3.3.4 Financial Markets

(This is an archived extract from the book Patterns of Power: Edition 2)

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 are able to 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 (3.3.4.1).

· Banks act as intermediaries between lenders and borrowers; they have become large and exploitative (3.3.4.2).

· Financial markets are destabilised by price bubbles, such as that in the American housing market in 2007 (3.3.4.3).

· Regulation needs to be changed, to prevent the need for taxpayers to have to ‘bail-out’ banks (3.3.4.4).

· Financial markets are asymmetrical: the lender has more power than the borrower (3.3.4.5).