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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.
Home / Personal Finance / Lifestyle & Money / Consumer & Debt
Tuesday, September 06, 2005
GM, Ford Score Highly in Dependability
Smart Money
The latest J.D. Power study shows GM and Ford performing well. Here are the complete results.
If you want a recommendation on a certain kind of car, who better to ask than someone who owns it? J.D. Power and Associates does just that, across the board.
On Wednesday, the Westlake Village, Calif., market-research company released its annual vehicle-dependability study. It surveyed more than 50,000 original auto owners to see which cars and trucks had the fewest problems during their first three years of ownership. The results are based on 2002 models.
In terms of name plates, or brands, Lexus topped the chart for the 11th consecutive year, and improved 14% over last year in terms of reported problems per 100 vehicles. (See tables below.)
Within the Lexus family, the top award goes to the Lexus LS 430, whose owners reported just 90 problems per 100 vehicles. This is the first time any individual model experienced fewer than 100 problems per 100 vehicles, says Neal Oddes, director of product research and analysis for J.D. Power.
Porsche was the No. 2 brand. Owners reported just 149 problems per 100 vehicles, a 38% improvement over 2004's performance and the largest percentage increase of all brands.
Korean auto maker Hyundai made the biggest improvement in the raw number of reported problems. Although it's still hovering below the industry average of 237 problems per 100 vehicles, Hyundai decreased its problems per 100 vehicles to 260 in 2005 from 375 in 2004, a 31% improvement.
While Lexus took home the top prize overall, General Motors (GM) earned an impressive eight segment awards. Among GM's stable of brands, Chevrolet performed the best with awards for its Prizm (compact car), Malibu (entry midsize car), S-10 Pickup (midsize pickup) and Silverado HD (heavy-duty full-size pickup).
Ford Motor (F) received five segment awards. The Ford brand earned three of them, for the popular Thunderbird (entry luxury car), Windstar (midsize van) and E-Series (full-size van).
Toyota Motor (TM) earned
four segment awards, with Lexus garnering three of them, for the Lexus LS 430 (luxury car), RX 300 (entry level SUV) and LX
470 (premium luxury SUV).
| Top Three Models Per Segment | |
| Cars | Trucks |
| Compact Car Chevrolet Prizm Toyota ECHO Toyota Prius Entry Midsize Car Chevrolet Malibu Oldsmobile Alero Hyundai Sonata Premium Midsize Car Buick Century Buick Regal Toyota Avalon Full-Size Car Buick LeSabre Ford Crown Victoria Mercury Grand Marquis Entry Luxury Car Ford Thunderbird Lincoln LS Infiniti I35 Mid Luxury Car Lincoln Town Car Lexus GS 300/GS 430 Buick Park Avenue Premium Luxury Car Lexus LS 430 Lexus SC 430 Cadillac Eldorado Sporty Car Mazda Miata Chevrolet Camaro Toyota MR2 Spyder Premium Sports Car Porsche 911 Honda S2000 Chevrolet Corvette | Midsize Pickup Chevrolet S-10 Pickup GMC Sonoma Toyota Tacoma Light-Duty Full-Size Pickup Cadillac Escalade EXT Ford F-150 LD Toyota Tundra Heavy-Duty Full-Size Pickup Chevrolet Silverado HD Ford F-250/F-350 Super Duty GMC Sierra HD Entry SUV Honda CR-V Toyota RAV4 Jeep Liberty Midsize SUV Toyota 4Runner Toyota Highlander Ford Explorer (total) Full-Size SUV GMC Yukon/Yukon XL Ford Expedition (tie) Toyota Sequoia (tie) Entry Luxury SUV Lexus RX 300 Acura MDX Infiniti QX4 Premium Luxury SUV Lexus LX 470 Cadillac Escalade (tie) Lincoln Navigator (tie) Midsize Van Ford Windstar Toyota Sienna Mercury Villager Full-Size Van Ford E-Series Chevrolet Express Dodge Ram Van |
| Source: J.D. Power and Associates |
The 2005 results represent the finest performance in the history of the study. The industry, on average, improved by 32 problems per 100 vehicles compared with 2004. Nearly all brands, and 84% of vehicle models, reported year-over-year improvements. The categories showing the most significant improvements this year were ride, handling and braking, engine and interior.
More-dependable cars should translate into slower depreciation, says J.D. Power's Oddes. According to retail data from the Power Information Network, a division of J.D. Power, a three-year-old vehicle that performs above the industry average in the VDS study typically retains $1,000 more of its original value than do vehicles performing below the industry average.
The VDS is one of three quality surveys J.D. Power releases each year. Its initial quality survey, which measures problems during the first 90 days of ownership, came out in May (click here for the results), and the Automotive Performance, Execution and Layout Study, which measures customer perceptions on the designs, content, layout and performance of their new vehicles, is due in late September.
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