Role of a smooth economy

Role of a smooth economy

In economy, in order for a country to have balance it must have stability and growth to become successful and function properly. The economy is very important, as it is as defined as the wealth and resources of a country or region. A strong economy brings wealth and stability to consumers, borrowers, purchasers, savers, and lenders. We also need a balanced financial system that runs smoothly to go along with a strong economy. One might ask what is the financial system? It is a network of markets and institutions that bring together households, businesses, and governments. When the financial system begins to struggle or becomes unstable everyone is affected. Chaos is an inevitable result when the financial system is not stable and we face the possibility of recessions. The financial system helps the economy keep a healthy status but lack of control and other factors such as corruption, greed, and too much debt have kept it from functioning properly.

Financial systems provide great services such as data on risk sharing, liquidity and information. The risk in finance are high because many of the times we are dealing with uncertainty as it is difficult to determine how well organizations may do. The services that the financial system provides is the fact that it allows risk sharing and this helps spread and transfer risk. The transferring of risk is a good thing because it ensures not just one entity is affected when a great loss occurs. Risk sharing is a great feature the financial system provides and “it allows savers to hold many assets” (Hubbard, O’Brien, 2012 pg 13). The second service the system provides is liquidity. Savers and borrowers are provided with ease that an asset can be exchanged for money. Lastly we know that the financial system provides information and when dealing with money it is important that everyone involved is well informed on the loss or risk that one faces. The services the financial system provides are essential to the functioning relationship between everyone involved and are a great benefit that citizens receive. It has been demonstrated that when these things are not watched and monitored financial crisis happen. Countries with severe poverty have a weak financial system in place. In order for everything to run smoothly positive relationships much exist. Banks must have loans in order to collect interest rates to keep running and consumers must be well informed and protect themselves from abuse and fraud. It is all a revolving relationship where everyone involved benefits in some way and in order for it to continue, the parties involved must remain courtesy and no abuse of one another. Countries such as Mexico and Greece are an example of just what a bad economy looks like. Greece is currently facing a difficult situation as they have major debit issues and banks are running out of solutions.

In the United States as we all know, we have been forced to face financial crisis in the past with the Great Depression and the Great Recession of 2007. In both situations the country faced unemployment and a rise in poverty that at times seemed difficult to overcome. In The Recession of 2007, the financial system was unstable and banks struggled to conduct business as necessary but did not have bank failure as in the 1930’s. Liquidity and funding was a problem that was a major key role in both time recessions. Although the economic decline was not as severe in 2007 as in 1930 the country was very much hurting. We must note both crises were preceded by innovations in consumer finance in the 1930s we saw installment on consumer credit and in the 2000’s banks ramped up lending in regards to real estate and securitization of mortgages. (Geewax, npr.org). The biggest difference of course is that the Great Depression lasted approximately 43 months oppose to the Great Recession that lasted 18 months. A big difference noted between the two crises was the United States response; in The Great Depression they raised taxes and cut spending and in 2007, they issued a Federal stimulus plan that gave fiscal relief to states to lessen the impact if tax increases. Both of these hard times displayed what a lack of financial stability looks like and just how far debt can take the country. Inflation and bad planning leads the countries to suffer banks have a hard time climbing out of the debt. Improper lending and borrowing really created a problem that occurred in 2007 and many did not thing the United States would recover.

The Federal Reserve is a large bank that lends the United States money and throughout history they have obtained more and more control. Although many argue whether or not they should exist or have power the reality is they have much control over the financial markets as they play a major role in regards to money or U.S. currency. In 2008 the SAFE Act was established as a precaution to stop some issues from occurring. The SAFE Act put into effect the federal registration requirements that an individual that is acting as a residential mortgage loan originator and is employed with an company that is regulated by the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, or the Farm Credit Administration. (Federalreserve.gov). They also developed the Troubled Asset Relief Program in which the government attempted to address and improve the subprime mortgage crisis, the program for the most part ended in 2014. They also implemented the federal takeover of Fannie Mae and Freddie Mac (treasury.gov). The housing market needed a lot of improvement after the crisis that was faced. In the current years it has become more difficult to purchase a home than before as requirements set in place are attempting to stop people from buying homes they simply cannot afford. Changes such as robust supervision and regulation of financial organizations are also among implementations for improvement. Among all of the supervision changes, we also witnessed new employment roles in the Federal Reserve in charge of supervising firms that could be a threat to financial stability. They established changes so that consumers would not be subject to financial abuse in hopes of winning back the trust of Americans across the country that lost faith in the government. Other changes were also implemented and I believe it was all in efforts to avoid the crisis from repeating itself. Many consider the changes the government made to be too much, but with what we have seen happen in past years these changes were very much needed.

In conclusion, the financial system is complex and has many implications when things are not running smoothly. Factors such as loans and interest rates are what keep things flowing and when something is off balance everyone feels it one way or another. History shows us what happens when things are not ran smoothly and control is lost to inflation and greed. All of the parts that make up the financial system are important, as we must have risk, liquidity, and information to function. It is important that we have supervision in place and that risk is always assessed when dealing with borrowers and savers. The government continues to attempt to keep things running smoothly so that history does not repeat itself and money does not lose value, now how long this will last is unclear.

References

Financial Regulatory Reform. (n.d.). Retrieved June 29, 2015.

Geewax, M. (2012, July 11). Did The Great Recession Bring Back The 1930s? Retrieved June 29, 2015.

Hubbard, R., & Brien, A. (n.d.). Key Components of the Financial System. In Money, banking, and the financial system (Second ed., p. 13). Pearson.

Troubled Asset Relief Program (TARP) Information. (2013, August 2). Retrieved June 29, 2015.