Archive for the ‘Levels’ Category

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If a bank won’t lend to someone, why would you?

Thursday, November 5th, 2009

For a long time, banks and economists thought that the millions of poor people who now use microfinance services simply couldn’t afford loans, and they were right. They couldn’t afford the relatively large loans that banks offer to people in the developed world because even the lowest interest payments on a big loan would be way too expensive for them to make. It wasn’t economical for banks to lend small amounts of money to people who were far away from traditional bank branches and had a limited history of borrowing.

However, as many microfinance institutions have discovered in the last few decades, many of these people can afford a slightly different kind of loan: a microloan. Thus there are nonprofits and for-profit micro financiance institutions (MFIs) that realize it can be profitable to service the otherwise “unbanked” community.  Microfinance is self-sustaining when it attracts new kinds of investors who realize the potential and power in reaching the many more millions of people who desperately need, and want, access to financial services.
While individuals, companies, and governments are beginning to see the potential size and impact of the market, there are still plenty of people that really can’t afford a loan and, for the most part, they don’t receive any. Many different organizations – mainly charities and governments – offer other types of services that don’t charge any interest so that eventually these people might be able to afford microfinance services.

With the support of charitable organizations and everyone who donates to them, microfinance institutions and banks everywhere will be making lots more loans to people who can now afford them.

Why and how do interest rates increase and decrease?

Thursday, November 5th, 2009

Interest rates reflect the price of borrowing money. The Federal Funds Rate, the interest rate for banks borrowing money from one another, is determined by the Federal Reserve. The Fed meets eight times a year to determine if they should change the interest rate, though they can meet more frequently if there’s a crisis (such as the economic meltdown in late 2008).

The most important factor in determining the interest rate is supply and demand. If many people are buying houses and cars, the demand for funds will be high because people want to borrow money to spend, and banks want to profit from that demand. So during an economic boom, interest rates tend to be high. In an economic downturn, interest rates are very low to encourage borrowing and stimulate the economy.

The Fed’s monetary policy dictates their decision on whether to “loosen” or “tighten” the money supply. The Fed has the power to inject money into the economy – essentially printing cash, which lowers the interest rate as there is now more money available to borrow. On the other hand, the Fed can also “tighten” the money supply, by buying bonds and essentially withdrawing money from the economy, decreasing the money supply and increasing the interest rate.

Another important factor in interest rate fluctuation is whether we are in an inflationary period. If the economy is threatened by high inflation, the Fed will increase the interest rate to discourage borrowing.

The interest rate should be important to a consumer who wants to borrow money and is also a key factor in understanding how our economy functions.

A Savings Rate is…

Thursday, November 5th, 2009

A savings rate is the percentage of your disposable income that you save. For example, if your annual savings rate is 5%, that means you save 5% of your disposable income every year.

A Borrower is…

Thursday, November 5th, 2009

A borrower is someone to whom money is lent with the expectation that it will be paid back. If you’re not planning on paying it back, it’s either a gift or you’re stealing.

Real Loss is…

Thursday, November 5th, 2009

Real loss is a financial loss whose value is adjusted for inflation. For example, if an investor lost $2,000 on the stock market 20 years ago, and inflation has risen 25% since then, the real loss is 25% smaller, or $2,500.

A Deficit is…

Thursday, November 5th, 2009

A deficit is a term that describes the phrase “you owe more than you have.” It can also relate to losing more than winning, or spending more than you are making.

Global Climate Change (GCC) is…

Monday, November 2nd, 2009

Global climate change is the sum of all the alterations in the Earth’s climate that are happening as a result of human activities – most notably the emission of greenhouse gasses into the atmosphere. GCC includes global warming but also includes increases in storms, droughts, and other extreme weather. Global climate change is already and will continue to have a great impact on the global economy, health, and safety of people around the world.

How can you get on a charity board?

Monday, November 2nd, 2009

To get on a charity board, you generally have to be recruited by well, that charity’s board. One of the responsibilities of board members is to find and recruit new board members – usually they look for people who bring needed skills, enthusiasm, and influence to the organization. Celebrities are sometimes asked to be board members because they bring attention to that charity, while others are asked because skills from their professional life or other experiences can benefit the charity. Some might be asked simply because they have given lots of money and have demonstrated a true interest in the cause. In essence, there are many ways to a nonprofit board, any of which require determination, interest, dedication, and a bit of money wouldn’t do any harm either.

Why do generics cost less?

Monday, November 2nd, 2009

You can find a generic version of almost anything: prescription drugs, soaps, even breakfast cereals. A generic product is one that lacks a brand name or a registered trademark. For example, you can buy brand-name Bayer Aspirin at the drugstore or you can buy generic aspirin usually with the name of the store on the label for slightly less. There should be no physical difference between the two products, but people willingly pay more for Bayer. Why would someone do this?

Companies spend lots of money on advertising to establish a good reputation or brand image. Because of that, people feel like they can trust the brand name product more than a nameless, faceless generic product. Both products are covered by the same consumer safety laws and regulations, but people in general are willing to pay more for a familiar brand name. The generics have lower prices both because they don’t have the same advertising costs and because consumers wouldn’t be willing to pay as high a price for them.

Companies also fight hard lobbying and in courts to protect their trademarks and copyrights and prevent companies from selling generic versions of their products, which allows them to control supply and keep prices higher. For products like life-saving medicines, some argue that this is unfair and prevents millions of poor people from accessing the treatment they need. Others argue that this gives companies incentives to come up with new drugs.

Who is “the Fed?”

Monday, November 2nd, 2009

The “Fed” is the Federal Reserve, otherwise known as our national banking system. There are 12 Federal Reserve banks scattered across the country; their job is to loan money to local banks, who then loan it to the people. The Fed is controlled by the Federal Reserve Board, which consists of seven governors chosen by the President and approved by the Senate. The Board’s responsibilities include determining monetary policy, making reports to Congress, overseeing national banks, consumer protection, and discount rates, and setting standard requirements for other banks or institutions that store money.

The most important thing the Board does is head up the Federal Open Market Committee (FOMC), which meets eight times a year to discuss monetary policy. The FOMC consists of the seven members of the Federal Reserve Board, the President of the Federal Reserve Bank of New York, and four of the other eleven Federal Reserve Bank Presidents, who take turns serving on the Committee. The FOMC votes to determine the discount rate (the interest rate at which the Federal Reserve lends to other banks), how much capital banks will be required to have on hand for financial security, and open market securities (how and with which companies the Federal Reserve will trade).

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