Is the U.S. Financial System flawed, if so, how?

Would you consider the U.S. financial system flawed? If you think so, why?

I don't think that the there are any major flaws in the system. The biggest issue that I can see is that the government tries to prevent the natural cycles that happen in any economy (recessions/depressions) and end up doing harm my saving business and systems that are fundamentally flawed and need to go out of business and be replaced by stuff that works better. (For example the flaws in the housing market could have been exposed earlier and fixed if there wasn't government regulation in place mandating a certain percentage of sub-prime mortgages)

The government could have never done anything to prevent the arbitrage demonstrated in the real estate market. Speculation and high balance sheet leverage created the real estate asset bubble. The only way to stop that occurrence would be to convince speculators that the ride was imminent to stop. Of course, they continued to borrow in order to generate high returns and that resulted in a crisis.

Humans only live so long, therefore they invested in the short-term and disregarded the long-term consequences.

@EagleEyedOn

The economy went into recession because a housing/credit bubble had been inflating since the mid 90s. There were a lot of systems put in place by the government to encourage banks to give out too many subprime mortgages (mortgages with high risk) by guaranteeing those mortgages and buying/reselling these mortgages through Fanny May and Freddy Mac. The bubble would probably not have been inflated nearly as much if those hadn't been in place.Without this, the bubble also would have deflated when it was smaller (and might have done so without popping) and would have had a lower impact. During the period around the tech crash and 9/11, the government made interest rates very low for a few different reasons (one of them being to try to prevent housing price deflation), which in turn caused the bubble to inflate even more and pushed back a pop until it finally did in 2008.

To summarize: the housing market would've crashed eventually (it is a natural cycle), but the government made the situation worse by doing everything it could to promote home ownership.

Obviously there are some natural flaws of capitalism that we have laws in place to help mitigate. The most obvious one that comes to mind is monopolies.

Yes, it heavily favors the rich, allows for shady things like patent trolling and slave labor, minimum wage workers who rely on gov't assistance.

Considering that this caused that, yes.

How so: negative externalities and free riding.

I think we need more government. Obviously the government is perfect and has never have to go out of business.

I'm no economist, but I seriously doubt the U.S government bailed out those businesses out of purely economic reasons that are supposed to be in the interest of the economy in general and the people.

When you have elected officials who receive endorsements and have their campaigns funded by these same businesses, its only natural that those same officials will pay their dues once they are in positions of public authority by protecting the interests of these businesses which practically got them into office in the first place. One of those interests is cleaning the mess they create.

I also think that there is a strategic motive behind such actions. U.S major businesses are a global force that play a role in implementing the U.S government's foreign policies and strategies.

in some way..mostly due to how much industry can influence policy. in moderation, that isn't a bad thing, and necessary for a free society, but given the small size of the U.S. gov't, it's led to legalized bribery.

It's not just the US financial system, it's but the global financial system. The flawed global financial system essentially holds all major governments hostage. Whenever a crisis happens, the policy priority is to stabilize the financial system for short-term economic stability. This tends to favor "Too big to fail" financial institutions. Every crisis makes the problem bigger.

The vicious cycle between short-term economic stability and long-term financial risk begins with central banks easing monetary policy to stimulate growth. The systemic distortion of the price of money rewards speculation, which tends to make some financial institutions bigger and bigger over time.True global stability will only come when major governments are willing to sacrifice short-term growth for long-term stability. That threshold will only be reached when the short-term situation is beyond repair.

Not bailing out the financial sector would have made the recession we actually went through look like a mere hiccup.

@Jimn_tonic: "Small size of US government?" The US government spends about 40% of GDP. Spending nearly half of the money is in no way small.

Of course yes. But those bailouts do not solve the inherent problems with the global financial system, they only attempt to preserve that system for a while. At some point the financial system will get to an irrecoverable point, at which all of its accumulated defects and past short term solutions will come back to the world hard and all hell will break loose on us all.

I agree with Beans. Bailing out the financial sector was an economic decision not an example of a favor being repaid. Public-will was largely un-supportive of the measure, and I'm pretty sure would have let all the firms fail if it was a viable option. For what it's worth most of the major financial service entities have already repaid the money they received from the bailout. I think CIT Group is the notable exception.

In any case I'm not entirely sure what you're getting at with your post. It seems to be more style than substance. What do you mean by inherent problems and irrecoverable point?

I'm guessing he means the lack of oversight and accountability, the huge risks that financial companies take to make short term profit and the risk of long term problems. The consolidations of financial companies into a few etc.

I did say I'm no economist, which means I'm neither very knowledgeable or speaking from experience on the matter. But I remember reading on the financial crisis of 2008/2009 and I remember how it revealed a lot of problems with major fiscal policies and financial institutions. Do you remember how the world was back at that time? It felt like the damn apocalypse. A financial system that is capable of producing such implications that went to affect most if not the whole world with massive severity has something seriously wrong with it. WTF does it even mean for a STATE to go bankrupt? So many people were kicked to the streets in the U.S. We had entire states going bankrupt. The EU didn't have the slightest clue about what some of its member states were doing, financially and economically speaking, all these years (Italy, Greece, Cyprus, Portugal). Not to mention how the Euro and the ECB proved not to be up to the challenge after all.

Again I'm not claiming to be cognizant of the subject of economics and finances, but I've seen enough to at least have an impression.

The biggest reasons for the euro crisis were the huge trade deficits of the southern EU economies, the lack of a fiscal union and that the PIGS countries allowed wages to grow faster than productivity.

The gap between German and PIGS productivity increased resulting in a large current account surplus financed by capital flows. The capital flows could have been invested to increase productivity in the peripheral nations. Instead capital flows were squandered in consumption and consumptive investments.

Wasn't the Euro crisis mostly due to many countries all sharing the same currency which stopped countries from being able to stabilize thier economies using monetary policy?

Then because they couldn't using monetary policy to stabilize their economies they turned to fiscal policy resulting in severe austerity in many countries which further damaged the economies of most nations.

Not to mention things like tax fraud in Greece being a national past time.

While the inherent problems remain, I don't really think they will really change much. It's been more or less the same for decades - not good, mind you, but not going to cause all hell to break loose (though, apparently, will cause a p. nasty recession here and there). That also means the issues mightn't ever be addressed.

Yes, but in an optimally functioning currency union, when the exchange rate mechanism is removed as an adjustment mechanism, there are three alternative mechanisms for the necessary adjustments: fiscal transfers, labor mobility, and, most importantly, labor markets being sufficiently flexible to allow wages to fall in the countries that have experienced a decline in their competitiveness.

In the Eurozone, however, most workers do not consider moving to a different country when they cannot find a job in their home country, because of the language barrier. High unemployment in one country (e.g. Spain and Greece) and relatively low unemployment elsewhere (e.g. Germany and the Netherlands) can thus hardly be solved by labor migration. The other adjustment mechanism, wage costs, are also not sufficient to solve the differences between the current Eurozone countries, because labor markets in many countries are inflexible and it is difficult to reduce nominal wages. Allowing higher inflation in the weak countries would reduce real wages, also making these countries more competitive, but this is nearly impossible to achieve if there is just one monetary policy.

That leaves the adjustment mechanism of fiscal transfers. Which is why I said the lack of a fiscal union is one of the main reasons. A banking and political union would also be a big help.

Of course theres flaws in this system. How can Feds (reserve) print up money out of thin air, with out anything backing it up, and never been audit for it in over 60+ years, since they put there criminal activity bank in our backyard, but me, u other hard working middle class citizens do every yr, and thats a problem to me.