We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.

The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.

These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.

When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?

Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.

Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.

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Wednesday, July 02, 2008

Bargain Hunters Look to Refurbished Gadgets

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Matt Egan

FOXBusiness

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Forget the negative connotation usually associated with refurbished electronics. Bargain-hunters are likely to get more bang for their buck with minimal risk by going the "refurb" route.

Melissa Edouard, a student at Florida Southern College, recently bought a refurbished iPod and a Dell (DELL) computer.

“So far I haven't had any problems with the products I purchased. I would definitely buy other refurbished electronics,” said Edouard. “In my case, I'm a college student and buying new electronics is fun yet painful when I have to pay.”

Edouard said she bought the iPod for $209, a discount of at least 20% from the listed price of a new one. And the PC was just $350, while a brand new one would have been “way over my budget.”

While Edouard and many other customers have had positive experiences with their refurbs, many others remain apprehensive. Part of the reason for the stigma that often surrounds these less-than-new products is that the term “refurbished” means different things to different people.

“I think people confuse refurbished and used. People think of buying a used car. In electronics, that doesn't typically happen,” said Stephen Baker, vice president of industry analysis at NPD Group, a market research firm.

Many times refurbs are iPods, cell phones and computers that fall victim to buyer’s remorse and are returned to the store, meaning they can’t be sold as brand new but aren't exactly used.

Typically it’s “a box that was opened and someone didn’t like the color because it didn’t match their nail polish,” said Cat Schwartz, gadget and toy director at eBay (EBAY), the online auction site that sells hundreds of refurbs.

Many consumers also don’t realize that these products are given an inspection before being sold to the public, meaning they receive an extra pair of eyes that new products never get.

“Many times these products are better than the average products,” said Richard Doherty, research director at Envisioneering Group, a technology assessment and market research firm. Statistically, refurbs have fewer problems and last longer than brand new ones, he added.

Customers are often drawn to refurbs because of the price discount, which is typically at least 10% lower than a new item’s price.

For example, a refurbished Sony (SNE) 40” Bravia XBR series of LCD TV sells for $1,899.99, compared to the new version’s price tag of $2,499.99. That’s a savings of 24% from the present price, and even greater savings from its original price of $2,799.99. Sony says all refurbs come with a 30-day return policy and a 90-day limited warranty covering parts and labor.

“Remember that most consumers go into retail and just say, ‘What do you got?’ Most aren’t going to go through the trouble of finding something like that. But for a bargain-hunter who cares, they can actually do better with a refurb,” said Roger L. Kay, president of Endpoint Technologies.

Given the discounts and the extra inspection that refurbs receive, it can often be a better deal to buy these gadgets instead of brand new ones. However, it’s very important to buy from reputable sources that offer warranties and return policies.

“In the case of a refurb I’d rather buy from a manufacturer than a distributor because you don’t really know the pedigree of something after it’s been down the distribution chain a bunch” of times, said Kay. “If you look at Dell or HP, they have a lot to lose if they mess that experience up.”

Many sellers even offer the same or comparable warranties and return options for refurbs as they do for their new products. According to Dell’s Web site, all certified refurbs are re-boxed in brand new packaging and have the same limited warranty as the built-to-order systems.

Kay said it’s wise to ask the seller (if it’s not the manufacturer) where they receive their refurbs from. “If they say, ‘We go around the streets of Mumbai and we get our screw drivers out…’ Then obviously that’s going to be a big risk.”

The advantages of buying refurbed gadgets can change based on the type of buyer and the product category. Consumers who put a premium on the latest cutting edge technology may not be interested in refurbs because they’d rather pay more for the very latest version of a gadget. Those on a limited budget and value buyers will likely find the move more advantageous.

Many bargain-hunters decide to go online to eBay, Overstock.com or countless other Web sites that offer refurbished electronics.

“I am definitely seeing an increase in refurbished purchases. I think part of it has to do with people having good experiences and the discounts being so awesome,” said eBay's Schwartz. “This is a hot industry and the consumer is definitely seeing the benefit in the end.”