June 27, 2009 at 8:34 pm · Filed under Uncategorized and tagged: adverse selection, asymmetric information, financial system, financial systems, function of financial system, moral hazard
Asymmetric information occurs when one party knows more about an economic transaction or asset than the other party does.
Adverse selection occurs before a transaction takes place. If unmitigated, lenders and insurers will attract the worst risks.
Moral hazard occurs after a transaction takes place. If unmitigated, borrowers and the insured will take advantage of lenders and insurers.
Financial systems help to reduce the problems associated with both adverse selection and moral hazard.
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June 27, 2009 at 8:26 pm · Filed under forex trading and tagged: brilliant financiers, capital and shares risks, financial system, financiers, good or evil, intertemporal trade
Financiers are not innately good or evil but rather, like other people, can be either, or can even be both simultaneously.
While some financiers are brilliant, they are not infallible, and fancy math does not reality make.
The financial system is a dense network of interrelated markets and intermediaries that allocates capital and shares risks by linking savers to spenders, investors to entrepreneurs, lenders to borrowers, and the risk-averse to risk-takers.
It also increases gains from trade by providing payment services and facilitating intertemporal trade.
A financial system is necessary because few businesses can rely on internal finance alone.
Specialized financial firms that have achieved minimum efficient scale are better at connecting investors to entrepreneurs than non-financial individuals and companies.
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