Individuals save to prepare for their retirement, to help fund large purchases, and to cushion swings in their income—most generally, savings help individuals, firms, and governments to smooth their consumption over time. Similarly, individuals, firms, and governments borrow to finance large purchases like a home, to invest in new capital, or in the case of governments to finance large expenditures such as those necessary for a war. Once again, borrowing helps agents to smooth their consumption streams. Financial intermediaries bridge the gap between savers and borrowers.

Financial intermediaries also collect savings, evaluate investments, and diversify risk. Banks, bonds, and stock markets help finance new and innovative ideas, such as Google and Federal Express. Financial intermediation is a central part of healthy economic growth.

Without effective financial intermediation, an economy will end up adrift. Insecure property rights, inflation, politicized lending, and bank failures and panics can all contribute to the breakdown of financial intermediation. The 2007–2008 crisis was brought about by high leverage and falling asset prices that created a panic in the shadow banking system that sharply reduced the amount of lending in the economy. The resulting decline in activity demonstrates how important financial intermediaries are to the economy, both when they operate well and when they do not.