3.3.4 Financial Markets
Financial markets are an example of supply and demand: the demand for loans competes for the supply of credit. Lenders supply borrowers with money at a price – an interest rate – that both are prepared to accept. People and governments tend to borrow more if interest rates are low, and lenders can charge a higher rate of interest if the money supply is tight.
There are several differences, though, between financial markets and the supply and demand for labour or for goods and services:
- Risk, of loans not being repaid, is a major factor (188.8.131.52).
- Banks act as intermediaries between lenders and borrowers; they have become large and exploitative (184.108.40.206).
- Financial markets are destabilised by price bubbles, such as that in the American housing market in 2007 (220.127.116.11).
- Regulation needs to be changed, to prevent the need for taxpayers to have to ‘bail-out’ banks (18.104.22.168).
- Financial markets are asymmetrical: the lender has more power than the borrower (22.214.171.124).
- Inflation and fluctuations in currency exchange rates can affect the value of loan repayments (126.96.36.199).