These days, almost everyone is connected in some way to financial markets. When you receive a paycheck, pay a bill, borrow money, or use a credit card, the financial markets assist with the transaction. And a recent FDIC study found that about 91% of U.S. households have some form of checking or savings account.
In Module 22, we learned about the three tasks of a financial system: to reduce transactions costs, to reduce risk, and to provide liquidity. The financial system performs these tasks largely through financial intermediaries, such as banks and mutual funds. In Module 25, we looked at what banks do and how problems in the banking system can adversely affect the economy. Past problems have led to financial regulations that help to ensure a safe and efficient financial system. But what happens in an economy when its financial markets do not function well—