Archive for the ‘Question of the Day’ Category

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Why do you have to declare what you bought when you go through customs?

Thursday, December 17th, 2009

Customs can be confusing, tiresome, and tedious – and that’s before you reach the hour-long line at JFK. Before getting off the plane (or crossing the border from Mexico) you’ll have to fill out a customs form detailing exactly what you bought and how much it cost. What’s the point though? And why does the government care?

The U.S. government isn’t actually interested in whether you are bringing jeans or a pair of shorts back – it cares that you are bringing something back. Just like people can’t freely enter the country, there are also laws governing which items can be brought back. Items already illegal in the U.S. (like Cuban cigars) are obviously banned, but the government also looks at the value of your purchases. In most situations, if the total dollar value of your items is above $800, there will be a duty (tax amount) assessed on that extra value. If you purchased $923 in clothes, you will only be taxed on $123 and not the full amount. It may seem like the government is making you pay unnecessarily, but they’re actually cutting you a break.

When you buy something in the U.S., no matter how much it costs, you will also be paying a tax on the good. When you’re at customs, you actually are being allowed $800 of tax-free goods – that’s a pretty good deal. Above that amount, the government is only collecting what it normally would receive had you been shopping in the U.S.

What happens to your money if your bank disappears?

Thursday, November 19th, 2009

Don’t worry, just because your bank has evaporated doesn’t mean your money will too – no screaming necessary. Every major bank in the country is insured by the Federal Deposit Insurance Corporation (FDIC); it’s the government organization in charge of protecting your deposits (up to a certain amount) and keeping the banking system running smoothly. But what happens when a bank outright fails?

Although rare, when a bank does fail the FDIC can step in one of two ways. The preferred method is where the FDIC will try to find a healthy bank to buy the failing bank’s assets, which would mean your funds are transferred over to the better bank. Without you doing anything, your money is automatically put in a safer place. On the other hand, if a buyer can’t be found, the FDIC will write you a check for your money.

How quickly and for how much? The FDIC insures your money up to $250,000 per account and typically sends checks out within a few days of the bank failing. Since the FDIC’s creation, no one has ever lost a single penny of insured funds – a pretty good record for a 76-year-old organization. Either with a new bank or in a hefty check, you can breathe easy knowing you’ll get your money back.

How can five percent unemployment possibly be a good thing?

Thursday, November 19th, 2009

For an individual, being unemployed when you desperately need a job is never a good thing. However, a little unemployment in an economy is not necessarily a bad thing. First of all, some people don’t want to work – at least not in jobs that get listed on tax returns like stay-at-home moms and dads. That’s called voluntary unemployment, but it really shouldn’t even be counted in unemployment statistics. There are also always going to be people who are between jobs – having just left one job and waiting to start another, but not in real danger of long-term unemployment or desperate to find work. Economists call that “frictional unemployment.” Even if everybody who wanted a job had one, there would still be some “frictional” unemployment as people transitioned between jobs.

In reality, however, it’s extremely rare that every single person who wants a job is employed. Unemployment moves up and down in a cycle along with the rest of the economy and, while increased unemployment in a minor economic downturn is not a good thing, it isn’t an economic death knell. Some people will also be involuntarily unemployed because of structural unemployment – unemployment that happens because wages (the price of jobs) can’t change with demand or the right types of employees aren’t available for existing jobs.

Structural unemployment can be lowered in the short term by sparking inflation, but the unemployment goes back to its previous rate, so trying to push the unemployment rate below a certain level tends to make the economy unstable. Milton Friedman, who won the Noble Prize for Economics in the 1960s, called this level “natural unemployment” or NAIRU (the non-accelerating interest rate of unemployment). It’s the level of unemployment in an economy at which prices and jobs are stable. The NAIRU for the United States in the past two decades has been about 5%, and for most of that time, the economy has been quite healthy.

So, it’s not good if YOU are unemployed (assuming you want a job), but unemployment is a natural, unavoidable part of any economy.

Why is there a stock exchange in Cleveland?

Wednesday, November 18th, 2009

All publicly traded companies can be bought and sold on one of the many stock exchanges that exist all over the country and the world, but rarely do you hear about any exchanges other than the New York Stock Exchange or NASDAQ. And wait… why do we even need more than one?

Why is there a stock exchange in Cleveland? Well, there isn’t one, but there used to be. Many of the small, regional exchanges that no longer exist were necessary because, without the Internet and computers, it wasn’t possible to buy and sell stocks quickly across vast distances. Today, huge exchanges like the NASDAQ only exist on a computer network – there is no NASDAQ trading floor.

Each different exchange only trades a limited number of companies and can impose rules on the companies it lists, or only allow companies of a certain size or stock price. The NYSE has a minimum share price and share volume so that only big companies can trade, so it’s considered a less risky exchange than say the NASDAQ which doesn’t have those types of restrictions. Exchanges can also only trade specific types of securities. The Chicago Mercantile Exchange (CME) only trades financial and commodity derivatives for example.

Being familiar with the differences between the various exchanges can help you make decisions about investing in companies traded on those exchanges and empower you to have an informed discussion of your investments with your broker or financial advisor.

How can you protect your identity from being stolen?

Wednesday, November 18th, 2009

It can take years of stress and thousands upon thousands of dollars to clear the wreckage left in your life after an identity theft. While nobody has figured out a way to protect your identity 100%, there are some steps you can take to protect your information:

  • Don’t give out personal information over the Internet, phone, or mail, unless you’re certain who you’re talking to and that you can trust them – identity thieves are sneaky! Be especially careful about giving out your social security number. Employers and financial institutions need your SSN for tax reasons, but lots of other people, like the cable company or your landlord, might not do business with you without it. Find out what they do to protect your information or if there’s any way you can avoid giving them your SSN.
  • Some identity thieves go through your garbage or steal your mail to find and use private information. Before throwing away anything that contains important personal information – like bills or receipts – shred them. Mail anything that contains sensitive information in big postal boxes at the post office, and inform the postal service if you’re going to be away so mail isn’t left in the open at your house for long periods of time. You can also opt out of pre-screened credit offers (which thieves can use to open cards in your name) by checking out any of the national credit bureaus’ websites.
  • If you’re really worried, you can institute a credit freeze – laws about this differ from state to state, but in most states anyone can do this. It won’t affect companies with whom you’re already doing business, but it does prevent anyone else from purchasing your credit report from a reporting agency. This makes it nearly impossible to for an identity thief to open a line of credit in your name. If you want to start a new card, you can temporarily lift the freeze and put it back.

Although there is no fool-proof method to safeguard your identity, by following these simple steps you can potentially save yourself a whole lot of money and hassle.

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.

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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