The purpose of this paper is to examine the history of financial reforms and its impact on the US economy. Thus, we attempt to limit our study to major reforms that sharply affect macroeconomic indicators. For a long time, private financial institutions were gaining the power to control and run the financial regulations on their own. Still, the financial crisis of 2007-2008 has changed the paradigm of control over financial regulations which were later looked after by the government authorities (Gadinis 327; Siklos and Lavender 110). These regulations help protect public’s welfare, which, in turn, creates an atmosphere of trust among the public.
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Moreover, antitrust laws have been introduced to prevent the unhealthy activities of private and public companies such as hostile takeovers. The government has developed some progressive strategies and schemes that help people improve their standard of living through various loan schemes. These kinds of schemes enable the public to buy vehicles for personal use and house for residence. The impact of these types of non-progressive loans is terrible for the economy for a longer period of time. On the one hand, these non-progressive loans raise the standard of living. On the other hand, without a strong industrial infrastructure and sound economic policies, these loans create a credit crunch that destabilizes the economic structure both at micro and macro levels.
Overall, government is the main pillar that can protect the public interests, improve living standards, and formulate a constructive policy of supporting the industry, which, in turn, will boost the overall economic performance. Financial and monetary policies are the main tools for countering economic issues, such as adjustments of the interest rate, tax rates, money supply, and inflation among others. These policies can be changed according to the macroeconomic and microeconomic situations.
Timeline of US Financial Reforms
In the current section, we will try to highlight the financial reforms since the 1700s. The US economy was partially controlled by the United Kingdom. The US revolution freed the US economy from the United Kingdom and allowed them to plan and implement their own economic policies. In 1787, the US government wiped out the tax on internal trade and made a common market. In 1791, the banking sector began to perform its functions, and the US government launched a state bank named Bank of United States. Transport and industry sectors also flourished. The new road infrastructure was built to facilitate the trade between cities and small communities that boosted the internal trade (Gadinis 327; Siklos and Lavender 110). Modern techniques were introduced for an industrial process to increase the efficiency and decrease dependence on human labor.
Previously, the US economy was highly dependent on agriculture, and the major part of population was connected with agriculture. The urban population was mainly associated with exports. Over time, the industrialization spread its roots in USA, which also provided employment opportunities. In the early 1900s, a large number of industries began to operate in the USA, which later modernized the production and processing techniques, especially in flour, sugar, textile, iron, and coal industries. However, the labor gained higher income from agriculture than industry. This situation created a labor shortage. The nineteenth century experienced numerous global financial crises. All these crises forced the policy makers to form new financial and monetary policies to fill the gap that had been missed (Ansart and Monvoisin 751). The great financial crisis after World War I destroyed the European economy which was also a spillover to the US markets.
Later in 1929, the Wall Street crash again created a horrible situation for the policy market. In 1932, these crises turned into a monster, which increased the unemployment rate by 25%. The export of textile, heavy industry, and agriculture was at a very low rate. The US government defined new policies and plans to cure the recession of 1929, and the government achieved milestones by decreasing unemployment from 25% to 13.9% (Gadinis 329; Grammatikos et al. 100). The new policies were unable to boost the employment, exports, and economic growth. In the 1980s, highly regulated financial institutions reported more serious issues than less regulated financial institutions, such as declines in market shares and less innovativeness among others. To counter these issues, the Congress passed new regulations and acts to deregulate these financial institutions. The Depository Institutions Deregulation and Monetary Control Act and the Financial Institutions Reform, Recovery, and Enforcement Act were adopted in 1980 and 1989 respectively.
Furthermore, a large number of reforms have taken place since the 1980s. The Riegle-Neal Interstate Banking and Branching Efficiency Act (1994) released the restriction of interstate branches of financial institutions. Later, the US government introduced the well-known Gramm-Leach-Bliley Act of 1999, the Commodity Futures Modernization Act of 2000, and the Voluntary Regulation of 2004. Soon after that the subprime mortgage crisis hit the US economy in 2007, many large financial institutions defaulted due to this crisis that further had an impact on other economic sectors worldwide. Moreover, the crisis not only destabilized the financial institution but also disrupted the entire financial system (Boubaker et al. 15; Grammatikos et al. 100).
