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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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Tuesday, May 27, 2008
Costing Out the Farm Bill and the Upcoming War Spending Debate
Comtex
WASHINGTON, May 27, 2008 /PRNewswire-USNewswire via COMTEX/ ----This is the WashingtonWatch.com federal legislative update for the week of May 26, 2008.
The House and Senate are not meeting this Memorial Day week. We will take this time to briefly look at a bill recently passed, and one to be considered when Congress returns.
Last week the president vetoed H.R. 2419, the Food and Energy Security Act of 2007. The Congress promptly overrode the president's veto, passing the bill into law.
Among other things, Public Law 110-234, the Food and Energy Security Act of 2007 provides for the continuation of agricultural programs through fiscal year 2012. Passage of the bill will cost the average U.S. family about $5,650.
P.L. 110-234 The Food and Energy Security Act of 2007 Costs $5,643.27 per family What People Think: 32% For, 68% Against http://www.washingtonwatch.com/bills/show/110_PL_110-234.html
The House and Senate continue to debate a spending bill for military operations in Iraq and Afghanistan. The most recent version of H.R. 2642, the Supplemental Appropriations Act, 2008, also includes spending to extend unemployment benefits and college aid to veterans, plus a tax on the wealthy to offset the costs of the veterans program.
http://www.washingtonwatch.com/bills/show/110_HR_5749.html
http://www.washingtonwatch.com/bills/show/110_SN_22.html
Passage of the H.R. 2642, the Supplemental Appropriations Act, 2008 would cost the average U.S. family a little under $1,700.
H.R. 2642 The Supplemental Appropriations Act, 2008 Costs $1,677.28 per family What People Think: 44% For, 56% Against http://www.washingtonwatch.com/bills/show/110_HR_2642.html
Displayed below are new, updated, and passed items with their cost or savings per family.
New Items H.R. 5876 The Stop Child Abuse in Residential Programs for Teens Act of 2008 Costs $6.81 per family http://www.washingtonwatch.com/bills/show/110_HR_5876.html H.R. 6028 The Merida Initiative to Combat Illicit Narcotics and Reduce Organized Crime Authorization Act of 2008 Costs $13.87 per family http://www.washingtonwatch.com/bills/show/110_HR_6028.html H.R. 5959 The Intelligence Authorization Act for Fiscal Year 2009 Costs $6.08 per family http://www.washingtonwatch.com/bills/show/110_HR_5959.html Updated Items H.R. 5658 The National Defense Authorization Act for Fiscal Year 2009 Costs $5,651.48 per family http://www.washingtonwatch.com/bills/show/110_HR_5658.html H.R. 6049 The Energy and Tax Extenders Act of 2008 Saves $72.16 per family http://www.washingtonwatch.com/bills/show/110_HR_6049.html Passed Items P.L. 110-231 To amend Public Law 110-196 to provide for a temporary extension of programs authorized by the Farm Security and Rural Investment Act of 2002 beyond May 16, 2008 http://www.washingtonwatch.com/bills/show/110_PL_110-231.html P.L. 110-232 The Strategic Petroleum Reserve Fill Suspension and Consumer Protection Act of 2008 http://www.washingtonwatch.com/bills/show/110_PL_110-232.html P.L. 110-233 The Genetic Information Nondiscrimination Act of 2007 Costs $0.00 per family http://www.washingtonwatch.com/bills/show/110_PL_110-233.html P.L. 110-234 The Food and Energy Security Act of 2007 Costs $5,643.27 per family http://www.washingtonwatch.com/bills/show/110_PL_110-234.html
SOURCE WashingtonWatch.com
http://www.washingtonwatch.com
Copyright (C) 2008 PR Newswire. All rights reserved
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