{"id":40275,"date":"2017-10-05T02:00:33","date_gmt":"2017-10-05T06:00:33","guid":{"rendered":"http:\/\/quotulatiousness.ca\/blog\/?p=40275"},"modified":"2017-09-24T10:02:07","modified_gmt":"2017-09-24T14:02:07","slug":"four-reasons-financial-intermediaries-fail","status":"publish","type":"post","link":"https:\/\/quotulatiousness.ca\/blog\/2017\/10\/05\/four-reasons-financial-intermediaries-fail\/","title":{"rendered":"Four Reasons Financial Intermediaries Fail"},"content":{"rendered":"<p align=\"center\"><iframe loading=\"lazy\" width=\"853\" height=\"480\" src=\"https:\/\/www.youtube.com\/embed\/cdGA9t_PDpY\" frameborder=\"0\" allowfullscreen><\/iframe><\/p>\n<blockquote><p><strong>Marginal Revolution University<\/strong><br \/>\n<strong>Published on 26 Jul 2016<\/strong><\/p>\n<p>As we\u2019ve discussed in previous videos, financial intermediaries bridge savers and borrowers. When these bridges crumble, the effects can be disastrous. For businesses, credit shortages can lead to bankruptcy, or layoffs. For individuals, they rely on credit to invest in education or a new home or car. These negative effects show you how crucial intermediaries are to our lives. <\/p>\n<p>Still, what exactly causes failed intermediation? Four answers:<\/p>\n<p>First, insecure property rights. Simply speaking, when you save money at a bank, you expect the ability to pull out your funds when needed. But what if your deposits are frozen? Or confiscated altogether? For instance, in 2013 amidst a financial crisis, the government in Cyprus confiscated bank deposits to help pay down the country\u2019s budget shortfall. You can see how insecure property rights can scare away potential savers.<\/p>\n<p>Second, controls on interest rates. Interest rates are the price of borrowing. Thus, controls on interest rates, often called usury laws, are effectively price ceilings\u2014they set the interest rate lower than the market equilibrium interest rate. With this forced lowering of interest rates, borrowers will want to borrow more, but lenders won\u2019t want to lend. The effect? A lending shortage.<\/p>\n<p>Third, politicized lending. Banks profit by assessing risk, and then loaning, based on that assessment. Banks that excel at assessment succeed. Those poor at it die out. Problems arise when the government intervenes to prop up failing banks, resulting in what we call \u201czombie banks.\u201d In such cases, intervention undercuts normal competition, and intervention tends to favor banks that are politically connected. In fact, it\u2019s been shown that there\u2019s an inverse correlation between government ownership in banks and a country\u2019s GDP per capita and productivity growth. <\/p>\n<p>Fourth, you have runs, panics, and scandals. Remember, trust is vital to the financial system. When trust erodes, depositors may rush to withdraw their money from banks, causing what is known as a \u201cbank run.\u201d This can cause banks to fail, as we saw during the Great Depression. Scandals can also depress market confidence. Enron, WorldCom and Bernie Madoff may come to mind. <\/p>\n<p>So, which of these four factors contributed to the Great Recession of 2008? <\/p>\n<p>We\u2019ll discuss that in our next video.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>Marginal Revolution University Published on 26 Jul 2016 As we\u2019ve discussed in previous videos, financial intermediaries bridge savers and borrowers. When these bridges crumble, the effects can be disastrous. For businesses, credit shortages can lead to bankruptcy, or layoffs. For individuals, they rely on credit to invest in education or a new home or car. [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":35193,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[465,25,24],"tags":[492,436,893,1093,718,359],"class_list":["post-40275","post","type-post","status-publish","format-standard","hentry","category-americas","category-economics","category-japan","tag-argentina","tag-banking","tag-cyprus","tag-macroeconomics","tag-recession","tag-uncertainty"],"jetpack_featured_media_url":"https:\/\/quotulatiousness.ca\/blog\/wp-content\/uploads\/2016\/06\/favicon.png","jetpack_shortlink":"https:\/\/wp.me\/p2hpV6-atB","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/40275","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/comments?post=40275"}],"version-history":[{"count":1,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/40275\/revisions"}],"predecessor-version":[{"id":40276,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/40275\/revisions\/40276"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/media\/35193"}],"wp:attachment":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/media?parent=40275"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/categories?post=40275"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/tags?post=40275"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}