Markets and Intermediaries Competition by lakpa sherpa samarpit

          Markets and intermediaries often fulfill the same needs, though in different ways. Borrowers/securities issuers typically choose the alternative with the lowest overall cost, while investors/savers choose to invest in the markets or intermediaries that provide them with the risk-return-liquidity trade-off that best suits them.

        Like investors, borrowers are concerned about the total net costs of different types of finance. One big consideration is government and self-regulation. Compared to most other parts of modern capitalist economies, the financial system is relatively heavily regulated. Regulators like the Securities and Exchange Commission the New York Stock Exchange  and the Commodities Futures Trading Commission onitor and regulate financial markets. Other regulators, including the Office of the Comptroller of the Currency the Federal Deposit Insurance Corporation  and sundry state banking and insurance commissions, monitor financial intermediaries. Companies that wish to avoid direct regulatory scrutiny due to its high cost tend to use intermediaries rather than markets. For example, instead of selling shares to the public, which would require following the many rules of the SEC and the a company might decide that it would be cheaper to obtain a long-term bank loan or sell bonds to life insurers, mutual funds, and other institutional investors in a direct placement.

         Regulators serve four major functions.First, they try to reduce asymmetric information by encouraging transparency. That usually means requiring both financial markets and intermediaries to disclose accurate information to investors in a clear and timely manner. A second and closely related goal is to protect consumers from scammers, shysters, and assorted other grifters. Third, they strive to promote financial system competition and efficiency by ensuring that the entry and exit of firms is as easy and cheap as possible, consistent with their first two goals. For example, new banks can form but only after their incorporators and initial executives have been carefully screened. Insurance companies can go out of business but only after they have made adequate provision to fulfill their promises to policyholders.

        Risk is a bad thing, while return and liquidity are good things. Therefore, every saver wants to invest in riskless, easily saleable investments that generate       high returns. Of course, such opportunities occur infrequently because investors bid up their prices, thus reducing their returns.To keep returns high, some investors will be willing to give up some liquidity or to take on more risk. For example, they might buy securities not backed by collateral As a result of the competition between investors, and between borrowers, the financial system offers instruments with a wide variety of characteristics, ranging from highly liquid, very safe, but low-return T-bills and demand deposits, to medium-risk, medium-liquidity, medium-return mortgages, to risky but potentially lucrative and easily sold derivatives like put options and foreign exchange futures contracts.

        Investors care about more than risk, return, and liquidity, but generally other considerations are secondary. For example, investors will pay more for investments with fixed redemption dates rather than ones that can be called at the borrower’s option because fixed redemption dates reduce investors’ uncertainty. They will also sometimes pay a little more for instruments issued by environmentally or socially conscious companies and countries and less for those issued by dirty,rude ones.

       Money also works as a store of value and as a standard of deferred compensation. By store of value, economists mean that money can store purchasing power over time. Of course, many other assets real estate, financial securities, precious metals and gems perform precisely the same function.Storing value, therefore, is not exclusively a trait of money. By standard of deferred compensation, economists mean that money can be used to denominate a debt, an obligation to make a payment in the future.

Suggested Reading

Ball, R. J. Inflation and the Theory of Money. Piscataway, NJ: Aldine Transaction, 2007.

Bresciani-Turroni, Costantino. Economics of Inflation. Auburn, AL: Ludwig von Mises Institute, 2007.

Samuelson, Robert. The Great Inflation and Its Aftermath: The Past and Future of American Affluence. New York: Random House, 2008.