John Maynard Keynes is among the most well-known economic theorists. Go to http://en.wikipedia.org/wiki/John_Maynard_Keynes and write a summary of his life and contributions to economics based on what we have learned during this course.

QUESTION

Choose ONLY two (2) from the following topics.

John Maynard Keynes is among the most well-known economic theorists. Go to http://en.wikipedia.org/wiki/John_Maynard_Keynes and write a summary of his life and contributions to economics based on what we have learned during this course.
The financial crises of 2007-2009 sent the United States into its worst recession since the understanding end of World War II, with unemployment rate rising above 10%. Go to https://research.stlouisfed.org/fred2/ and click on the series link “UNRATE” (Civilian Unemployment Rate). What has happened to unemployment rate over time, why is this important on an aggregate basis, and how has our financial system reacted to those changes?
Why is the Volcker Rule important?
Explain the concept of “Too Big To Fail” and why it is important? Cite examples to demonstrate your understanding.
Explain the Banking Act of 1933 (Glass-Steagall) and 1935 and why are they important?
Explain the Securities Act of 1933 and Securities Act of 1934 and why are they important?
Explain the Sarbanes-Oxley Act of 2002 and why is it important?
Explain the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and why are they important?

ANSWER

Understanding the Significance of ‘Too Big To Fail’ and the Dodd-Frank Act

Introduction

The concept of “Too Big To Fail” and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 are crucial components of modern financial systems. These topics hold particular significance due to their impact on financial stability, regulation, and consumer protection. In this essay, we will explore the concept of “Too Big To Fail” and examine its importance, supported by real-world examples. Additionally, we will delve into the Dodd-Frank Act, its purpose, and the reasons why it is considered an important piece of legislation in the realm of financial reform.

Explaining ‘Too Big To Fail

The phrase “Too Big To Fail” refers to the notion that certain financial institutions are so large and interconnected that their failure would have severe adverse consequences on the overall economy. These institutions often operate in sectors such as banking, insurance, or investment, and their size and complexity make their failure highly problematic. If such an institution were to collapse, it could trigger a chain reaction throughout the financial system, leading to a destabilization of markets, widespread economic downturns, and potentially necessitating government intervention to prevent further harm.

Importance of ‘Too Big To Fail

The concept of “Too Big To Fail” is significant due to several reasons. Firstly, these institutions hold considerable influence and control over vast amounts of assets, capital, and funds, which gives them the ability to impact the stability of financial markets (Kumar & Lester, 2014). Therefore, their failure can have far-reaching implications, affecting not only the institution itself but also investors, depositors, and other market participants. Furthermore, the interconnectedness of these institutions through various financial instruments and transactions means that their distress can quickly spread, potentially causing a domino effect across the entire economy.

Examples of ‘Too Big To Fail

A prime example of a “Too Big To Fail” scenario is the global financial crisis of 2008, where the failure of major investment banks, such as Lehman Brothers, had severe repercussions on the global economy. Lehman Brothers’ bankruptcy led to a freeze in credit markets, a collapse in investor confidence, and a wave of job losses and business closures. Governments worldwide were forced to intervene with massive bailouts and stimulus packages to stabilize the financial system and prevent further deterioration.

Another example is the rescue of large banks during the Great Recession, such as Citigroup and Bank of America, which were considered too systemically important to be allowed to fail. These institutions received substantial government support to prevent their collapse, highlighting the importance of avoiding the potential systemic risks associated with their failure.

Understanding the Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a comprehensive piece of financial legislation enacted in response to the 2007-2009 financial crises (Hayes, 2023). Its primary objectives are to enhance financial stability, increase transparency and accountability, and protect consumers from abusive practices in the financial industry. The act introduced various regulatory reforms targeting different aspects of the financial system, including banking, derivatives, consumer protection, and systemic risk.

Importance of the Dodd-Frank Act

The Dodd-Frank Act holds immense importance in the realm of financial reform. It aims to prevent a recurrence of the conditions that led to the financial crisis by imposing stricter regulations on financial institutions and enhancing oversight. The act established the Consumer

 Financial Protection Bureau (CFPB), which serves to protect consumers from predatory lending and other unfair practices. It also mandated increased transparency in the derivatives market, requiring standardized derivatives to be traded on regulated exchanges or clearinghouses.

Furthermore, the Dodd-Frank Act introduced the Volcker Rule, restricting banks from engaging in proprietary trading and certain types of speculative investments with their own funds (J. Chen, 2022). This provision aims to limit excessive risk-taking by financial institutions and reduce the potential for future financial crises.

Conclusion

The concepts of “Too Big To Fail” and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 are pivotal in understanding financial stability, regulation, and consumer protection. The notion of “Too Big To Fail” highlights the systemic risks associated with the failure of large financial institutions and the potential for their distress to reverberate throughout the economy. On the other hand, the Dodd-Frank Act represents a significant step towards enhancing financial regulation, transparency, and consumer safeguards, aiming to prevent future crises and protect the interests of both the financial system and consumers. These topics demonstrate the ongoing importance of regulatory measures and reforms in maintaining a stable and resilient financial system.

References

Chen, J. (2022). Volcker Rule: Definition, Purpose, How It Works, and Criticism. Investopedia. https://www.investopedia.com/terms/v/volcker-rule.asp 

Hayes, A. (2023). Dodd-Frank Act: What It Does, Major Components, Criticisms. Investopedia. https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp#:~:text=Consumer%20Protection%20Act%3F-,The%20Dodd%2DFrank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act,safer%20for%20consumers%20and%20taxpayers. 

Kumar, A., & Lester, J. N. (2014). Do Deposit Rates Show Evidence of Too Big to Fail Effects? Social Science Research Network. https://doi.org/10.2139/ssrn.2412852