arrive to know these objects – by perception, discrimination and thinking. By perception here, I mean the process of how our senses operate to recognize things in the material word. Discrimination then comes simultaneous with perception in order to give a concrete description of the thing being perceived. In example, upon the perception of a certain plant, we can able to distinguish its structure and other ontical features as the mind started to categorized. As a corollary, we arrived at the conclusion that what we perceived is indeed a plant. From there, we judged that what we perceived is indeed a plant and hence, arriving in the state of thinking. It can be deduced then that through thinking, one can able to comprehend the ontical features of an object and by virtue one’s reason, its primary essence. By primary essence, I mean the telos or the end itself of a thing. Since reason for Aristotle is innate in human beings so is intellect. It is because for Aristotle, reason is an essential property of the mind – that is of the intellect. If that is the case, then reason for Aristotle is relatively tantamount to the intellect. Husserl, on the other hand regarded the process of intuition as the first level of cognition wherein the objects are grasp in its original thru experience. This is also the case when one is cognizing objects of mere representations which includes but not limited to pictorial intuitions and any means of symbolic indications. To wit, experiencing is consciousness that intuits something and values it to be actual; experiencing is intrinsically characterized as consciousness of the natural object in question and of it as the original: there is consciousness of the original as being there in person. The same thing can be expressed by saying that objects would be nothing at all for the cognizing subject if they did not appear to him, if he had of them no phenomenon. Here, therefore, phenomenon signifies a certain content that intrinsically inhabits the intuitive consciousness in question and is the substrate for its actuality valuation. (Husserl, p. 3) It is only but logical to infer that experience plays a vital role in the cognition of a certain object. As such, it is only upon experience, can one theorized and moved to a higher level of cognition. A thing must first be intuited before one can theorize about them. And after theorizing, comes the process of reflection. Evidently, both Aristotle and Husserl believed in the value of experience in which the former calls perception and the latter intuition. From these processes arises higher forms of cognition wherein the end result for Aristotle is thinking through the use of reason while for Husserl, it is pure reflection as a result of phenomenology. It is then with utmost importance to first clarify, what does Husserl meant by intellect and Ego. As such, in what process does a person uses his intellect. Furthermore, what is the difference of reflection from pure reflection and of the empirical Ego to the transcendental Ego? Also, one should answer the question â€Å"what is phenomenology? † and â€Å"why it is only through this process one can arrive at pure reflection? † For Husserl, intellect is identical with consciousness as Ego is identical to Self. As such, when one speaks of intellect, one is referring to consciousness and vice-versa. Such is also the case with the Ego and the Self. Reflection is the process wherein one is looking not towards the act of reflection itself but rather in the direction of the objects one is conscious of. As such, one is absorbed in reflecting how these objects exist rather than asking how they come into being or essentially, enquiring on their primordial existence. If the consciousness is moving towards this kind of reflection, then the Ego is only in his/her ontical (empirical) status. Pure reflection, on the other hand, is the process wherein the consciousness is reflecting his consciousness – that is the act of reflection per se. This is the case wherein the Ego transcends from his ontical stage by describing the events i. e. relating, referring, combining, et al in his consciousness. And this can only be done thru the process of phenomenology. What is phenomenology then? Phenomenology is defined as the science of consciousness. (Husserl, p. 5) It is the process of describing the things and events themselves in their primordial sense through the use of phenomenological reduction. Phenomenological reduction then is the process wherein one suspends his/her preconceived notion of things in order to objectively describe the objects and events as what it appears to them. It only thru this process that we can arrive at pure reflection because this is the only method wherein objects and events are describe as themselves without concurring to any established principle or assumption. Evidently, Aristotle’s notion of intellect and Husserl’s notion of Ego posited the strength of mind in general – transcending from space and time. If that is the case, then the conception of a person is not only confined within the physical realm – that is he can do things beyond the limit of his physical existence in his journey to unravel the primordial existence of objects and any discipline for that matter. However, what sets them apart from each other is their notion on how one can really grasp the ontological state of an object or in the words of Kant –their intentionality. Aristotle believed that one can only know the ontological state of a thing by referring to its primary essence, its telos as the context clue in able to grasp the object’s primary essence. For Husserl, on the other hand, it is only through the use of phenomenological method can one comprehend the ontological state of objects. In Being and Time, Heidegger attempted to know the meaning of a Being – that is the Dasein, by starting to ask and redefine the fundamental question of â€Å"What is a Being? † He further continued this method by asking the ontological question of Being – that only a being can know his Being because he is consciousness to his Being by his being. His starting point is the fact that a being is a Being-in-the-World. He is a being situated in this world. As such, it is only him who can know his being by virtue of his ontic-ontological character. If that is the case, then it is only him who can determine his possibilities by virtue of being a spatio-temporal entity. Since no other entities can determine his possibilities as a being conscious of his existence, then the Dasein solely can ascertain his existentiall. It can be deduced then that the task of Dasein is to transcend to his existentiell in order to arrive at his ontological status. He can only