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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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Saturday, July 19, 2008
Bewildered By Barack, From The Washington Times
Comtex
WASHINGTON, July 19, 2008 /PRNewswire-USNewswire via COMTEX/ ----The following is distributed by the Republican National Committee and is an Op-Ed piece from The Washington Times By Rep. Eric Cantor (R-VA):
(Logo: http://www.newscom.com/cgi-bin/prnh/20080519/RNCLOGO ) By Rep. Eric Cantor (R-VA) Op-Ed July 19, 2008
[N]ext week, Sen. Barack Obama will visit Germany. If he has his way, the senator will turn the capital of Berlin into his own personal campaign prop. ...
Most disturbing is the presumptuousness with which the Obama campaign plans to assume the mantle of JFK and Mr. Reagan. In all likelihood, Mr. Obama will give a mea culpa on behalf of the American people for seven-and-a-half cruel years of Bush unilateralism. Hopefully, he can find a moment to press Germany and other NATO allies to step up their insufficient contributions to the war in Afghanistan. Last time I checked, Islamic terrorism poses an equally grave threat to Europe.
But either way, Senator Obama is no Kennedy or Reagan. Consider the Berlin speeches the two former presidents -- sitting heads of state at the time, of course -- delivered. ...
Obama may be charismatic and polished, but his politics are hardly the radical departure he claims to represent. His brief legislative record in Illinois and the U.S. Senate suggests a doctrinaire liberal. And though he recently has lunged to the center, most notably on guns, NAFTA, Iraq and wiretapping, Obama is conspicuously short on bold ideas that challenge his party's orthodoxy or the status quo -- in other words, ideas that entail political risk.
Contrast that with JFK's calls for huge income tax cuts and his challenge for Americans to reach the moon in less than 10 years; Reagan's willingness to withstand withering criticism of his desperately-needed supply-side economic vision; and Reagan's steady determination to wear down the Soviets through heavy defense spending, despite taunts equating his prized Strategic Defense Initiative (SDI) with "Star Wars."
JFK and Reagan changed the course of history with their respective speeches in West Berlin. They advanced the cause of freedom at ground zero of the Cold War. An Obama campaign speech in Berlin would merely be a way to score political points on the cheap. As he dresses himself in the garb of JFK and Reagan, the American people are too smart to take the bait.
To View The Entire Article, Please Visit: http://www.washingtontimes.com/news/2008/jul/19/bewildered-by-barack/ A Product Of The RNC Research Department Paid for by the Republican National Committee. 310 First Street SE, Washington, D.C. 20003 - (202) 863-8500 - www.gop.com Not authorized by any candidate or candidate's committee.
SOURCE Republican National Committee
http://www.gop.com
Copyright (C) 2008 PR Newswire. All rights reserved
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