Complexities of the U.S. Financial System
There has been a lot going on in the US financial market in the past few years. They have affected the economy, business and individuals. The Federal Reserve Chairman and Board have that are in charge of the monetary policy have lowered the interest rates to practically zero in effort to revive the economy. The effect is not only felt in the US but globally as well.
When the US financial markets are running smoothly it will be a contributing factor in the having an economy that is strong and effectual. The flow of savings and investments that the financial markets efficiently guides helps to assist the accrual of funds and the manufacture of goods and services (Federal Reserve Bank of San Francisco, 2005). So if the US Financial markets were to have problems then the economy will also due to their close relation. The US financial market effect the ability of business to receive loans, their capitol and production. If there were to be issues then sales would decrease and production would drop. The US financial markets would not be able to keep the flow of money going into business, through loans or investments, at the rate it is accustom to cause funds to decrease. The individual would be effected at the same time if there would be a decrease in the US financial markets. Jobs would be in jeopardy, inflation would make things harder to afford the necessities, and people could lose procession and place to live due to financial difficulties.
This is where the Federal Reserve Bank comes in. The main role of the Federal Reserve is to direct monetary policy. Monetary policy governs the development and accessibility of money and credit. The Fed influences the flow to achieve the ...
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...onetary policy is doing what it was intended to do.
Works Cited
Amadeo, K. (2013, July 2). How are interest rates determined?. Retrieved from http://useconomy.about.com/od/interestrateindicators/p/interest_rate.html
Federal Reserve Bank of San Francisco. (2005, January). Please explain how financial markets may affect economic performance.. Retrieved from http://www.frbsf.org/education
Federal Reserve Bank of St. Louis. (2011). Low interest rates have benefits …and costs. Retrieved from http://www.stlouisfed.org/publications/itv/articles/?id=2082
Federal Reserve Board. (2003, July 8). The board of governors of the Federal Reserve System. Retrieved from http://www.federalreserve.gov/pubs/frseries/frseri.htm
McGuigan, B. (2014, Feburary 15). What is a federal reserve chairman?. Retrieved from http://www.wisegeek.com/what-is-a-federal-reserve-chairman.htm
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
Livingston, James. Origins of the Federal Reserve System : money, class, and corporate capitalism. Ithaca, N.Y: Cornell University Press, 1986
Mid September 2008 saw a significant change for the Australian economy, with the collapse of the Lehman Brothers triggering the Global Financial Crisis. The Global Financial Crisis was characterised by a tightening in the availability of money from overseas markets and resulting in governments having to intervene to maintain market stability. The Australian economy and its leaders generated considerable discussion about the prospect of a global recession, while most expected the financial crisis would have a major impact on the Australian economy, a factor that was not considered was the immediacy of its effects. The December quarter of 2008, saw business stocks devalue by $3.4 billion, the largest fall on record. In addition, there was a considerable softening in property prices, resulting in many companies/people having too much debt vs. too little wealth. With this, consumer confidence plummeted which in turn deteriorated consumption. Throughout the month of September and into October, the financial crisis spread from the United States to Europe, and all around the global economy, with economies contracting in growth.
The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed is able to control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession.
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such control over our economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds. The Federal Reserve System is the central banking authority of the United States.
Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies...
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress
The recession was preceded by the global boom of 2002 - 2007, which resulted in risky investment decisions by individual companies, which eventually left the markets teetering on weak financial supports. Cracks in the over-optimistic market started developing, first with the collapse of individual companies, including Goldman Sachs and Lehman Brothers, but those cracks quickly spread to the housing market and soon impacted the entire U.S. market. At the same time, markets all around the world tumbled, wiping out trillions of dollars in value for global investors. In the U.S., unemployment shot up by 5%, while the S&P 500 lost up to 40% of its value in one year. The events of 2008 and the realization of Firm-specific and Market Risk left investors with few safe-havens to protect their investments (International Monetary Fund,
First, when the stock market crashed banks began to shut down causing havoc because people were not able to make transactions. (Could not deposit or withdraw money.) Since people were not able to access their money people were beginning to get frightened on the possibility of not being able to pay their bills, or be able to provide enough to maintain food on the table for their families.
According to federalreserveeducation.org, the term "monetary policy" refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S. economy, (n d). The tools used are diverse but the main ones are:
The recent Global Financial Crisis (GFC) initially began with the collapse of credits and financial markets, which caused by the sub-prime mortgage crisis in the US in 2007. The sub-prime mortgages were given to high-risk lenders (with bad credit history) who were in danger of defaulting, which eventually caused a global credit crunch, where the banks were unwilling to lend to each other. In October 2008, the collapse of the major financial institutions and the crash of stock markets marked the peak of this global economic slowdown (Euromonitor International, 2008).
Financial crises have influenced the os of financial markets in past. The most important the Great Depression in 1929-30, the 1970s inflation failures and the banking difficulties in the 1990s led to problems in the financial markets causing serious disturbance. The recent financial crisis which became known in 2007, though the roots were implanted much earlier, has been the worst situation financial markets have ever faced.