The regulation of the financial system of the U.S. is conducted by a wide array of regulatory bodies, with each of them performing a specific function. In fact, the Federal Reserve Board determines the monetary policy, the Federal Deposit Insurance Corporation insures the deposits, and the Office of the Comptroller of the Currency regulates the activity of banks. Moreover, the Office of Thrift Supervision supervises the federal savings associations, the Commodity Futures Trading Commission works with the commodity options, the Financial Industry Regulatory Authority trains the professionals and tackles the conflicts in the stock markets, and the Securities and Exchange Commission monitors stock exchanges.
At the same time, the activity of one of the most significant financial institutions that is the Federal Reserve raises many questions. Over the years, it has been accused of provoking the crises, excessive secrecy, and inefficient management. In turn, it was proposed to establish control over this institution. However, such course of actions may potentially undermine the stability of the financial system of the U.S. as a whole, with the entire world experiencing the consequences of its destruction. As a result, there is no merit in these concerns, especially in case the primary goal of the politician is the unlimited access to the resources of the Federal Reserve.
The financial system of the U.S. is overseen by several bodies that are known as regulators. The most significant of them is the Federal Reserve Board, which has control over money as a whole, defining the monetary policy of the country. In the course of its activity, it uses such tools as open market operations, regulating the sale and purchase of securities issued by the U.S. Treasury, as well as federal agencies. As a result, it is capable of changing monetary reserves of the U.S. as well as the federal funds’ rate. Additionally, the Federal Reserve Board regulates the banking system (Barth, Caprio, & Levine, 2012). Thus, it ensures the stability of the entire financial system of the country.
The next regulator is the Federal Deposit Insurance Corporation. Its primary function is related to the provision of the insurance on deposits. In turn, such activities guarantee their safety, meaning that the institution ensures that the banks are trusted by individuals and companies. In general, the corporation is to protect up to $100,000 per depositor, i.e. a person that lost a deposit due to problems with the banking system may be compensated by this regulatory body (Barth et al., 2012). However, this sum may change taking into account the circumstances.
Next, there is the Office of the Comptroller of the Currency. This entity regulates, supervises, and provides charters to the local banks, i.e. the ones that operate within the boundaries of the U.S., ensuring the efficiency of the banking. In fact, it is responsible for maintaining the competition between the banks (Barth et al., 2012), which forces them to provide the high-quality services to the clients.
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The Office of Thrift Supervision is another financial regulator. However, it is different from other regulators due to the fact that it receives funding only from the entities it regulates. When talking about functions, it is similar to the Office of the Comptroller of the Currency. However, instead of banks, it supervises federal savings associations, i.e. thrifts (Barth et al., 2012). Thus, its field of activity is somewhat narrow in comparison to the previous regulatory body.
Additionally, there is the Commodity Futures Trading Commission, which was created with the purpose of regulating the markets handling the commodity options and futures, maintaining the competitive environment. At the same time, it provides buyers and sellers with protection against the unfair competition and fraud. In the recent years, its functions have been expanded, with it supervising single-stock futures (Barth et al., 2012). In other words, it has become prone to experience reforms.
Moreover, the financial system of the U.S. is regulated by the Financial Industry Regulatory Authority. It is an independent entity that is tasked with the supervision of all enterprises engaged in the securities business with the public. Its functions also include the training of professionals in the field of finance as well as the establishment of control over the disputes between brokers and their customers (Barth et al., 2012). Thus, it can be compared to the judge in the court.
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In addition to the entities that operate on the federal level, there are many lesser regulatory bodies. The State Bank Regulators supervise the activity of the local banking systems, being similar to the Federal Reserve and the Federal Deposit Insurance Corporation. The State Insurance Regulators oversee the insurance industry, providing protection to consumers, conducting investigations, and issuing licenses and certificates. The State Securities Regulators collaborate with the Financial Industry Regulatory Authority, registering the investment advisors and performing legal enforcement functions. Finally, there is the Securities and Exchange Commission. This independent body has control over the securities industry of the country. It covers local stock exchanges as well as electronic securities markets. Additionally, it supervises the activities of the investment advisors that are not supervised by the State Securities Regulators (Barth et al., 2012). Thus, it complements the latter.
