Eco 100 – Principles of Economics

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.

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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: http://bespacific. com/mt/archives/020771. html 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 The real key to what was going on is revealed by the components of the monetary base. It consists of reserves held by the banks and other depositories, either in their accounts at the Fed or as vault cash, plus currency in circulation among the general public.

The annual growth rate of the monetary base, the magnitude over which the Fed has the most control, fell from 10% in 2001 to below 5% in 2006. Nearly all of the growth in the monetary base went into currency, an increasing proportion of which is held aboard. The Fed controls overnight interest rates, but not “long-term interest rates and the home-mortgage rates drove by them”; and a global excess of savings was “the presumptive cause of the world-wide decline in long-term rates. The Fed only determines the overnight, federal-funds rate, but movements in that rate substantially influence the rates on such mortgages. 2 Maturity-mismatches abounded and were the source of much of the current financial stress. Short-dated commercial paper funded investment banks and other entitles dealing in mortgage-backed securities. Global savings and investment as a share of world GDP have been declining since the 1970s. Reference: http://vizedhtmlcontent. next. ecollege. com/(NEXT(1e41df9156)/Main/CourseMode/Vized…

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