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The Current Financial Environment
The Current Financial Environment
The Current Financial Environment
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The Current Financial Environment
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The financial environment in the United States is currently unstable compared to previous
years. The financial status of the United States grew array over years, and it will take the same
amount of time to reach its same high standards. The root of all the nation’s troubles came from
several different sources, and they continue to affect the well being of the country. For example,
market forces, market failures, and incentives created by policy and regulations led the country
to financial ruins.
The beginning of the Chaos was when the process of lending funds out to the now lenient
regulation on mortgages began to change. At one point, the housing market was at an all-time
high. However, many homeowners did not that have appropriate documentation to justify that
they could afford their mortgage. Since the financial crisis, homeowners must now show
appropriate documentation confirming there income is enough to pay for their mortgage.
Adjustable Rate Mortgages (A.R.M.’s) were another factor that led to financial troubles.
A.R.M.’s gave buyers low mortgage rates initially, but once the initial term expired, they were
subject to pay much higher rates. The sudden increase of mortgage payment created much stress
for a lot of homeowners. Eventually, many homeowners were subject to foreclosure and/or
bankruptcy. Bankruptcy became a key issue as the financial environment worsened. Newer and
extended provisions were set to determine who applied for bankruptcy and the new procedures
for applicants.
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Within the five years before the lowest point in the financial market, there was a series of
odd financial conditions. Within that time there was a drastic drop in short term interest rates
worldwide. In addition, there was an increasing inflation rate after a decade of long secular
declines in inflation rates.
The Federal Reserve System (FED) U.S. central bank sets monetary policy and regulates
the banking system. The Federal Reserve System has its own unique system and a particular
marriage of public supervision and private interest. However, they are purposely separated from
the elected government, while simultaneously still a part of it. The Fed raised its own revenue
and drafted its own operating budget without directing to congress for approval. In fact, the
Federal Reserve System fully took advantage of luxuries that no other agencies were entitled too.
The Federal Open Market Committee primarily uses the federal funds rate to indulge
interest rates and the economy. Any changes in the federal funds rate tend to have long lasting
effects. The borrowing cost of banks in the overnight lending market and subsequently the
returns offered on bank deposit products such as certificates of deposit, savings accounts, and
money market accounts are due to the influences from the federal funds rate.
The current rates for Prime, Federal Funds, and Discount are shown with the current GDP
in the table below.
Prime Rate
Federal Funds Rate
Discount Rate
Current GDP
3.250%
0.000 - 0.250%
Primary level 0.750%
Secondary level
1.250%
$14.204 trillion
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Commercial banks and other depository institutions absorb interest rates from the
regional Federal Reserve Bank lending facility. Otherwise known as the discount rate and the
discount window. The three discount window programs offered by Federal Reserve banks to
depository institutions include primary credit, secondary credit, and seasonal credit. Each of the
depository institutions are subject to their own interest rates. All discount window loans are fully
secured by the Federal Reserve.
I have experienced financial losses through my personal banking as well. Every time that
I make a deposit I am subject to oddly high interest rates. Furthermore, through all my reading
and networking among the financial industry, I gather that most people are looking outside the
banks to invest there money.
A chart below displays the comparison of the Federal Funds Rate and the Discount Rate
over the course of 10
years:
Financial Institutions are lending out there funds in different ways since the financial
industry began to struggle. Most Financial Institutions are charging interest on certain loans or
services on a very diverse scale. The following is a list of three different institutions:
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Financial Institution
Variable Credit
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Auto Loan
30 Yr Mortgage
12.99-20.99%
9.80%-17.80%
3.60%
4.25%
5.00%
4.50%
9.99-20.99%
4.99%
4.875%
Card
Bank of America
Pawtucket Credit
Union
U.S. Bank
Every institution listed above has their own policies and guidelines that are required with
the given rates. The majority are dependent on credit worthiness, determined by credit score and
history. The other banks listed are dependent on the terms for financing. I personally researched
on auto loan rates at 60 months across the board. When lending on mortgages, the majority of
banks will establish pricing tiers based on your credit worthiness, location of the house so they
can determine if it’s in a declining market, and whether or not the loan is used for a purchase or
refinance.
In addition to the list information on mortgage pricing, banks also price depending on
how much is borrowed. Credit Unions are great to borrow money from because they are not
imposed by the growth of their shareholders dividends in the stock market. Credit Unions present
competitive pricing in every area and the prices are not affected by how much is borrowed.
In conclusion, the government is attempting to make any adjustments necessary to
stabilize all the issues with our financial system. There have been huge loans made to large
American banks that have absorbed losses from the mortgage bubble. However, these large loans
have already created a significant national deficit that will take decades to pay back. These huge
loans were disbursed, accompanied by an increase in the money supply. Because of the increase
in the money supply, the dollar has decreased in value significantly. Tax increases and financial
cutbacks is the most common method to reducing national debt. Eventually, the country will take
The Current Financial Environment
action to put both methods into effect. Although the methods are not guaranteed to have a
positive effect, they are the best methods towards fixing our nations financial environment.
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References
Bankrate.com. (2010). Prime rate, fed funds, COFI. Retrieved August 26, 2010 from
http://www.bankrate.com/rates/interest-rates/prime-rate.aspx
Geithner, T. (2008). Federal Reserve Bank of New York. The Current Financial Challenges.
Retrieved August 26, 2010 from http://www.ny.frb.org/
Federal Reserve Bank of New York. (2010). Rates. Retrieved August 26, 2010 from
http://www.ny.frb.org/
Robb, G. (2010). Market Watch. Feds Ramp up discount rate to 0.75%. Retrieved August 26,
2010 from http://www.marketwatch.com/story/fed-raises-discount-rate-to-075-from-052010-02-18
Melicher, R.W. & Norton, E.A. (2005). Introduction to Institutions, Investments, and
Management. (12th ed.).