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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Monday, June 23, 2008

Summer Camps Adjust to Higher Pump Prices

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Kathryn Glass

FOXBusiness

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Summer camps are finding they have to adjust to higher prices at the pump.

Fears that enrollment would slump at summer camps with the weakening economy haven’t turned out to be true. In fact, enrollment overall is up, said Peg Smith, chief executive of the American Camp Association.

But an increase in enrollment doesn’t mean the camps aren’t making some adjustments to offset higher fuel prices. Steve Heiny, director of the Flat Rock River YMCA camp in St. Paul, Ind., said his camp has been phasing out some of the longer bus trips over the past few years as gas prices have climbed higher.

“It hasn’t impacted us too much this year because we don’t do a lot of driving anyway,” he said. “We used to do trips for our older kids and we’d take them on two-hour road trips to parks, but we stopped doing that three or four years ago.”

This summer, Heiny said the camp staff has really tried to consolidate the number of trips made into town for food and supplies to save money on gas. The camp is located about 50 minutes outside of Indianapolis, and staff has tried to keep the trips into town at one trip per week.

High Sierra Camp, located in the Tahoe National Forest in eastern California is another camp that’s experienced increased enrollment. Scott Shaffer, of Shaffer’s High Sierra Camp, said despite the fact that he raised tuition prices 10% from last year the camp is already sold out for a good portion of the summer.

But fuel costs are a problem for the camp’s staff.

“We’re remote, so people who live in the general area usually have to drive a long way to come to camp and work, and they’re very conscious about the cost of gas -- so it has hurt our ability to be able to recruit local staff,” Shaffer said.

Shaffer has also been trying to expand the camp’s facilities by adding more cabins and bathrooms and he said higher gas prices will probably slow his expansion plans. He doesn’t plan to curtail any of the program options available to the kids this summer, but he will be watching the bottom line when it comes to setting a budget for next year.

“We’ll be keeping a sharp eye on gas prices since we do drive to various areas for our activities,” he said. “We go backpacking and mountain biking and visit lakes so we do a fair amount of driving and we’re going to have to keep a sharp eye on that.”

Gas prices aren’t the only strain. Camp directors are keeping their eye on increased food costs. Butler Camp in Maryland increased pizza prices for their Friday pizza lunches for the first time in six years from $1.50 per slice to $2.00.

“Someone on our school staff researched the cost per slice and it had been roughly a 25% or more jump in price for us for pizza,” said Diane Long, the Butler Camp director.

But the rise in costs hasn’t been enough to keep kids away, said Smith, of the American Camp Association.

“We’ve spoken to camps across the country,” she said. “Enrollment is steady and there’s actually even an increase in attendance, which isn’t too surprising if you figure that, for most parents, the last dollar they cut is the money they spend on the kids.”