Eco 100 – Principles of Economics

Topics: Federal Reserve System, Central bank, Monetary policy Pages: 2 (498 words) Published: July 24, 2011
ECO 100 – Principles of Economics
Week 9 Articles – The Federal Reserve
Federal financial regulation in the United States has evolved through a series of piecemeal responses to developments and crises in the markets. This report provides an overview of current U.S. financial regulation: which agencies are responsible for which institutions and markets, and what kinds of authority they have. United States banking regulation is largely based on a quid pro quo that was adopted in the 1930s in response to widespread bank failures. The government provides deposit insurance, to reduce customers’ incentive to withdraw their funds at the first sign of trouble, and in return the banks accept direct regulation of their operations, including the amount of risk they may incur. Bank regulators can order a stop to “unsafe and unsound” banking practices and can take prompt corrective action with troubled banks, including closing the institution. There are five federal bank regulators, each supervising different (and often overlapping) sets of depository institutions. Reference: Moral hazard occurs when one side of an economic relationship takes undesirable or costly actions that the other side of the relationship cannot observe. 1 Adverse-selection problem is a situation in which the uninformed side of the market must choose from an undesirable or adverse selection of goods. Congress created the Federal Reserve System to be a central bank, or a banker’s bank. When it was crated, on of the Fed’s primary jobs was to serve as a lender of last resort. When banks need to borrow money during a financial crisis, they can turn to the central bank as “a last resort” for these funds. Reference: Textbook Principles of Economics...
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