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- [Narrator] What are financial intermediaries?

Financial intermediaries are institutions

that reduce the cost of moving funds

between savers and borrowers.

The most common financial intermediaries

are banks, bond markets, and stock markets.

Why do we need financial intermediaries?

Well, individuals and businesses need to borrow and save

at different periods of their lives.

Individuals rely on borrowing

to invest in things like education and housing.

If your car breaks down

and you don't have enough money to fix it,

you can borrow money for repairs

and continue living your life.

And, individuals need to save for retirement

when their incomes drop but their needs don't.

Businesses also rely on credit to operate and grow.

Entrepreneurs with great ideas but not much money --

they can borrow money or sell a stake in their idea

to get their venture off the ground.

For example, Howard Schultz built Starbucks into a global brand

by borrowing and raising capital

through several different types of financial intermediaries.

Though less common, businesses can also save money.

Now, sometimes, the individual who needs to borrow

knows the individual willing to lend.

But financial intermediaries allow you to venture

beyond just borrowing $5 from Grandma.

So we see just how common borrowing and saving

through financial intermediaries is.

But what happens when these institutions fail?

Much like our real bridges,

it's only when the metaphorical bridges

of financial intermediation crumble

that we recognize just how dependent we are on them.

As just one example, on September 15, 2008,

the world's financial system was shaken to its core

when the investment bank Lehman Brothers

filed for bankruptcy.

The impact was great,

not simply because Lehman was big,

but also because it was an important financial intermediary

that connected savers to borrowers.

The failure of Lehman marked the beginning of a series of events

that signaled America's worst economic downturn

since the Great Depression.

And while there are several significant angles

to the Great Recession,

one of them was the decreased efficacy

of financial intermediation.

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To learn more about specific kinds of financial intermediaries,

namely banks, click here.

Or, to test your knowledge on financial intermediaries,

click here.

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