Vocabulary

to waste – тратить зря

harbor – гавань

waterwheel – водяное колесо

charity – благотворительность

warships – военное судно

to inherit – унаследовать

fascinated – восхищен, увлечен

gadget – устройство

to adopt – усыновлять

to power – приводить в движение

bulb – лампочка

unload – разгружать

QUESTIONS AND ASSIGNMENTS

1. What did William Armstrong invent?

2. Find in the text the facts proving that he also was a great philanthropist.

3. What did he do for his native town?

4. Who inherited the Cragside?

29. Banks – initiators or victims of crisis?

Banks are a circulatory system of economics. But how effective is modern bank system? Nowadays many world economists and politicians think over this question because it helps us to understand real reasons of crisis. Majority of specialists suppose that the main reason of collapse in economic system is imperfection of banks’ legislation, which regulates their work. Let us start with short history of bank system and we can see the reasons for their failures and their consequences.

Bank in its classic meaning is an organization, which obtains funds of financial market participants. The finances at this moment are surplus. Then banks allocate them as loans to other members, which need them. The difference between rates of funds’ attraction and their allocation is income of the bank.

This function was the most important for industrialization in England, Germany, and the USA in the 19^th century, because it helped to concentrate considerable capital. It was necessary for building factories, mills, for development of manufactures. Crediting real sector of economy had been the main source of revenue until 70-80s of the 20^th century.

At the same time, corporations have begun using alternative source of circulating capital selling their own shares on the stock exchange. Banks began to participate actively in the development of the stock market buying shares of manufactures expecting their cost increase. Banks bought stocks both on behalf of clients and with their own capital. Unfortunately, legislation, which regulated operations on the stock exchange, was not perfect. There were not defined demands to participants, who wanted to place stocks on the exchange. There were no rules to openness of financial work of enterprises, which had their stocks in the market. The result of it was unreasonable price increase of securities of the most companies in USA.

In 20s American banks had enormous income through stock jobbing, which was more than their incomes from crediting. However, in 1929 it was obvious that real price of all holdings of the most companies are much lower than the price of stocks. It caused crash of exchange market, bankruptcy of banks. Crisis lasted for a long time and demanded enormous managerial effort by the state government. Government headed by President F. Roosevelt, restricted greediness of bankers.

Derivatives Market began to develop in 70s. Development of this market can be explained by the necessity to insure risks of the main commercial work. The main instruments of derivatives market are futures, options and forward contracts.

A futures contract is a standard contract to buy or sell a specified commodity of standard quality at a certain date in the future and at a market-determined price. The contracts are traded on a futures exchange. Futures contracts are not “direct” securities like stocks, bonds or warrants.

In finance, an option is a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to buy or to sell a specified asset on or before the options expiration time at an agreed price.

A forward contract is a non-standard agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. The party agreeing to buy the asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price.

Therefore, such instruments were made to insure risks of some trade and they have become very popular trading in securities and their derivatives. These financial instruments were new; they were not regulated by government. That is why the profit rate of speculating trade of derivatives was considerably higher than profitability of crediting operations and deals on the stock market. In its turn, it resulted in redistribution of capital in favor of the derivatives market. When the volume of this market was more than volume of deals on the stock market, bonds began to influence the current price of these assets in both developed and developing countries. By the August of 2008, the participants of financial market realized discrepancy of exchange quotations of stocks assets and their real price, which has resulted in just another crisis, which has drawn over not only the USA but also the whole world. The reason of it was the same greediness of bankers, which was not controlled by society.

We tried to understand the real reason of the world crisis. At the end, we want to tell about one way out of crisis, which may turn out to be a reliable one. It is Volker Plan. The Volker Rule is a proposal made by US economist Paul Volker to restrict banks from making speculative investments that do not benefit their customers. Volker argued that such speculative activity played a key role in the financial crisis of 2007-2010. President Obama first publicly endorsed the Volcker Rule on January 21st, 2010. The Obama administration also wants to limit the ability of the largest banks to use borrowed money to fund expansion plans. Volker was earlier approved by Obama as the chair of US President Barack Obama’s Economic Recovery Board. A board was created on February 6th, 2009. The Volker Rule remains an unimplemented proposal. Certainly, there are different views and opinions on this topic, but such talks all over the world show that the problem should be discussed and measures should be undertaken. It is evident, that the activity of the banks and their system must be regulated in a more strict way.