Question

Scenario

Though the United States has certainly learned its share of lessons from the economic meltdown of 2008, the financial institutions that helped cause it remain largely intact and unrestrained. For legislators in Washington, writing regulations to prevent another widespread collapse is a slippery slope. For instance, Democratic leaders in the House and Senate called for a consumer protection agency to serve as a watchdog over Wall Street’s biggest banks. As with every political issue, the idea is not universally supported. Opposition from Republicans and disagreement over the autonomy of the agency has delayed its implementation for the time being.

Ideally, the consumer protection agency would act like the FDIC: If a bank goes belly up, it won’t take its customer base or the whole financial system down with it. Regulators are searching for an elusive middle ground that would allow an ailing bank to fail smoothly without causing a Lehman Brothers–level panic or another controversial bailout. The Senate’s version of the financial regulation bill includes provisions that would make banks easier to break apart should they fail. But the crux of the bill lies in the consumer protection agency, which would help prevent banks from failing in the first place by keeping a close eye on them.

Nevertheless, the United States is a free market that needs healthy financial institutions to support a stable economy. Too much oversight on banks’ lending practices could hamper their day-to-day operations. Still, it’s hard to forget that the reason why the Great Recession has been so severe is because of the toxic assets banks bundled together and pushed around to each other. It’s true that banks aren’t solely responsible for the economic collapse: foreclosures by debt-ridden consumers triggered the initial panic. But perhaps the whole ordeal could have been avoided if something had prevented banks from offering such bad loans in the first place. In the end, the leverage of banks to deal in debt so freely played a major role in the financial meltdown. Simple solutions like raising reserve requirements wouldn’t work due to the adverse effect they’d have on recovering businesses. A more sweeping change is needed, and hopefully it will come in the form of sound and fair reform.

Questions

Would banking reform threaten the U.S. free-market economy? Why or why not? Provide examples to support your answer.

Do we really need reform in the banking industry? Why or why not? Provide examples to support your answer.

Answer 1

Q. Would banking reform threaten the U.S. free-market economy?

A. Free Market Economy means an economy where government regulations are lesser and the forces of demand & supply determines the prices of goods & services in the economy.

Banking reforms may mean some relaxation in governament regulation for banking sector hoewever the forces of demand & supply will always determines the prices in an economy and may not be greatly affected by the reforms. US has been free-market economy since ages and banking systems co-exists without crossing ways or adversely affecting the price determination. An example to quote: the manufacturing and service sector produces goods & offers services and are allowed to set the prices or wages but at the same time there are regulation on the minimum wages, minimum number of days of employment etc that co-exists with these regulations.  

Q. Do we really need reform in the banking industry?

A. The answer is definitely 'Yes'. Today, we need to see banks as business houses that offers financial products to customers and the offerings include schemes in mutual funds investment, influencing people to invest in stocks and bonds markets, covering health & life term insurances, offering standard automobile loans & home loans or mortgages. These financial services are designed to make money, but we should also remain aware about the facts these banking system work under many strict regulations.

They almost operate in fixed imposed conditions and have little room & flexibility. These constraints also pose restriction in their expansion, merger & collaboration. Some relaxation & reforms is needed in these areas to ensure they have enough financial space to operate an sustain in the market.

Prominently, the ability to offer variety of financial services & product is definitely as a result of reforms in the past however the fiscal & monetary policies govern the amount of sum left in their (banks) hands to lend general public.

Financially speaking interest, commission & agency function are the major types or modes of through which banks earns, but these are regulated by Federal policies and call for more relaxation or reforms.