Complexities of the U.S. Financial System

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Complexities of the U.S. Financial System

Professor Issar
FIN 100
May 5, 2013

The U.S. financial system has many complexities and it is impacted by several environmental influences, including federal regulations and the economy. These factors not only effect the economy, but also business and individuals. The U.S. Federal Reserve, the Federal Reserve Chairman, and Board, also play a direct role into the effectiveness of today’s economic environment. Some of the complexities that impact the U.S. also have a direct influence on the global financial environment. These complexities include the interest rates and the exchange rate. The U.S. financial market has a major impact the economy, businesses, and individuals. Financial markets help to skillfully direct the flow of savings and investment in the economy in ways that facilitate the increase of capital and the production of goods and services. The worth of credit and returns on investment provide signs to producers and consumers. These signs help direct funds from savers and businesses to the consumers, businesses, governments, and investor. Also, the existence of healthy financial markets and institutions also accelerates the international flow of funds between countries. In addition, efficient financial markets and institutions tend to lower search and transactions costs in the economy. By providing a large range of financial products, with fluctuating risk and pricing structures as well as maturity a well-built financial system offers products to participants that provide borrowers and lenders with a close match for their needs. Businesses, individuals, and governments in need of capital can easily discover which financial institutions or which financial markets may offer funding and what the cost will be for the borrower. This will allow investors to compare the cost of financing to their anticipated return on investment, so they can make the investment choice that best suits their needs. In this way, a financial market directs the distribution of credit through the economy and aids the production of goods and services. The Federal Reserve plays a significant role in the U.S. payments system. The twelve Federal Reserve Banks offer banking services to depository institutions and to the federal government (Federal Reserve's Key Policies for the Provision of Financial Services, 2012). For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as financial agents, paying Treasury checks, processing electronic payments, and issuing, transferring, and redeeming U.S. government securities (Federal Reserve's Key Policies for the Provision of Financial Services, 2012). The Fed controls financial institutions, manages the nation's money and influences the economy. By increasing and decreasing the interest rates, creating money and using a few other tricks, the Fed can either fuel or slow down the economy. This effect helps maintain low inflation, high employment rates, and manufacturing output. Currently, the Federal Reserve is keeping the interest rates at a minimum to stimulate the Economy. If the real interest rate is low, the costs of living, doing business and investing are also low. This stimulates the economy because home and car loans are more affordable. If people can borrow more, they'll spend more. The chair of the Federal Reserve, formally known as the Chair of the Board of Governors of the Federal Reserve System, is the head of the central banking system of the United States and the active executive officer of the Board of Governors of the Federal Reserve System (About the Fed, 2013). The chairman reports to Congress twice annually on the Federal Reserve’s activities and monetary policy and testifies before Congress on numerous other financial issues. The chair...
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