Issue Post: Federalism

Federalism plays a key role in both our national debt, and our financial system. Both the Federal Government and States regulate the financial industry. The Federal Government operates the SEC CFBP, FDIC.  The SEC regulates the operations of banks all over the United States, as does the CFBP. The FDIC insures bank deposits for all banks across the USA. The Federal Government justifies the creation, and operation of these regulatory agencies by invoking the Commerce Clause. State regulatory agencies only regulate the operations of banks within their states. The near collapse of insurer AIG exposed some of the flaws in this system. While its Financial Products division was regulated by the Federal Government, many of its insurance subsidiaries were regulated by separate states. When losses piled up at Federally regulated AIG FP, AIG couldn't get approval to sell it's different subsidiaries fast enough from the States. This lead to a liquidity crisis that resulted in AIG being forced to take a tax payer financed bailout. On the debt front, almost all States are required in their Constitutions to have a balanced budget. Obviously, the Federal Government does not have these requirements. However in cases of fiscal emergency such as the 2008 financial crisis, the Federal Government will lend money to embattled States. The States will then follow Federal instructions on when to pay it back. Also the Federal Government will often tie grants with following new Federal Laws. This is called Fiscal Federalism. For example, when the Federal Government wanted to raise the drinking age to 21, they forced States to comply by making new highway funding dependent on raising the drinking age to 21.

http://www.britannica.com/EBchecked/topic/203491/federalism

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