Government 
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Why I’m glad Yellen was tapped to run the Fed

Janet YellenWith their PhDs and economic jargon and mysterious market-moving meetings in Washington, D.C., the Federal Reserve may seem pretty far removed from the day-to-day finances of the average person.

But there are few humans on the planet who have more power over the economy we all live and work in than the chairman of the Federal Reserve. Their decisions affect the rates we get on financial products almost all of us use — mortgages, credit cards and investments — and the health of the labor market where most of us earn the majority of the income we depend on.


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 Investing 
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What’s all this taper talk? — Updated

No tapir today

If you follow any finance nerds on Twitter or watch CNBC, it’s going to be hard to avoid hearing the word “taper” today. But what the heck is it?

“The taper” is the label the financial press and the markets have slapped the Federal Reserve’s decision to start slowing down their massive purchases of long-term government debt and investments backed by mortgages, whenever it finally comes down. The reason they call it that is the Fed’s purchases are likely to taper off gradually, rather than be cut off suddenly, which would definitely harm the economy at this point.

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 NEWS 
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Durbin Amendment: Limit Interchange Fees to 12 Cents

The Durbin Amendment to the Dodd–Frank Wall Street Reform and Consumer Protection Act is set to be official in a little over a month. The amendment would have the Federal Reserve limit interchange fees on debit transactions, the fee a bank charges to process card transactions, to a mere 12 cents. It’s a proposal they put out for comment late last year and it’s drawn a lot of criticism. There are two alternative interchange fee standards:

  • Fee standard based on the costs with a safe harbor at 7 cents per transaction and a cap at 12 cents per transaction.
  • A standalone cap at 12 cents per transaction.

By the Fed’s own calcluation, this is 70% lower than the 2009 average and the rule is set to take effect on July 21st, 2011. In addition to putting this 12 cent hard cap, the regulation would prohibit an issuer from restricting on which networks the debit transaction could be processed

What does this mean for consumers? If the banks are to be believed and 12 cents is below the cost of doing business, banks will severely curtail the use of debit cards or find some other way to charge for the convenience of debit cards, which generates $16 billion a year. If you rely on your debit card, you may find that there will be new fees or restrictions associated with it if the banks are to recover some of this revenue.


 NEWS 
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Fed Hints at Potential of QE2

The Fed, in it’s FOMC meeting notes (September 2010), announced that it might be using quantitative easing again this year, with the market calling it QE2. In it’s September meeting, it echoed sentiments from its August meeting about the slowing economy and stated that the Committee is prepared to provide “additional accommodation” if necessary – codeword for quantitative easing.

Why is this notable? If the economy were really recovering as nicely as many of us would like to believe, then quantitative easing wouldn’t be necessary. If we’re back on track and we aren’t facing deflation, QE1 worked, and we should just continue on with business as usual. By mentioning the potential for another round of quantitative easing, the FOMC introduces the idea that maybe we’re not recovering as nicely.
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 Government 
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What is Quantitative Easing?

Quantitative easing, known as QE, is a monetary policy used by a central bank to increase the money supply by increasing the excess reserves. In layman’s terms, they inject a lot of new money into the money supply through open market operations. If this sounds like the central bank is just printing more money, you’re right (technically they just make up money out of thin air electronically, no actual printing is necessary). The specifics of how they do this are probably not important to 99.99% of us, but they’re explained below, but what is important is why a central bank like the Federal Reserve would want to do this.

How is QE accomplished?

(in case you were curious) The central bank essentially credits its own account with new money and uses that money to buy assets from banks, thus increasing the reserves at those banks. Those banks can then lend that money out at a multiple based on the reserve ratio. If the ratio is 10%, then they can lend out 90% of the amount of the added reserves. Reserve ratios are the percentage of an asset they must keep as reserves (so if you have $100 and the ratio is 10%, you can lend out $90). The next bank can lend out $81, keeping $9, and so on and so forth.

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 Credit 
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Cash Only Consumers Pay For Credit Card Rewards

Visa Signature CardI’ve been fortunate never to have fallen down the hole of credit card debt. For those that have, it’s a very difficult situation since lenders, of all types, make more money the longer you’re in debt. Credit card debt is especially dangerous because it’s so easy to accumulate and the interest rates are so high. Consider the hoops you need to jump through for a mortgage, which is backed by an actual home, and the requirements of a credit card seem almost comical.

When experts recommend debtors go cash only, I think it’s prudent advice. I think it’s important to recognize your weaknesses and only do things that improve your life. If you can’t use a credit card without falling into debt and paying double digit interest rates, don’t use them.
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 Personal Finance 
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No Law Requires Acceptance of US Currency

CoinsTake any bill out of your wallet, notice the little “Federal Reserve Note” written in the ribbon at the top of the bill? You may have heard that it’s considered legal tender and that you are required to accept it as payment.

As it turns out, while the Coinage Act of 1965 states that “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues,” there is no such law that requires anyone to accept them. Section 31 U.S.C. 5103 of the act only states that the coins and currency are considered legal tender, but a business has the option must accept it as payment.

So the next time you want to “get back” at a business by paying in pennies, they are legally allowed to tell you to pound sand.

(Photo: r-z)


 Government 
4
comments

Federal Reserve Transparency Act of 2009 (HR 1207)

Federal Reserve Bank in New YorkRepresentative Ron Paul, Republican from Texas and long-time favorite of the Internets, introduced a bill earlier this year called the Federal Reserve Transparency Act of 2009 (H.R. 1207). HR 1207, which now has 303 co-sponsors and last saw action in committee hearings on September 25th, would call for a full audit of the Federal Reserve by the Government Accountability Office before the end of 2010. The audit would be reviewed by Congress.

I think accountability is fundamental and I agree with many that the secrecy of the Fed, protected by the U.S. Code under 31 USC 714 – Sec. 714, is not in keeping with the transparency and openness we should require of our public officials (I understand the Fed technically only quasi-public, but for all intents and purposes it’s public in my mind). I understand it when we need to keep things hidden for purposes of national security but I don’t think this extends to national financial security.

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