Banking Intermediaries, Market Failures & Economic Policies

Banking Financial Intermediaries in Spain

Banks, thrifts, and credit unions constitute the Spanish banking system. These entities are financial intermediaries. The primary differences between them lie in their legal structure:

• Banks: Private companies aiming to generate profits for their owners.
• Savings Banks: Non-profit entities allocating profits to charitable and social causes.
• Credit Unions: Members are depositors who benefit from their financial services.

Regarding services, the typical activities of these banking intermediaries are very similar: deposit-taking and lending.

Market Failures

1. Cycles: The market is criticized for failing to ensure stable economic growth.
2. Externalities: Many economic activities generate external effects on society and the environment that the market does not control.
3. Public Goods: The market responds to private property demand but struggles to provide the necessary quantity of public goods.
4. Lack of Competition: Monopolies or cartels fixing prices or production quantities benefit companies but harm society.
5. Equity: The market often results in an uneven income distribution.

Understanding Externalities

Externalities occur when a company's or consumer's activity creates external effects impacting others. These externalities can be positive or negative for society.

Fiscal and Monetary Policies

Fiscal Theory

The state can stimulate a country's economic activity by increasing spending or reducing taxes. This provides consumers with more income, encouraging business activity. Conversely, the budget can curb economic activity by limiting spending or raising taxes.

Monetary Policy

The Central Bank (such as the Fed in the US) can regulate economic activity by adjusting interest rates or controlling the money supply.

State Functions

• Regulates economic activity.
• Produces and provides goods and services.
• Establishes taxes and redistributes income.
• Attempts to stabilize the economy.

Economic Schools of Thought

Neo-Keynesians

Economists following Keynes focus on unemployment. They advocate for reactivating the economy through public investment to improve employment.

Monetarists

Economists who believe in deregulation or removing state regulations to allow the market to operate more freely.

Internal Market Forces

Internal forces refer to the market forces of supply and demand. A country's production level depends on what companies are willing to sell and what consumers are willing to buy. Supply is difficult to modify in the short term, but demand depends on the frequently changing expectations of economic agents.

Fiat Money and Money Supply

Fiat Money

Money that derives its value from the credit and trustworthiness of the issuer.

Money Supply

The money supply, or the quantity of money circulating in an economy, is the sum of cash held by the public and bank deposits.