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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Tuesday, July 08, 2008

Securing Your Identity With The Touch of a Fingerprint

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Kathryn Glass

FOXBusiness

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It used to be the stuff of spy novels, but now biometric security is the way of the world.

Biometrics -- which use an individual’s unique physical characteristics for identification -- are securing more personal information as fingerprint scanners become more common on personal computers, store checkout lines and company laptops.

From blasting music into our ears to helping us get information quickly-- personal technology devices are a major part of our lives. FOXBusiness.com takes a look at some of the hottest gadgets and industry trends. So check back every day to find everything from the next big tech hit to what it takes for a gadget to make it mainstream.

A new gadget called the Icache, which allows consumers to store credit card and loyalty card information on a device that’s accessible via a swipe of the finger, has people asking: how secure are these sensors?

Stacy Cannady of Lenovo, whose ThinkPads were the first notebook PCs to implement a biometric fingerprint reader, says the technology has been steadily improving both in its reliability and security.

Researchers have found the scanners can be “spoofed” or tricked using fake or manufactured fingerprints. A Japanese mathematician spoofed several commercial sensors using fake fingers made of the same kind of gelatin found in Gummy bears. And Clarkson University researchers successfully tricked scanners using fake Play-Doh fingers.

Reliability has been the primary topic of research in the field of fingerprint biometrics, said Victor Lee, of International Biometric Group (IBG), an independent research group.

“Rarely have I encountered a system that has been fully resistant to spoofing, and that’s at the more secure levels. But even though these systems might be spoof-able it doesn’t mean it’s easy to spoof them—you have to know what you’re doing; it’s not as easy as people think it is,” he said.

It may not be easy, but the fact that it’s possible to fool fingerprint sensors in this age of widespread identity theft is disconcerting, especially given biometric security features are typically more expensive than using a password as protection.

Rob Enderle, principal analyst with the Enderle Group, a market research firm, says the degree of security the fingerprint sensors provide varies.

“It depends on the device,” Enderle said. “Most of the new devices contain some level of encryption, and in almost all cases the newer scanners are safer than having a trivia password or a written password.”

Icache founder and CEO Jonathan Ramaci touted the Icache’s "deep reading" sensor, which reads the fingerprint below the skin’s surface, making it less likely to be spoofed, he said.

Lee, of consultant group IBG, believes biometric security systems should be used as supplemental security--but probably not as the sole measure protecting highly sensitive data.

Lee advocates the "trifecta" approach, in which sensitive data is protected by something you know, (such as a password) something you have (such as a smartcard) and something you are (biometric information).Ramaci says the Icache does use this "trifecta" approach by requiring a username and password in order to access the option to have data stored on Icache’s backup servers, requesting a fingerprint to access and decrypt credit information, and employing the Icache itself as the ‘smartcard’

Regardless of its security and reliability performance, Avivah Litan, a security analyst with Gartner Research, predicts that the Icache will be popular with consumers. “Consumers love biometrics,” she said. “It’s a convenience thing—it’s easier for them to not have to remember passwords.”

But Rick Smith, a security expert and author of Authentication: From Passwords to Public Keys, says that whether the security is failsafe or not, he still won’t be buying one.

“The Icache is definitely better than the credit card security we have now,” Smith said. “On the other hand, I already carry enough electronic gizmos that don't fit in my back pocket; I'm not about to carry another one.”