Complexities of the US Financial System Essay Example

System consists of member banks, Federal Reserve District banks, the Board of Governors, the Federal Open Market Committee, and advisory committees.

According to the Federal Reserve Act, member banks must acquire capital stock from their respective District Bank of the 12 districts in the Federal Reserve. This process places them on reserve. The responsibilities of the Federal Reserve Bank encompass various tasks such as holding reserve balances for depository institutions, lending to them at the discount window, establishing discount rates, providing currency, processing checks, facilitating fund transfers for depository institutions, and managing U.S. government debt and cash balances.

The Board of Governors is made up of seven appointed members and has several responsibilities. These include setting reserve requirements and improving discount rates as part of monetary policy, supervising and regulating member banks and bank holding companies, establishing and administering protective regulations for consumer finance, and overseeing the Federal Reserve Banks. To assist in their decision-making process, the Board of Governors seeks advice from the Consumer Advisory Council, the Federal Advisory Council, and the Thrift Institutions Advisory Council.

The Federal Open Market Committee, consisting of the Board of Governors and five Reserve Bank presidents, employs open-market operations as its primary monetary policy tool. Currently led by Ben Bernanke, the chairman of the Federal Reserve wields substantial power in national monetary policy and holds significant sway over global financial affairs. However, the effectiveness of the Fed's policies has been limited in the last four years.

The Federal Reserve has a dual mandate of controlling inflation and encouraging employment. To achieve these goals, they use two main tools: setting interest rates and engaging in

open-market purchase/sale of securities. In order to accomplish these objectives, the Fed has implemented strategies such as lowering interest rates for banks to borrow money. However, banks also receive a higher rate of interest on their deposits at the Federal Reserve. This creates an incentive for them to earn a risk-free return on their borrowings, which supports their balance sheet but discourages them from taking risks like making loans.

The absence of inflation resulting from monetary creation through the money multiplier and the limited credit availability have both hindered economic growth. Despite the Federal Reserve injecting trillions of dollars into the financial system, only a small portion has been utilized in the real economy to boost demand, thus job creation remains insufficient. These challenges are also faced by other central banks.<<<<<<< HEAD

Both the European Central Bank and the Fed are contemplating implementing interest charges on deposited funds to stimulate lending. Bernanke has also mentioned that the Fed is considering this approach. Interest rates have a significant global impact as they affect a country's currency value. Higher interest rates attract foreign investors seeking greater returns, leading to increased demand for the country's currency and causing its value to increase.

Different countries use various methods to boost their economy and make their products and services more affordable for international purchasers. For example, the Bank of Japan has recently introduced quantitative easing to fight deflation and assist exporters with a weaker currency. Likewise, the Federal Reserve practices quantitative easing by generating $85.0 billion per month, which is subsequently utilized to purchase government bonds and mortgage-backed securities.

Despite the Bank of Japan's unsuccessful attempts

to stimulate the Japanese economy through various measures, it has decided to increase its quantitative easing efforts. In an effort to end years of deflation and economic hardship in Japan, the central bank announced that it will inject $1.4 trillion into the Japanese economy.

Japan is currently experiencing a recession with a decrease in exports. Worries about asset bubbles arise from the quantitative easing measures implemented, evident in the devaluation of the yen by over 30% (chart next to this text). Additionally, Japanese stock indices have shown significant growth, surpassing previous records set in 2008. The United States economy displays similar patterns.

According to etfdailynews.com, quantitative easing has resulted in inflation and compelled bond investors to assume greater risks. The stock market is surpassing reality, while China serves as a prominent instance of currency manipulation, keeping their currency undervalued potentially in violation of international financial law.

China's export value growth might be hindered due to the appreciation of the Yuan, which is influenced by factors like interest rates and money flows. China has countered this problem by aligning its currency exchange rate with that of its main trading partner, the United States. By doing so, China artificially keeps the Yuan's value low and prevents it from appreciating, which gives China an unfair advantage.

In addition to the factors mentioned above, fluctuations in exchange rates can have various impacts on a business that is competing globally. These impacts include changing the cost of imported raw materials, modifying the prices of competitors' products in the domestic market, and either increasing or decreasing the price of a product sold abroad. For instance, if

the exchange rate increases, there will be an increase in prices overseas resulting in lower sales. Simultaneously, there will be a decrease in the cost of imported raw materials which could lead to either a decrease in price and more sales or an increase in profits. Moreover, competitors' prices will decrease causing reduced sales.