The term global finance describes the existence of a financial system that comprises of regulators and institutions that perform various financial transactions on an international front. By definition, the term does not constitute institutions and regulators that act on local and regional capacities. Instead, its primary components include huge financial institutions such as the IMF and a series of national agencies and federal departments. These agencies and departments include finance ministries, federal banks, and multinational private financial organizations.
Contrarily, banking refers to the corporate activity of receiving and protecting private money as well as offering financial credit to earn profits. It is a general process that places banks at the center of a nation’s financial system. Both federal and private banks are part of the system that offers various kinds of financial services. Some of these services include money lending, deposit collection, currency issues, debit card transactions, and currency processing. They also work as major profit-seeking organizations that trade in financial assets.
The government has a vital role to play in banking through its federal bank. In the US, the federal bank, dubbed the Fed, functions as a government agency that regulates interest rates and money circulation within the economy. These actions are part of a monetary policy system whose various moves aim at stabilizing the economy. For instance, expansionary monetary policies see the Fed increase its monetary supply to reduce interest rates and encourage investment through increased borrowing.
Furthermore, the government uses the federal bank as its national representative on the international front in the global finance system. It acts as a watchdog tasked with the identification and implementation of financial opportunities on a global capacity as one of the major players in the international financial world. For instance, the Fed would advise the US government to invest or borrow from other global markets to stabilize their economy.
Governments transition from national banking to the global finance system to improve their growth prospects. They use global financial markets as lenders and borrowers of credit. Through such activities, they intend to create a buffer zone that would help protect their economies from collapse. Financial globalization can assist in developing the role of a country’s financial system in two major ways as follows. First, it increases the availability of funds for foreign and domestic investors. Second, it improves the financial infrastructure of the parent nation.
Financial centers are cities that allow for an agglomeration of primary financial participants who trade with each other. Such participants include banks, federal banks, and institutional investors. Cities like London, New York and Tokyo remain the ultimate financial centers in the world because they dominate and arbitrate the bulk of trading in the developed and emerging world. They are the most active markets regarding market liquidity across all major products. Some of their products include derivatives, foreign exchange, bonds, and insurance. These products are the essential drivers of the global financial system.
Financialization is a term that describes the increase in size as well as the vitality of an economy’s financial sector about other players in the aggregate economy. Financialization is bound to have a positive effect on the country’s economic growth prospects. For instance, in the US, Financialization contributed to growth in the housing sector. The process resulted in the growth of the real estate sector that encouraged and protected purchases through credit.
The real economy is part of an economy that focuses on the actual production, distribution, and consumption of goods and services. Contrarily, the financial economy is the part of the economy that concentrates on financial market trading. Private economic agents have learned that they can make additional money through financing and other shady deals without following the regulatory limits associated with the real economy. Thus, financial activities take over a country’s functioning in place of real productive economic activities. That is, they become exceptionally detached from reality. This disconnect is what results in economic downswings (Cochrane 3-4).
Spatial Fixes have a close association with market volatility and a redirection of investments from one location to the next. They take place in two major phases. The phase before the fix is the boom phase where increasing demand results in a rise in sector-centered investment. The second phase, however, happens during a depression, or the bubble burst. The period is characteristic of a slump in home ownership, and relative losses in the real estate market. The switching crises, such as the house loans, exist as an effect of the spatial fix as an element of capitalism. Therefore, spatial fixes in housing are temporary events whose obsolescence results in a crisis and reset as new houses, given the existence of new loans, replace their old counterparts (This American Life).
Works Cited
Cochrane, John. Financial Markets and Real Economy. Working Paper . Cambridge, MA: National Bureau of Economic Research, 2005. PDF Document .
This American Life. "This American Life Episode Transcript: The Giant Pool of Money." 2008. This American Life Program Link. Web. 25 March 2016. <http://www.thisamericanlife.org/play_full.php?play=355>.
