The financial system in the United States of America (identified as the largest economy in the world, with a strong and robust financial system) has been under extreme analysis and criticism during the past few years (and recent months) mainly due to the current crisis. In order to understand the current global financial crisis, it is important to review the progression (or rather deterioration) of its financial system as well.
Since 1913, the US Federal Reserve System has been playing the role of a Central bank, controlling the money supply and credit within the economy. However since 1913, several financial institutions and regulatory bodies were setup in the economy, causing the main Federal Reserve System to lose efficient control of the credit operations in the country.
A number of factors have contributed to the fall of the US economy. These are mainly due to: •
Increasing number of financial institutions that were lending funds outside the control of the US Federal Reserve System •
Increasing Corporate and mortgage debts
Increasing Government liabilities
Increasing Current account deficits
Increasing National and external debts
Low savings rate
Falling house prices
Fall in profits of organisations and financial institutions and eventually filing for bankruptcy.
Rising inflation and unemployment also placed pressure on US interest rates. In order to resolve this instability of the financial system, US regulators and government attempted to de-regularise the system, however this step came under heavy criticism as the banking system continued to be influenced heavily by the US stock market. As a result, excessive deregulation and mortgage debts were the main issues which needed immediate attention and indicated that the US economy was actually in recession.
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