Complexities of the U.S. Financial System
The U.S. financial markets play a big role in the economy. If no one is investing in businesses, they cannot start up, or grow larger to meet the needs of the country or nation. The economy is directly impacted by the amount of stocks bought and sold each day. Before the U.S. stock market crashed in 1929, it was booming. Americans had invested so much money in France that when their economy rose, so did the U.S. It collapsed because Americans pulled their money out of France and put it in U.S. stocks. If everyone pulled their investments today, the same thing would happen. Businesses would fail, and the U.S. would go into more debt.
The central bank of the United States is the Federal Reserve System controls the financial system, and is the most powerful single actor in the U.S. economy. The head of the central banking system of the U.S. is called the Chairman of the Federal Reserve. The chairman is appointed by the president of the United States and serves a four-year term with confirmation from the Senate, currently serving is Ben Bernanke. The Federal Reserve System has a total of seven board members including the Chairman. With the exception of the Chairman members serve a staggered fourteen-year term. The Federal Reserve Board of Governors is responsible for the monetary policy and serves as a dependent political structure. Although it is a dependent political structure and operates on its own, disagreements between the administration and board are very common. Pressure from Congress and/or the President can and have influenced the decision of the board but its semi-independence prevails, generally. The Federal Reserve Board of Governors “operates through the Federal Open Market C...
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... and makes adjustments to keep it in line with the true market value. Operating in foreign markets under goes a checklist and monitoring the exchange rate of that market is a contributing factor.
The financial market of the United States impacts many levels of the economy, businesses, and individuals. As you can see it is like a pyramid businesses and individuals are affected by the economy and how it stands within the market.
References
Investopediacom 20110906 How Interest Rates Affect the U.S. MarketsInvestopedia.com (2011, September 6). How Interest Rates Affect the U.S. Markets. Retrieved May 1, 2013, from http://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp
Melicher R W Norton E A 2011 Introduction to FinanceMelicher, R. W., & Norton, E. A. (2011). Introduction to Finance (Fourteenth ed.). Hoboken, NJ: John Wiley & Sons, Inc.
According to federalreservehistory.org “The Federal Reserve is about the Central Bank of the United States it was created by Congress to provide the nation with a safer, more flexible and more stable monetary and financial system. The Federal Reserve was created in 1913 with the enactment of the Federal Reserve Act” (federalreservehistory.org). According to investopedia.com “the Fed is headed by a government agency in Washington known as the Board of Governors of the Federal Reserve. There are 12 regional Federal Reserve banks located in
The Federal Reserve System is the central banking authority of the United States. It acts as a fiscal agent for the United States government and is custodian of the reserve accounts of commercial banks, makes loans to commercial banks, and is authorized to issue Federal Reserve notes that constitute the entire supply of paper currency of the country. Created by the Federal Reserve Act of 1913, it is comprised of 12 Federal Reserve banks, the Federal Open Market Committee, and the Federal Advisory Council, and since 1976, a Consumer Advisory Council which includes several thousand member banks. The board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews and determines the discount rates established pursuant to the Federal Reserve Act to serve the public interest; it is governed by a board of nine directors, six of whom are elected by the member banks and three of whom are appointed by the Board of Governors of the Federal Reserve System. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, San Francisco, Cleveland, Richmond, Atlanta, Saint Louis, Minneapolis, Kansas City and Dallas.
Post the era of World War I, of all the countries it was only USA which was in win win situation. Both during and post war times, US economy has seen a boom in their income with massive trade between Europe and Germany. As a result, the 1920’s turned out to be a prosperous decade for Americans and this led to birth of mass investments in stock markets. With increased income after the war, a lot of investors purchased stocks on margins and with US Stock Exchange going manifold from 1921 to 1929, investors earned hefty returns during this time epriod which created a stock market bubble in USA. However, in order to stop increasing prices of Stock, the Federal Reserve raised the interest rate sof loanabel funds which depressed the interest sensitive spending in many industries and as a result a record fall in stocks of these companies were seen and ultimately the stock bubble was finally burst. The fall was so dramatic that stock prices were even below the margins which investors had deposited with their brokers. As a reuslt, not only investor but even the brokerage firms went insolvent. Withing 2 days of 15-16 th October, Dow Jones fell by 33% and the event was referred to Great Crash of 1929. Thus with investors going insolvent, a major shock was seen in American aggregate demand. Consumer Purchase of durable goods and business investment fell sharply after the stock market crash. As a result, businesses experienced stock piling of their inventories and real output fell rapidly in 1929 and throughout 1930 in 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...
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.
...Governors is also the chairman of the FOMC. Its principal duty as described under law is the supervision of open market operations that principal method of federal monetary policy (Federal Reserve System 8th ed. pp. 12).
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Kosakowski, Paul. "The Fall of the Market in the Fall of 2008." Investopedia. N.p., 09 Apr. 2009. Web. 08 May 2014.
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
Financial Future: Where Will it be in 10 Years? Retrieved on November 20, 2013 from
These shareholders are represented by the Board of Governors. The Board is the main decision-making body, determines the policy of the World Bank. The member countries are represented on the Governing Board, usually Finance Ministers. The Governing Council meets once a year during the Annual Meetings of the Boards of Governors of the World Bank and the International Monetary
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
The USA is the leader of the earthly concern economy. It has the largest and strongest economy in the world, because United States has GDP per capita $49,800 (The World Factbook). The USA is an engine of world economy, the reason of changing and permutation of economic situation. The United States of America very strongly influences world economy. Many international and world transactions pass in US dollar. The increase and fall of dollar changes all world economy. All technologies and the newest technicians become and checked in America. Because of this essay will learn about the influence of the USA economy on the world economy. This essay seeks to check the positive and negative impacts of the American economy on the world economy. This research will test the economic factors of the United States economy and inquiries of the questionnaire.
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...
Studying Banking and Finance at University of St.Gallen will help me further increase my proficiency of corporate finance and financial markets. The in-depth research of specific topics, as well as a comprehensive curriculum, is a possibility for me to focus on my topic of interest ...