Sunday, July 5, 2009

Why don't depositors skip intermediaries and engage in direct finance?

After all, since a bank charges a higher rate on a loan than it pays depositors, it would seem that a depositor could do better by making a direct loan to a borrower or a borrower could get a lower rate by borrowing directly from a saver. The answer to this question lies in the role intermediaries play in an economy. Notice that we could also ask this question about product markets: why don't consumers buy directly from factories instead of from retailing outlets? The answer, of course, is that the benefits derived from using intermediaries exceed the extra cost of dealing with them.

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