The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy's Only Hope

6The Essential Role of Banks in a Complex Economy: The Liquidity Challenge

 

BANKS PLAY A UNIQUE AND IMPORTANT ROLE IN THE ABILITY OF modern economic systems to extend the investment cycle, take more risk, and accelerate economic growth. Through their ability to pool and diversify risk—including credit risk, interest-rate risk and liquidity risk—they fund important economic investments that otherwise would not be made.

As an example of how this process works, suppose a real estate developer has plans to build a subdivision that will cost $6,000,000 and result in 100 building lots that can be sold over time at a current price of $80,000 per lot, or a total of $8,000,000 (100 lots × $80,000). He has saved $1,000,000 and therefore needs $5,000,000 ...