do this by maximizing his possibilities to know himself thru the things which are ready-at-hand – things which can help him to reveal his being to him. It should be kept in mind that this process of knowing the Dasein does not go in hermeneutic circles rather on a back and forth condition Dasein as a spatio-temporal entity is facing a hard time to know his being because there is a tendency that he might be too absorb in his world or fall. Yet what Heidegger wants to emphasize is that he as a Dasein should not conceive his being as a spatio-temporal entity an encumbrance to his Being. It is because it is only through this world he can have his possibilities. This separates him from other entities and makes him a Dasein. Evidently, Heidegger’s notion of Dasein greatly gives importance to the relationship of the Being and the world which is also apparent in Aristotle notion of intellect and Husserl’s notion of Ego. However, what separates the former from the latter is that it focused on providing an answer on how one can transcend to his facticity in order to ontologically know his Being. The latter, on the other hand, focuses in discovering the essence and the ontological existence of the objects in the material world. Transcendental phenomenology is defined in general as the study of essence. It designates two things: a new kind of descriptive method which made a breakthrough in philosophy at the turn of the century, and an a priori science derived from it; a science which is intended to supply the basic instrument for a rigorously scientific philosophy and, in its consequent application, to make possible a methodical reform of all the sciences. (Husserl, p. 15) Essentially, transcendental phenomenology then is a description of phenomena. Husserl, then, laid down the method to achieve the objective of reforming all the sciences. The first step is the use of phenomenological epoche or reduction or bracketing wherein one suspends or take away all his/her biases and prejudices in order to â€Å"objectively describe† a phenomena. By doing this, we can arrive at a universal description of a phenomena. This will be followed by the compare and contrast method which one will have to undertake in order to arrive at the pure data of things. It appears then that by suspending one’s judgment and undergoing the intersubjectivity test, we can arrive at the â€Å"pure data of things†. In relation to this, Husserl claims that this method should be followed by all sciences in order to answer their primordial condition. It is held that sciences cannot escape their dogmas because it fails to question how they come to be. What they are just doing is a mere adaptation of established principles proven in the past to be true. Since these established principles were proven in the past to be true, scientists or people who work in the sciences do not make any attempt to further verify the truthfulness of their established principles – that is how and why is it the case that such principles were held to be true. For indisputably, things cannot just come into being without any rationalization, scientific explanation for that matter. Sciences have constructed ready-made answers to all things – their nature, existence, feature, et al; grounded on the preconceived notion that sciences have already provided sufficient answers to the primitiveness of these objects. While sciences are busy in explaining these things [the ready-made answers], they failed to realized that they were not able to arrived at the Isness of these objects, on how they come into being. However, since the sciences had already deceived the people, that in the past, it already provided sufficient answers to the primordial existence of things, it appears then they are seemingly contented and satisfied by what the sciences have achieved. This is what phenomenology wants to deconstruct – it wanted to create a paradigm shift by destroying the â€Å"tradition† institutionalized by science and overcoming relativism and subjectivism by the use of phenomenological reduction. From these, one can arrive at the pure data of consciousness. It is in this sense, that phenomenology becomes transcendental. Phenomenology is different from descriptive psychology because it draws upon pure reflection exclusively, and pure reflection excludes, as such, every type of external experience and therefore precludes any co positing of objects alien to consciousness. (Husserl, p. 7) Descriptive psychology then does not depend upon pure reflection exclusively; it needs psychological experiencing which would result to the reflection of the external experience. As such, consciousness itself becomes something transcendent, becomes an event in that spatial world which appears, by virtue of consciousness, to be transcendent. (Husserl, p. 7) It can be inferred then that phenomenology focuses solely on the consciousness per se of a being making it the science of consciousness while descriptive psychology focuses on the consciousness of a being in his psychic experiences. Transcendental idealism states that everything intuited in space and time, and therefore all objects of any experience possible to us, are nothing but appearances, that is, mere representations which, in the manner in which they are represented, as extended beings or as series of alterations, have no independent existence outside our thoughts. (Kant, p. 1) As such, it posits that one cannot have the knowledge of the realm beyond the empirical – that is one cannot experience objects outside space and time. It is because the mind as Kant argues having certain constraints [in reference to space and time] – can only grasp the noesis of the object but not its noumena – the object’s intentionality. It can be inferred then that transcendental idealism’s fundamental assertions lies on two grounds: first, objects by themselves exudes intentionality; and secondly, we can never know their intentionality [or noumena] because our mind can only grasp the noesis or what is appearing to us. Phenomenology believes on Kant’s first claim that indeed objects have their own intentionality but vies the second assertion. As such, its emergence as a domain of study in philosophy is grounded on its thrust to prove that indeed the mind can know the noumena of objects. Phenomenology believes that this can be done using eidetic reductionism proving to all that the mind can transcend beyond the physical realm – beyond space and time. Essentially, all the philosophies which were tackled in this paper seek to explain and interpret the world – including the objects within it and the beings living in it; from the primordial existence of things up to the authentication of one’s Being.