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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, April 23, 2008
Worldwide Food Crisis Highlights Need for Foreign Aid Overhaul, Says Oxfam
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WASHINGTON, April 23, 2008 /PRNewswire-USNewswire via COMTEX News Network/ ----Foreign Affairs Committee Takes First Step On Path To Fundamental Reform
Today before the House Committee on Foreign Affairs, international agency Oxfam America said that while US foreign assistance has helped millions of people, it is still underperforming and often fails to reach the people who need it most. Raymond C. Offenheiser, president of Oxfam America, told the Committee during his testimony:
"Just look at the headlines -- skyrocketing food prices are setting off riots in countries across the world where people were already living on a knife's edge. We have a moral responsibility to reduce poverty -- but if you look at the instability caused by the current food crisis, it's clear that reducing global poverty is fundamental to our national security as well.
"Making aid work for the world's poor and American taxpayers means the next President and Congress must seize this historic opportunity to make aid more effective by responding to the needs of recipients. This is a basic business approach -- know your customer. Our current top-down approach isn't going to cut it."
Howard Berman (D-CA), chairman of the House Committee on Foreign Affairs, called the aid reform hearing held today on Capitol Hill. The event was an important first step in Berman's planned overhaul of US foreign assistance.
In response to Berman's question on whether foreign aid should be provided to further US national security interests or to spur development and reduce global poverty, Offenheiser said:
"The national security establishment here in Washington has publicly acknowledged the threat of global poverty and this country's limited ability to fight it with its current foreign aid system."
According to Oxfam, designing a foreign aid strategy to reduce global poverty is itself a compelling American national interest. Foreign aid programs that are not designed with long-term poverty reduction as their clear purpose will not reduce poverty. Fighting poverty can deliver long-term security benefits, but only if the focus is first on poverty.
Testifying before the committee, Offenheiser, who has over 30 years of experience working on development and foreign assistance, made the case that the US has the greatest opportunity for foreign aid reform it has seen since the 1960's, when the current aid system was implemented.
"The beginning of a new presidency is the best opportunity for real progress in foreign aid reform -- there is both the need and opportunity to redefine America's global role," said Offenheiser. "It's clear that Americans are ready to embrace change as well -- our image abroad matters to them."
In a poll conducted by the Aspen Institute and World Learning in February, 9 out of 10 people believe it is very important for other countries to have a favorable opinion of Americans.
Oxfam supports a vision for a new US foreign assistance system that includes a new law, a new structure and a new strategy. Oxfam calls on the next President to work with Congress to:
-- Enact a new Foreign Assistance Act;
-- Create a cabinet-level agency dedicated to reducing poverty; and
-- Create a national development strategy that delivers real results for the world's poor.
Oxfam's detailed policy recommendations can be found in its report, Smart Development: Why US Foreign Aid Demands Major Reform.
Offenheiser testified along with Lael Brainard, vice president and director of global economy and development at the Brookings Institution; Steve Radelet, senior fellow at the Center for Global Development; and Jim Kolbe, senior transatlantic fellow at the German Marshall Fund of the United States.
To read Offenheiser's testimony please visit: www.oxfamamerica.org/aidreform.
For more information please contact Helen DaSilva at hdasilva@oxfamamerica.org, +617-728-2409 (office), or +617-331-2984 (cell).
SOURCE Oxfam America
www.oxfamamerica.org/aidreform.
Copyright (C) 2008 PR Newswire. All rights reserved
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