Volcker Rule Essay

1326 words - 5 pages

Introduction
The Federal Reserve Act was enacted in 1913, which created the central banking system of the United States, the Federal Reserve. The federal reserve acts as the bank to bankers and the bank to the federal government. The goals of the Federal Reserve are to create a safer, flexible, stable financial system. The primary responsibility of the Federal Reserve is to formulate and implement the monetary policy of the nation. Another one responsibility of the Federal Reserve is to supervise and regulate banking institutions and maintain consumer confidence in practices. Additionally the Federal Reserve provides financial services to depository institutions, the U.S. government, and foreign central banks. They clear checks, process electronic payments, and distribute money to United States financial institutions.
The system is still in tact today. The central bank, for the most part, is independent of political process. The Federal Reserve must regularly report to Congress to address important issues that the House and Senate may have. Throughout the years, since the establishment of the Federal Reserve, there has been periods of tension with Congress. In 1929 the stock market crashed. Although the United States economy entered into a depression six months before the fall of the stock market prices on the “New York stock exchange in October of 1929” many still claim the catalyst of the great depression was the crash itself. The efficient market hypothesis suggests the opposite, that the great depression was the cause of the stock market crash. Prior to the great depression, the Government relied on “impersonal market forces to achieve the necessary economic correction”. Theorists of the efficient market hypothesis believe that the economy will provide balance and stability to the financial system on its own, unless the Government interferes. In the early years of the great depression, this solution did not provide the recovery the Government desired, inspiring change in the structure of the United States Economy.
Regulation of Banks and Securities Firms
To promote recovery, Franklin D. Roosevelt’s political campaign for president promised a new deal for the American people. In 1933, the campaign proved successful and President Franklin D. Roosevelt “increased Government regulation and massive public work projects”. As a part of the New Deal, the Securities Act of 1933 and the Glass-Steagall Act (GSA) were enacted. These acts resulted in two separate regulatory schemes, one for institutions offering securities to the public and, a second, for commercial banks, prohibited from offering securities to the public.The GSA prohibited banks and securities firms from affiliating with one another. The term “bank” refers to any financial institution that holds federally insured consumer deposits. A securities firm, does not hold federally insured consumer deposits. Securities firms are also referred to as investment banks, or...

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