John Maynard Keynes was a British economist from Cambridge, England. Keynes changed the whole perspective of the ideology and functions of macroeconomics and the economic policies implemented by the government. He attended Eton College where he showed his skill in mathematics. Keynes received a scholarship to King’s College in Cambridge to study mathematics where he was a member of the Pitt Club. The Pitt Club was a debating club that only included the top students at the college. In 1904, Keynes received his first B.
An in mathematics. It was at King’s College that Alfred Marshall tried to convince Keynes to become an economist.
Even though he passed away in 1946, his legacy of Keynesian economics continues today. Keynesian economics is based on the belief that if the economy’s investment is greater than its savings, it will cause inflation to rise. However, If the current savings are higher than the investment, it will cause the economy to enter a recession.
In the short run, economic output relies on the demand of the economy. Keynes believed that unemployment changed drastically when the aggregate demand decreased. He also believed that if consumer spending increased it would cause the unemployment rate to decrease and benefit the economic standing. That being said, the consumers are going to need the capital to increase their spending so there are many factors influencing their total demand. When the times are good, people tend to increase their spending by a substantial amount. Contrary to that, if the times are bad and consumer spending is still increasing or stays the same, it would cause the economy to enter an extremely harsh recession.
The unemployment rate would soar which would cause the spending to eventually slow down for certain levels of the population.
John Keynes influenced the business world in several ways. He combined three principles with his economic theories. The first was the thought that aggregate demand could be predictably manipulated by several factors. Secondly, he said that prices will not change quickly when they are sticky and that economic adjustments will not always benefit if they are not efficient. The last principle was that in the short-run, changes in the demand of the economy would influence the total output and the employment rate more than it would the prices. If this starts to happen, he thought the government should try and increase spending and investing without changing the negative effects. John Keynes left a legacy on the business cycle that continues today.
The unemployment rate is the number of people unemployed as a part of the labor force. In labor force constitutes all the people above the age of sixteen years residing in the United States. The unemployment rate has increased since the time of the last reported value in figure 16. In October of 2009, the unemployment rate was at 10%. Today, it is at an all-time low at 3.7%.
Volker rule is the investment regulation imposed on the banks. It prohibits banks from using their customers’ money to increase their profits. The Volcker Rule tries to protect banks from making the same types of investments that lead to financial instabilities that can hurt the economy. The rule aims to prevent banks from taking too much risk by not allowing them to use their own money to make investments to increase their returns.
The “too big to fail’ usually describes if a certain company or corporation in the large financial industry is worth being bought out to prevent an even bigger economic downfall. This phrase represents banks and other financial institutions that might be too large in the capacity that their failure can run down the complete economy. The government maintains that these financial institutions cannot fail and should be in healthy conditions for the whole economy to be stable.
October 29, 1929, a rule otherwise known as Black Tuesday, was the day of the largest stock market crash in the history of the United States. This was a result of many banks taking on way too many risky investments. President Franklin D. Roosevelt passed the Banking Act of 1933 based on the current economy of the country. This Banking Act of 1933 mandated a four-day closure of the United States banks for inspection. Each of these banks had to pass several tests before they could reopen their doors for business. The first banks allowed to open back up were the 12 regional federal reserve banks. The next day, the federal reserve banks were followed by banks in cities with federal clearing houses, and the remaining banks that seemed fit to operate were allowed to re-open. The goal of the Glass-Steagall Act of 1933 was to restrict these banks from going into another harsh crash. The regulation was met with a lot of backlashes, but it held firm until repealed in 1999.
In August 1935, President Franklin D. Roosevelt signed a bill, the Glass-Steagall Act of 1935, which would bring some significant reforms to the federal reserve and the financial system. One of the first reforms would be shifting some of the powers from the reserve banks to the appointed board of governors. One of the largest issues addressed was the structure of the federal reserve system. The Federal Reserve board members became the leaders of the Board of Governors of the fed. It was believed there were powers in the hands of those who would be not fit to possess them. The banks in Washington, D.C. were now held to a higher standard than the regional reserve banks. In each reserve district, the chief executive officer was then labeled as the governor but now had the title of president and the chief operating officer was now the vice president. This act also established the Federal Open Market Committee (FOMC) which consisted of seven members of the Board of Governor, the president of the Federal Reserve Bank of New York, and the presidents of the other four banks on a circulating basis to control the tool of monetary policy, open market operations, and voting rules brought with the Board of Governors.
