Complexities of the U.S. Financial System

 Complexities of the U.S. Financial System.

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  Complexities of the U.S. Financial System.

The US financial system is a central pillar of both the US and the global economy. The system supports both local and international business activities; and also facilitates capital flow and direct investment in US businesses (Melicher & Norton, 2011).

The financial system directly impacts the economy through the US stock market where stocks are sold and purchased daily. Stock market crash has always led to economic crisis as exemplified by the 1929 stock market crash. This crash was caused when the investors suddenly pulled out their money from the stock market, thus causing businesses to fail and the nation sinking into debt. Individuals businesses which list in the stock exchange do so in order to raise capitals, and a health stock market ensures that such businesses have sufficient liquid assets that can be used to pay debts, sustain expansion and also support mergers and acquisitions. However, a stock market crash would lead these businesses to lose their investments thus leading to the devaluation of the businesses, and for such businesses to stay afloat in such turbulent times; they will need to increase their borrowing with the resultant effect that such business fall into debt. For individual investors, the stock market provides an opportunity for him or her to increase his or her asset base, but a market crash would equally cause them to lose their assets (or have their assets devalued). An aggregation of the individual and businesses losses due to a market crash would cumulatively lead to a reduction of the economic output of the nation (Melicher & Norton, 2011).

The Federal Reserve System acts as the US central bank, and as such, it controls and regulates the entire financial system thereby making it the single most powerful actor in the national economy. Moreover, the Federal Reserve plays a significant role in facilitating international trade. It is presided over by the Chairperson of the Federal Reserve, who is appointed to serve a 4-year term by the US president. There are a total of seven board members of the Federal Reserve inclusive of the chairperson. The current chairperson is Ben Bernanke. Apart from the chairperson, all the board members are appointed to serve for a 14-years term. The main responsibility of the Board of Governors is to formulate and recalibrate monetary policies. This is best explained by Melicher & Norton who state that the Board of Governors “operates through the Federal Open Market Committee to control the money supply as a means of meeting monetary policy objectives” (2011). The board of governors is considered to be an autonomous dependent political structure which relies on laid down guidelines, strategies and protocols to solve disagreements between it and the US administration. However, political pressure still influences its decisions. The other responsibilities of the board include the coordination of the activities of the Reserve Banks within its jurisdiction, in addition to implementation of credit control devices such as the Home Mortgage Disclosure Act, Equal Credit Opportunity Act and the Truth-in-Lending Act. The activities of the Federal Reserve also affect the bond mutual funds and the stock exchange. The Reserve also influences the loan rate thereby indirectly affecting the value of individual assets (such as houses), and the possibility of a person remaining employed or being employed (Melicher & Norton, 2011). The effectiveness of the Chairman and His Board of Governors in today’s economic environment is illustrated by the fact that America has recuperated from the financial crisis, and other financial crises have been averted in time.

Interests rates do influence the financial environments by determining the bond interest rates, stocks changing rates, and consumer (and also business) spending thereby determining if inflation and/or recessions will occur (Melicher & Norton, 2011). For example, increase in the interest rates for bank-to-bank borrowing would lead the overall loan interest rates to go up thereby preventing people from borrowing the much need loan for business development, and this leads to an overall stagnation of the US financial market. Moreover, high interest rates leads to inflation and this in turn leads to an economic recession. This stagnation in turn prevents American consumers from purchasing foreign products and since the US is one of the biggest purchasers of foreign products, this leads to a slowing down of the international trade thereby adversely affecting the global financial environment.

References.

Melicher, R. W., & Norton, E. A. (2011). Introduction to Finance (14 Ed.). Hoboken, NJ: John Wiley & Sons, Inc.