Complexities of the U.S. Financial Systems
Financial markets that operate in a smooth manner play a significant role in the contribution of a healthy and efficient economy. This role is prevalent in the accumulation of capital as well as the production of goods and services. Financial markets provide basis for the prices of credits and returns on investment to bring about indications for the producers and consumers or rather the financial markets participants (Pryor, 1996). These implications assist in directing the funds to the consumers and the government as well as investors who wish to borrow the money and connect others who value the funds most. Similarly, financial markets impact the economy in that they reduce the costs of transactions and search in the economy. This occurs through providing vast arrays of financial products that vary in terms of risks and prices and maturity (Pryor, 2006).
Financial markets also impact businesses in that they offer products to producers and consumers that provide borrowers and lenders with a relative match for their needs. Businesses as well as individuals who need funds get to discover the financial markets and institutions that may provide funds and the related costs for the borrowers. In turn, it allows investors to make comparisons of the costs of financing to that of their expected returns on investment (Lounsbury & Hirsch, 2010). This way, financial markets get to direct credit throughout the economy as well as facilitate the production of goods and services. In addition to this, financial markets affect individuals through pension funds, business investments and short-termism.
The primary role of the United States Federal Reserve is that it works to keep the banking, financial and payments safe and stabilized. It also provides financial services to the government and the public (Lounsbury & Hirsch, 2010). These should be coupled with their conduct of monetary contributes to the long-run health of the economy by promoting maximum sustainable employment and stable prices. It is basically the central bank in the United State. The primary role of the United States Federal Chairman is that he/she acts as the spokesperson for the central bank. The chairman negotiates with Congress and the President of the United States. The Chairman also controls the agenda of the board and Federal Open Market Committee (FOMC) meetings. The Federal Board is concerned with issuing regulations against major federal laws governing the banking system (Lounsbury & Hirsch, 2010).
The Federal Reserve is effective in today’s economic environment in that they bring about some form of balance between the short term measures of economic performance and the long term goals of sustainable growth employment and low inflation. The Federal Board on the other hand, is effective in that it offers regulated monetary policies that can prevent inflation in the global economic environment. The Federal Chairman ensures that the President and the Congress come up with policies that are substantial to the global economic environment without reducing inflation (Lounsbury & Hirsch, 2010).
The financial system in the United States works, towards maintaining a stabilized economy that provides maximum employment, stable prices and long term interest rates (D’Amico, et.al, 2012). Interest rates influence the economy of the United States in that they fluctuate the economy thus subjecting the consumers to spend more in order to support the prices of assets such as stocks. For instance, the 2007 financial crises caused much inflation in the country thus making people spend more on goods. This made the Federal Reserve to respond with stern measures in order to stabilize the economy (D’Amico, et.al, 2012).
Low interest rates create disturbances and challenge central banks and eventually influence global financial environments. This makes the global financial environment reduce the demand for public goods and services have been altered by borrowing costs. Global financial systems end up giving out more loans. For instance in the Great Depression, banks ended up lending more than the returns obtained (Lounsbury & Hirsch, 2010).
Money supply refers to the safe assets used by businesses and households for making payments or held as short term investments. This involves the flow of money from the bank to the public in form of coins and notes held by commercial bank’s reserves and maintained in accounts.
The Federal Reserve is composed of Board of Governors, Federal Reserve Banks, Member Banks, the Federal Open Market Committee as well as other Depository Institutions or rather the public. These entities influence the financial system by regulating the legal policies in banking systems as well maintain balance that regulates inflation (D’Amico, et.al, 2012).
The International System that involves organizations such as the World Trade Organization engages in issues such as analyzing exchange rates (D’Amico, et.al, 2012). This helps bring about the reality and perceptive of carrying out trade. It makes traders feel exogenous to fluctuations. Exchange rates impact the international trade in that they offer basis on which exporters and importers operate.
D'Amico, S; English, W; López-Salido, D; Nelson, E (2012). The Federal Reserve's Large-scale Asset Purchase Programmes: Rationale and Effects*.Economic Journal, 122(564), 415-446.
Lounsbury, M., & Hirsch, P. M. (2010). Markets on trial: The economic sociology of the U.S. financial crisis. (Emerald eBooks.) Bingley, UK: Emerald.
Pryor, F. L. (2006). Economic evolution and structure: The impact of complexity on the U.S. economic system. Cambridge: Cambridge University Press.