As a result of the stock market crash of 1929, the Securities Act of 1933 was passed with hopes of preventing another economic plummet. This act was also referred to as the “Truth in Securities” law or act. The two main reasons behind implementing this act were vital in regards to improving the overall regulation and sale of stocks and other financial securities. The Securities Act of 1933 required investors to attain financials and other important information regarding the public sale of securities. This act also prevented fraud in the sale of these securities. This was the first major legislation regarding the sale of securities. The sale of the securities had to be regulated by the Securities and Exchange Commission. Registration statements become public not long after they are registered with the SEC. This act was passed so businesses that are still private have to release accurate information available to the investing side of the sale. If an investment was made based on inaccurate information provided, the investors have recovery rights if able to prove the information is invalid.
This Securities Act of 1934 was what created what we know as the Securities and Exchange Commission. This was created to govern security transactions to make sure the financials provided are accurate and clear to both parties. It has five commissioners in charge each appointed by the president. The SEC has the authority to oversee stocks, bonds, and over-the-counter securities as well as the current markets, brokers, and dealers. The Securities and Exchange Commission is also in charge of future investigations of violations. These violations can range from the selling of unregistered stocks to insider trading. The reason behind all of these regulations and rules of the sale of securities is so it can be fair for both sides of the transaction.
The Sarbanes-Oxley Act of 2002 was passed to ensure that there was accuracy and transparency throughout all top-level management. There were harsher penalties for dishonest reporting of financials. The SOX Act of 2002 has eleven section that was passed due to the major financial misconduct that has occurred in companies like Enron and Adelphia. People have invested in companies and lost billions of dollars due to inaccuracy and falsified financial records.
This act increased the incentives to produce accurate audits of corporate income statements and balance sheets. This act established the Public Company Accounting Oversight Board (PCAOB) which oversees the audits and puts regulations to control conflicts of interest in the financial services industry. The Sarbanes-Oxley Act of 2002 or SOX Act of 2002 was also referred to as the Corporate Responsibility Act of 2002.
There have been a few modifications and revisions to the Sarbanes-Oxley Act of 2002. Section 302 of the SOX Act requires that the senior management handle and have the last evaluation of the financial records. This will help to ensure that the most accurate information is released because if not, then there will be specific people who are held responsible for their actions. Section 404 of the SOX Act requires management and the auditors to report if the internal control on financial reporting (ICFR) is acceptable or not. This revision to the SOX Act is by far the most expensive to constantly update and implement. Section 802 of the SOX Act of 2002 contains the three rules guiding the new rules and regulations of record keeping. The first rule contains the restrictions on falsifying records. The second explains exactly the retention period for storing records. The third rule outlines the specific business records that companies need to store, which includes electronic communications.
During President Barack Obama’s candidacy, he believed there needed to be a great change in the regulatory system. In 2009, he initiated an idea of an overhaul so drastic that it would be compared to the reforms that came after the Great Depression. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was passed in 2010 which made changes in all federal regulatory agencies and close to all of the nation’s financial service industry. The Dodd-Frank Act change the entire surface with the way businesses started to handle their money management. It established many of the agencies that oversaw the components of the act to ensure they were being handled correctly.
Title I of the Dodd-Frank created the Financial Stability Oversight Council (FSOC) in the United States Treasury Department. This agency was designed to work closely together because it was formed of 10 voting members, 9 of whom are federal regulators and 5 non-voting supporting members. The FSCO keeps track of the major firm’s stability to rule them as “too big to fail.” It identifies what could lead to downfall by keeping the supervision of the Federal Reserve on these companies if they seem like a threat to the financial stability of the United States.
In May of 2018, President Donald Trump signed a bill that would repeal some of the implications of this act. This only applied to back certain bank regulations, mostly the smaller-sized institutions. His opponents argued the changes could open taxpayers to more liability if the financial system collapses or increase the chances of discrimination in mortgage lending. However, it kept the restrictions on the larger financial services companies because there needed to be regulations that appealed to both sides of the political parties since it with bipartisan support.