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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 / Small Business
Tuesday, May 06, 2008
Young Guns: Behind the Scenes with Rickshaw Dumpling Bar
Christina Scotti
FOXBusiness
FOXBUSINESS.COM PROFILES ENTREPRENEURS AGE 35 AND YOUNGER
Meet 30-year-old Kenny Lao, owner of Rickshaw Dumpling Bar, a multi-million dollar start-up that is quickly expanding around the New York City area. Lao brings a lot of interesting entrepreneurial anecdotes to the table--including calling famed restaurateur Drew Nierpont's mother out of the phone book in hopes of contacting the food star. He also sold his business venture to what would seem like one of the tougher critics out there: Dean of NYU Stern School of Business Thomas Cooley.
But Lao is still keeping it simple as he bounces between two locations for the day-to-day managing grind. No limo for Lao. He does what so many New Yorkers do: He rides his bike.
| YOUNG GUNS |
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THE SIX SHOOTER
1. Where were you the moment you decided your business plan?
I was probably in my apartment at like two o’clock in the morning. It was my first year of business school, and I said, I am going to put together a business plan for Rickshaw.
2. What was the one thing you didn't know that you had to bluff your way through?
The first time I raised money was really, really difficult. It was something I had never had to do before because I had been opening up restaurants for clients who had really deep pockets. So the whole fundraising process has been new to me. One other thing that was a bit of a surprise was how to balance being very detail-oriented and being able to let go and do things that other people in the company don't know how to do. In other words, I can get us through a lunch rush at any moment, but a lot of other people can just as well. Being able to negotiate for pricing, being able to deal with real estate brokers--those are the things that I’ve really had to get good at doing.
3. What one life lesson did you learn that helped you build your business?
I would have to say to sleep as much as you can. Nap whenever you can nap. Without sleep, people don't function--at least I don't. I need a good eight hours every night, which means I’m not very social because I work a lot and I sleep a lot.
4. Who is your role model or inspiration?
This is going to sound really, really cheesy but I’d have to say that I am consistently inspired by my employees. I am so psyched that people are getting behind the project, that they are willing to earn their paychecks here, that they are willing to step behind the brand and put the uniform on every day and talk about the menu and cook the food--that's what keeps me going. Seriously. It's really inspiring to see people think this is going to be a big company and want to come and work here.
5. What do you wish you had more of: time or money?
Time. Hahaha. I think that the end game for a lot of entrepreneurs and a lot of investors is the money, [and] I am not going to lie, I am here for the money as well. But being able to add value to a company and actually increase not just the value of the brand but the dollar value of the company, takes a lot of time. And if you could crunch in an extra day in every week and no one else does, you're really psyched, right?
6. What is the one word your employees would use to describe you and why?
Unwavering, maybe. It’s just because when I have my mind set on something, I am very focused. I just want to make sure things get done. I may get really, really focused on the fact that the trash cans are dirty, and it's going to be super annoying, but I would be pretty unwavering about it. I think [employees] find it a good thing in doses. They find it’s a good thing that I am passionate, though on a day-to-day basis, it's important to step back and let them do their thing. You've got to take hold, but the key is to set expectations and say this is how we expect you to interact with customers and we are going to show you how to do it, train you how to do it, watch you do it, then we're just going to let you do it.
Want to know who's next? Check back every other week to see more Young Guns... If you know a Young Gun e-mail us at youngguns@foxbusiness.com.
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