Disintermediation

Background

Disintermediation entails the elimination of intermediaries, such as banks or financial brokers, in the lending and borrowing process. By circumventing these middlemen, providers and users of capital engage directly with one another.

Historical Context

The concept of disintermediation gained traction in the 1970s as corporations started to seek alternative avenues for raising funds, thereby bypassing traditional banking systems. This phenomenon was further accelerated with the advent of technological advancements and regulatory changes in financial markets.

Definitions and Concepts

Disintermediation involves direct connections between savers (providers of capital) and borrowers (users of capital), eliminating traditional financial intermediaries. For instance, companies might issue bonds directly to the public instead of obtaining loans from banks.

Major Analytical Frameworks

Classical Economics

In classical economics, the concept of disintermediation would align with the notion of efficient markets where participants operate on complete information without intermediaries.

Neoclassical Economics

Neoclassical economics also supports disintermediation as it promotes market efficiency, minimizing transaction costs and potentially leading to better rates for both savers and borrowers.

Keynesian Economics

Keynesian economics, which involves higher levels of regulatory scrutiny and intervention, might see disintermediation as a risk to financial stability due to alternative channels’ less oversight.

Marxian Economics

Marxian economic theory would view disintermediation through the lens of capital’s function and the elimination of intermediaries potentially redistributing financial power but also possibly intensifying capitalism’s inherent inequalities.

Institutional Economics

From an institutional viewpoint, disintermediation may challenge existing power structures and necessitate new forms of institutions to govern direct financial transactions effectively.

Behavioral Economics

Behavioral economics might examine how psychological factors such as trust and decision-making processes are affected in disintermediated environments.

Post-Keynesian Economics

Post-Keynesian analysis would likely assess the dynamics of financial markets without intermediaries, focusing on implications for liquidity, systemic risk, and economic stability.

Austrian Economics

Austrian economists, with an aversion to central planning and intermediary regulation, might favor disintermediation as a pathway to purer market-driven processes.

Development Economics

Development economics could explore disintermediation as a strategy for mobilizing capital directly towards development projects without intermediary fees and delays.

Monetarism

Monetarists might study how disintermediation affects money supply and velocity within an economy, given the reduced role of banks in capital allocation.

Comparative Analysis

Disintermediation’s impacts can vary significantly based on the economic model in consideration. Market efficiency and cost reductions are common benefits, whereas concerns may revolve around risk management, regulatory oversight, and financial stability.

Case Studies

Corporate Bond Issuance in the U.S.: Corporations issuing bonds directly can present both case study and benefits/risks analysis.
Peer-to-Peer Lending: Examining platforms like LendingClub provides insight into the changing landscape of retail lending.

Suggested Books for Further Studies

“Financial Disintermediation and Monetary Policy” by Kyoshiro Oyama
“The End of Banking: Money, Credit, and the Digital Revolution” by Jonathan McMillan
“The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order” by Paul Vigna and Michael J. Casey

Financial Intermediaries: Institutions such as banks or brokers that act as a middleman in financial transactions.
Direct Lending: The practice of lending money directly to borrowers without an intermediary.
Capital Markets: Markets for buying and selling equity and debt instruments, where disintermediation often occurs.