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To cover the loss of this crisis, the US government announced a series of counter reforms: the Term Auction Facility in December 2007, the Primary Dealer Credit Facility in March 2008, the Housing and Economic Recovery Act in July 2008, the Emergency Economic Stabilization Act in October 2008, the Money Market Liquidity Facilities in December 2008, and the Public-Private Investment Program in March 2009. Adopted in February 2009, the American Recovery and Reinvestment Act is the reflection of Keynesian theory that states that, during the recession period and decline in private spending, the government should cut off its own spending. Additionally, the Federal Reserve Bank has formed several other policies for lending facilities to improve the liquidity of market instruments.
Another progressive reform known as the Dodd-Frank Wall Street Reform and Consumer Protection Act was adopted in July 2010. This act was formed to protect public investments that create an investment environment without unexpected risks such as financial manipulations. It also helped end the abusive financial practices of companies, financial institutions, and stock brokers for abnormal profits. These reforms helped upsurge the economic growth, improve tight monitoring of financial institutions, and decrease complex and transparent mechanisms for trading.
Impact of Financial Reforms on the US Economy
Any government regulation or reform affects financial services either directly or indirectly and works on different aspects depending on the nature of the regulation. Increasing regulation by the government means increasing the workload for people in the financial field. On the other hand, adaptation to new regulation can take more time, which directly affects such microeconomic and macroeconomic indicators as gross domestic product, inflation, unemployment, industrial production, and so on. Despite negative consequences of the new regulation, many reforms are beneficial to the individuals, industry, and the economy of the nation as a whole.
According to the recent studies, the total cost of regulation in the United States was more than $1.7 trillion in 2008 (Gadinis 329; Grammatikos et al. 100). Additionally, the findings have shown that, in the United States, the total government expenditure in 2008 was about $3 trillion. This shows that, out of the total allocation of the federal government, 38% were allocated for regulations (Gadinis 329; Grammatikos et al. 100). It is the expectation of each US citizen that regulations are meant to produce goods and services that are of high value to the United States market. However, this is not the case, since some of these regulations take resources from the private sector to the less valuable and less demanding goods and services.
Any regulation or reform in a country seeks to improve the productivity of services and access to them. However, this does not apply to many of the reforms that have been made by the US government. Some of these reforms were introduced six years ago; thus, the Dodd-Frank Wall Street Reform and Consumer Protection Act diminished access to important products and services for different companies in the country. This act did not affect the owners of the companies, but had more effect on the growth of the US economy. Although any government wants to see its economy growing steadily, this act has led to the decline of the national economy.
According to the recent study on the US economy, it is estimated that the federal government has reduced the economic growth of the country by about two percent. It was concluded that these regulations discourage different people investing and participating in the growth of the economy (Boubaker et al. 16). One of the key reasons why the regulation lowers the growth of the economy is that many of these regulations act as a hidden tax on the people. When more taxes are imposed on an individual, then only very few can afford it and participate in the growth of the economy. This happens because the economy of a country is directly connected with the taxes of the citizens. The government may face an alarming situation for the economy if the taxpayers become incapable or unwilling to pay taxes.
Shifting the entrepreneurship is another result of government reforms. Some regulations may act as a barrier to the entrepreneurship because of preventing the selling of goods and other services. A good example is that there is a regulation that allows persons to do hair binding only if they have obtained a corresponding license. Such regulations prevent many people from having an opportunity to do business, which lowers the income of the nation. Those barriers are caused by the governments’ regulations, and they have an effect on the country’s economy.
