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Most states also have passed laws dealing with securities transactions. Today, most states have state securities boards, commissions, or departments to regulate the securities industry in their state and make sure that the state laws are being met. The primary mission of these entities is to protect investors--the buyers of securities--in their states.

In the 19th century, many states also imposed usury law, although there was much variation across states. These laws placed a maximum upper limit on interest rates charged in individual states by all lenders. New evidence (Benmelech and Moskowitz 2010) indicates that these laws came with broad societal costs, such as less credit availability and slower economic growth, but that wealthy political incumbents benefited by a lower cost of capital. Today, only a few states impose usury laws that have any meaningful effect on credit transactions.

Federal regulations pertaining to the securities industry did not become important in the United States until the establishment of the Securities Exchange Commission in 1934. The SEC is charged with maintaining fair, efficient, and orderly markets by regulating market participants in the securities industry. To the extent that securities transactions are becoming increasingly important in the U.S. financial system, the SEC's role as regulator is also growing over time. The SEC regulates issuers of securities and tells them what types of securities they can issue and the information that must be provided by them to investors--for example, in the form of prospectus and most recently in the Sarbanes-Oxley Act. It also regulates investors and monitors what investors are doing, making sure that investors do not break insider trading laws that preclude investors from availing themselves of insider information that is not publicly known and use that to their advantage in trading. To the extent that mutual funds, including money market mutual funds, invest primarily in financial securities, the SEC regulates the mutual fund industry, requiring that mutual funds let investors know the risks and returns investors can anticipate, providing this information in the form of a prospectus. The forms of mutual funds known as hedge funds traditionally have faced less stringent regulation, although under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act the reporting (or disclosure) requirements of such funds have increased.

In addition to the numerous governmental entities involved in regulating the U.S. financial system are many self-regulating organizations. These include the Financial Industry Regulatory Authority; the Municipal Securities Rulemaking Board; and stock and other financial instrument exchanges and clearinghouses, such as the New York Stock Exchange and the Chicago Mercantile Exchange, to name the largest, most well-known exchanges.

Futures contracts are instruments that allow market participants to buy and sell items, including financial assets, for future delivery but at a price set today. These contracts obligate both parties to fulfill commitments to make or accept delivery. Option contracts, on the other hand, only commit one party, called the writer of the contract, to a particular action, while the buyer of the contract has the option or choice to take a certain action or not. Futures contracts have been traded in the United States for over 150 years, and option contracts have been around for quite some time as well. In 1974, the U.S. Congress passed the Commodity Futures Trading Commission Act, which established the CFTC as the key federal regulator of both futures and options trading activities in the United States. The mission of the CFTC is to protect market participants in futures and options trading from fraud, manipulation, and other such abusive practices and to foster financially sound markets.

Financial regulation in the United States is in a constant state of flux but seems to change the most in response to economic and financial crises. The financial crisis of 2008-2009 does not appear to be an exception to this rule. The U.S. Congress recently passed, and President Obama signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act, legislation that will significantly alter the financial regulatory landscape going forward. Indeed, the mind-set in Washington, DC, following the financial crisis is that it was generally a lack of federal financial regulation that led to the crisis. Even with the 2010 act in place, much debate continues to take place as to how the new rules are to be applied by regulators and to what extent they will be shaped by such regulatory actions.

Included in the Dodd-Frank Act is a provision to establish a new Bureau of Consumer Financial Protection that is charged with making sure that consumers are not taken advantage of by "unscrupulous lenders," such as putting home buyers into mortgage loans that are not in the consumer's best interest. While numerous financial regulators were charged with such responsibilities in the past, this new regulator will have this as its chief focus. The Dodd-Frank Act also includes new laws and regulations dealing with the very largest financial institutions in the country that are deemed "too big to fail." The financial crisis has shown evidence of rippling effects throughout the financial system when a large financial institution, like Lehman Brothers, fails. To prevent such rippling effects, many large, systemically important financial institutions were provided federal aid during the crisis to prevent their financial failure. While the new legislation does address many aspects of the too-big-to-fail issue, it does not appear to settle the issue of the optimal method of dealing with large, systemically important institutions that are on the brink of failure. The act also includes some new regulation on derivatives other than futures and option contracts, such as swap agreements.

While the U.S. political leadership today seems to believe that the next financial crisis will be prevented by these new regulatory reforms, a reading of U.S. financial history suggests that future crises are still likely to occur in the not-too-distant future.

Bibliography:

Benmelech, Efraim, and Tobias Moskowitz, "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century." Journal of Finance 65, no. 3 ( June 2010): 1029-1073.

Bullard, James, Christopher J. Neely, and David C. Wheelock, "Systemic Risk and the Financial Crisis: A Primer." Federal Reserve Bank of St. Louis Review (September/October 2009): 403-417.

Cecchetti, Stephen G., Money, Banking, and Financial Markets, 2d ed. Boston: McGraw-Hill Irwin, 2007.

Friedman, Milton, and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press, 1963.

Kane, Edward J., "Interaction of Financial and Regulatory Innovation." American Economic Review 78, no. 2 (May 1988): 328-334.

Kaufman, George, "The Financial Turmoil of 2007-09: Sinners and Their Sins." Networks Financial Institute at Indiana State University, March 2010, 2010-PB-01.

NYU Stern Working Group on Financial Reform, "Real-time Recommendations for Financial Reform." December 16, 2009. govtpolicyrecs.stern.nyu.edu/home.html

Stigler, George, "The Theory of Economic Regulation." Bell Journal of Economics 1 (Spring 1991): 3-21.

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