The role of financial markets

The market for securities The expenditure by income recipients in the commodities market can be in the nature either of consumption or of real saving (if a saver decides to buy real estate, land, or a house), the remaining part being in the nature of financial saving. In the simplified case we are now considering, financial saving can take only one of two possible forms, either securities (or equities) issued by firms, or holdings of liquidity in the form of bank deposits. As already made clear, when savers decide to put their current savings into a bank deposit, firms lose the same amount of liquidity and their bank debt is correspondingly increased. The consequence is that banks and firms compete for the available financial savings. In this competition, the banks try to make bank deposits more attractive by paying higher interest rates and by supplying complementary services (or simply, as once remarked by Tobin, by setting up comfortable and well-equipped premises, Tobin 1982a: 498). On the other hand, firms and financial intermediaries, so far as they are concerned, try to attract savings by offering high-yield securities. They also try to stabilise the price of securities on the financial market in order to offer the savers less risky placements. (The crucial role of financial intermediaries is clearly described by Bossone 2001: 878.) Stability over time and yield are in fact the two main features that savers (as distinguished from speculators) evaluate before placing their savings.