Some of these government regulations were used to save business that would not survive otherwise. The Troubled Asset Relief program is a good example of such regulations. Thus, the regulation run by the United States Department of the Treasury had the goal of overcoming the financial crisis that affected the financial sector in 2007-2008. Due to such regulations, some of contemporary businesses could be saved from being influenced by the government intervention. This regulating legislation has led to a significant rise in the economy of the United States through the increased productivity in the financial sector. Thus, it is a duty of the government to moderate relationships between brokerage firms and consumers.
Furthermore, it is a responsibility of the government to lower prices of commodities by moderating the regulation. Through lowering the taxes on the licenses from the business individuals, the economy of the respective government can grow rapidly by levying lower taxes on many individuals. While too much regulation can drive up costs, too little regulation may lead to mismanagement and corruption. Therefore, it is a responsibility of the government to have neither an overwhelming number of regulations nor too few of them.
Some regulations have been seen to have impacts on the sustainability of jobs. As it was shown, some normative acts affect the stability of jobs. However, this may be misleading as some documents show that good policies may lower the job creation while bad ones may increase job opportunities. Through some regulations, companies are forced to increase the number of their employees, which may not reflect the income productivity of the company. For that reason, some of those companies are left with no option, but to close their companies, causing a huge loss to the economy of the nation.
Studies show that the United States is stuck in the worst economy they have ever experienced since the Great Depression. To overcome this challenge, the country has to make use of business-oriented firms to develop its economy (Boubaker et al. 16). Additionally, due to a high rate of unemployment in the country, the nation has to depend on industries to provide employment to its citizens. Therefore, the government has adopted measures to streamline the efficiency and production of business-oriented firms. Through some of its regulations, the government has lowered the taxes to encourage more entrepreneurs to invest in the country. However, the profits generated by these organizations are low as compared to what the government expected (U.S. Chamber of Commerce).
The growth of the economy of a state is directly related to the regulations and policies that the government put in place. As much as the government can try to improve the economy of its country, a business-oriented organization is the key to focus on, since the economy of any nation depends on the productivity of the country. Some policies that are set by the government have affected the business sector in a negative way, and some of them are being forced to shut down. This has led to some regulations such as the increased level of taxation among others. It is crucial for the government to understand that the responsibility of organizations to pay taxes depends on the government that should increase access to the services and goods for a better economic growth.
The involvement of respective organizations when formulating the regulations can be an effective way of solving some of the problems facing the economic growth. Additionally, the adoption of regulations can be increased if individuals actively participate in their development. Business-oriented organizations understand the problems that affect them better than the government. Therefore, it is very important to seek the opinions of individuals before implementing the regulation as this would require acceptance of the regulation and increase the economic growth of any country.
Ansart, Sandrine, and Virginie Monvoisin. “The New Monetary and Financial Initiatives: Finance Regaining Its Position as Servant of the Economy.” Research in International Business and Finance, vol. 39, no. 1, 2017, pp. 750-760.
Boubaker, Sabri, et al. “Financial Contagion between the US and Selected Developed and Emerging Countries: The Case of the Subprime Crisis.” The Quarterly Review of Economics and Finance, vol. 61, no. 3, 2016, pp. 14-28.
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Gadinis, Stavros. “From Independence to Politics in Financial Regulation.” California Law Review, vol. 157, no. 48, 2013, pp. 327-406.
Grammatikos, Theoharry, et al. “Market Perceptions of US and European Policy Actions around the Subprime Crisis.” Journal of International Financial Markets, Institutions and Money, vol. 37, no. 12-14, 2015, pp. 99-113.
Siklos, Pierre L., and Brady Lavender. “The Credit Cycle and the Business Cycle in Canada and the United States: Two Solitudes?” Canadian Public Policy / Analyse de Politiques, vol. 41, no. 2, 2015, pp. 109-123.
U.S. Chamber of Commerce. “Financing Growth: The Impact of Financial Regulation.” USChamber.com.