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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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Wednesday, August 20, 2008
The 2008 Convention: Wednesday, August 27th - Securing America's Future
Comtex
DENVER, Aug 20, 2008 /PRNewswire-USNewswire via COMTEX/ ----The Democratic National Convention Committee (DNCC) and the Obama for America campaign today announced that Democratic Senatorial Campaign Committee (DSCC) Chairman Charles E. Schumer (D-NY) and top Senate challengers will address the Convention Wednesday evening, August 27th.
(Logo: http://www.newscom.com/cgi-bin/prnh/20080331/DNCCLOGO )
"We have a once-in-a-generation chance to bring meaningful and lasting change to our country by electing Barack Obama President and sending a stronger Democratic majority to the Senate," said Senator Schumer. "We need a stronger majority in the Senate to enact Obama's broad, sweeping agenda, and our outstanding group of candidates is ready to deliver it."
Joining Senator Schumer on the stage on Wednesday will be Jeanne Shaheen of New Hampshire, Tom Udall of New Mexico, Jeff Merkley of Oregon, and Tom Allen of Maine.
Jeanne Shaheen is the former Governor of New Hampshire and the first woman elected to that office. She left her position as the Director of Harvard's Institute of Politics at the Kennedy School to run for the Senate.
"For too long, families in New Hampshire and across the country have struggled as Washington has put the needs of special interests ahead of the needs of middle class families. Well, it is time for a change," said Shaheen. "This November, we are going to take our country in a new direction by standing up and fighting for the middle class again. If we want a new direction in Washington, we need real change this fall."
Rep. Tom Udall was elected to the United States House of Representatives in 1998 and previously served as New Mexico's Attorney General. Udall, who has earned a reputation as a principled leader, is running for the open senate seat in New Mexico.
"As a proud Westerner and candidate for United States Senate, it is my honor to take part in this historic Convention for change," said Udall. "In my home state of New Mexico and around the nation, it's clear that voters will have a choice between leaders who will fight for our middle class and do what's right no matter what, or those who choose to stand for the same failed policies of the past."
In 2006, Jeff Merkley led Democrats to take control of the Oregon House for the first time in sixteen years. The son of a millworker, Merkley is the Speaker of the Oregon House of Representatives.
"I am honored to have the opportunity to address the Democratic Convention and speak to my vision to partner with Senator Obama and make Washington work for working families again," said Merkley. "Oregonians are ready for the kind of change Senator Obama will bring to Washington. George Bush's economy has been a disaster for Oregon workers and families."
Maine Rep. Tom Allen was elected to the United States House of Representatives in 1996, where he has been a strong advocate for health care, small business, energy, fiscal responsibility and economic competitiveness. Allen, who is currently the only U.S. Senate candidate with a universal healthcare plan, is running against incumbent Susan Collins.
"Next week's Convention will be a tremendous opportunity to talk about how we can change the direction of Maine and our nation," said Allen. "I look forward to speaking to my fellow delegates about solving the energy crisis, bringing our troops home safely and responsibly from Iraq, providing universal health care, and expanding opportunities for the middle class."
The headline prime-time speaker on Wednesday will be Barack Obama's Vice Presidential Nominee.
About the DNCC:
The 2008 Democratic National Convention Committee is the official arm of the Democratic National Committee responsible for planning and organizing the 2008 Democratic National Convention in Denver. www.demconvention.com
Paid for by 2008 Democratic National Convention Committee, Inc.
Not authorized by any candidate or candidate's committee.
SOURCE 2008 Democratic National Convention Committee
http://www.demconvention.com
Copyright (C) 2008 PR Newswire. All rights reserved
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