Describe How The US Financial Markets Impact The...

U.S. Financial Market: By
Adenikeh Victoria Davies
Professor: EB
Introduction to Finance
August 16, 2013

1) Describe how the U.S Financial markets impact the economy businesses and individuals?
Financial market is a market in which people buy and sell financial securities such as stocks and bonds, precious metals or agricultural goods for items of value at a lower transaction cost. In chapter 1 of the financial structure development and economic growth by editors (Kunts and Levine) concluded that financial markets play an important role in contributing to the health and efficiency of the economy. It also plays a role in the accumulation of capital and production of goods and services. Combination of well-developed financial markets and institutions along with a diverse array of financial products and instruments suits the need of borrowers and lenders and the overall economy. Price of credit and returns on investment provide signals to producers and consumers which helps direct funds (from savers, mainly households and businesses) to the consumers, businesses, governments, and investors that would like to borrow money by connecting those who value the funds most highly (i.e., are willing to pay a higher price, or interest rate), to lenders. The existence of robust financial markets and institutions also facilitates the international flow of funds between countries. (Rose, Peter S. 1994 “Money and Capital Markets”)
2) Explain the role of the U.S Federal Reserve, the Federal Reserve chairman, and Board, indicating its effectiveness in today’s economic environment. Provide support for rationale The Federal Reserve plays many important roles in today’s economy environment. Due to a series of financial panics and banks problems, Congress created the Federal Reserve Act which was sign into law by President Woodrow Wilson in 1913. The law created the Federal Reserve System, comprising of twelve public-private regional Federal Reserve banks. The Federal Reserve today is tasked with managing U.S. monetary policy, regulating bank holding companies and other member banks, and monitoring systemic risk. The U.S Federal Reserve has come under much scrutiny following the 2007-2009 global financial crises. Former chairman Alan Greenspan’s policy of holding interest rates down for an extended period of time in early 2000 is said to have contributed to the crisis. The Fed’s intervention in the financial system during this crisis has triggered a debate over the U.S. central bank regulatory authority. The 2010 Dodd Frank wall street reform and consumer protection act address the evolving role of the Fed in the post crisis period. Frank granted the Fed new powers, which is to break up companies that threaten the economic stability, but also subjected monetary policy to be audited by congress and created the consumer financial protection agency. The debate over the Fed’s role continue after it enacted rounds of quantitative easing, by buying the U.S treasury bonds to help spur economic growth. The Fed’s bought over $2 trillion worth of government bonds since 2008. The Fed has taken on a greater policy role in battling the country’s economic malaise. The Federal Reserve’s most primary function is to control inflation without triggering a recession. In addition to that the Fed’s have three other critical functions:
1. Supervise the nation’s banking system to protect consumers.
2. Maintain the stability of the financial markets and constrain potential crises.
3. Be the central bank for other banks, the U.S. Government, and foreign banks. The Federal Reserve control inflation by managing credit, which is the largest component of the money supply. The Federal Reserve can restrict credit by raising interest rates and making credit more expensive. This reduces the money supply, which curbs inflation. Ongoing inflation can destroy any benefits of growth. When there is no risk of inflation, the Fed makes credit cheap by

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