Concerns about the Federal Reserve
The independent nature of the Federal Reserve (the Fed) has led to representatives of the U.S. government as well as economists voicing several concerns regarding its negative impact on the financial system of the country. Some of them claimed that the Fed maintained the interest rate at the low level, which has caused the housing bubble of 2007. In turn, the U.S. has experienced the credit crunch, which provoked a crisis. Moreover, many perceive regulatory activities of the Federal Reserve as inefficient, especially with regard to the protection of consumers and supervision of the companies that control banks. The Fed was also accused of monetization of the country’s debt by printing money to purchase government bonds. Thus, the entity has a history of questionable decisions.
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However, the most significant concern was raised by Senator Rand Paul who argued that the Federal Reserve has too much autonomy, and its operations are rather secluded. Indeed, unlike other state agencies, the Fed is prone only to the limited auditing process. In fact, the General Accounting Office is not allowed to make a comprehensive review of the activities of the Fed since the audit could jeopardize the independence of the institution. However, Paul needs more than simply statistics from the Fed as he wants the General Accounting Office to make a report on the activities of the entity. The primary reason for that is the concern that the Fed is currently working under the cloak of secrecy. Thus, there is the need for an increase in the transparency of its operations.
On the one hand, the privacy of the Fed, as well as its activity prior to the financial crisis, does not contribute to the establishment of the productive relationship between it and the U.S. government. However, there is still little merit in the concerns described above as all of them are voiced with the single purpose, namely to gain more control over this entity. Many initiatives proposed by the senators (the reform of the transportation system, the improvement of the quality of healthcare, etc.) require funding. However, the increase in taxes to obtain them is not the best course of actions, especially on the eve of the elections. Therefore, it is imperative to find a reliable source of money, with the Fed being the best candidate for this position. Since 2008, this institution has been conducting a three-stage policy of quantitative easing. A positive side effect of such measures was the Fed’s accumulation of surplus funds in the amount of $26 billion. However, these funds cannot be perceived as the operating profit, which means that they cannot be legally seized. On the other hand, this sum can be used to fund one of the ambitious projects described above, especially after the autonomy of the Fed is limited. However, such seizure may create a dangerous precedent. In case Congress will be able to make a decision on withdrawal of the Fed’s surplus in the treasury, it may become the rule. In turn, the legislators may use fixed assets of the Fed again and again in the future to conduct some other plans. However, the stability of the monetary and financial systems of the U.S. is grounded on the fact that the state cannot simply take the required amount of money from the Federal Reserve. Thus, the decision to control the latter may jeopardize the future of the country.
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Moreover, for the Fed, $26 billion is a sort of a financial cushion. After the period of quantitative easing, the Fed stops buying bonds. Naturally, their price starts to reduce. After the Fed returns them to the market, they may fall below the yield, which may lead to financial losses. In this case, the financial cushion described above will be quite useful, provided the congressmen will not take it. Undoubtedly, the Federal Reserve is the owner of the so-called printing press (i.e. it has the right to issue money), meaning that in theory, it could print as many dollars as it is required. However, such course of actions is highly unreasonable. First of all, it would undermine the credibility of the Fed and provoke the Congress to put the institute under its control. Second, the use of the printing press weakens the Fed’s ability to conduct monetary and fiscal policy. After all, it is grounded on the use of the existing money supply to achieve the target values of inflation, unemployment rate, and gross domestic product (GDP) growth.
The problem is exacerbated by the fact that the U.S. economy occupies a large place in the world, with the U.S. dollar being a global reserve currency. In any other case, all the floats between the Fed and the Congress would have been a concern of the United States alone. However, the dominating position of the U.S. makes it possible to say that it is better for the Fed to remain independent. The experience shows that its actions are predictable enough for all market participants as the Fed has certain responsibilities to the shareholders. However, in the case this institution (i.e. the printing press) falls into the hands of the Congress, which is being torn apart by the ambitions of party leaders, the world can expect the unpredictability of monetary and financial policy of the United States. As a result, the dollar will become an extremely unstable currency, which may undermine the very foundations of the global economy. Thus, all these facts allow concluding that there is no merit in the described concerns related to the autonomy and secrecy of the Fed.
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