Did American Express Become a Bank Just for Bailout Money?

November 19th, 2008

American Express made their announcement to the world that they are becoming a bank. With credit failure and consumers spending crashing, American Express decided to dive into the world of banking in order to stabalize themselves financially using government bailout.

The Federal reserve approved the company’s request which will now lead American Express into a more secure future with access to funding and the big rescue bill. Since the global credit crunch, AmEx is now the third financial company to become a bank.

Currently, American Express operates two types of banks, a small bank known as American Express Centurion Bank and a savings and loan American Express Bank. They deal primarily with credit cards, loans, and deposits.

This is an important step for American Express considering the large amount of assets both banks hold together which totals over $50 billion. On top of that they hold over $14 billion in deposits. Had American Express not converted to a bank, their losses would have been devastating and would have eventually lead to failure of the company.

Chief Executive Kenneth Chenault announced plans to continue expanding deposits in order to take full advantage of help systems and finances that will help with daily operations. As the economy declines, more and more people are having trouble paying their bills causing AmEx to lose valuable assets for their company which lead to trouble affording everday expenses. By becoming a commercial bank, AmEx will be able to improve their flexibility and resources. With help from the Feds, American Express is hoping to become a more stabalized institution.

Since the announcement was made that AmEx was going to be a commercial bank, they have been limited by the Feds as far as their executive spending. Purchases made will be closely calculated to avoid further financial debt. Due to financial downfall, 7,000 employees were laid off. Since this still isn’t enough of a cut in saving money, American Express announced that they will start cutting out the middle man by paying less for rewards programs. This means that the rewards, such as cash back incentives, that customers value so much, will be fewer and far between.

The decision for AmEx to become a financial institution couldn’t have come at a better time. As profits decline each quater, value is quickly decreasing over time. AmEx stocks fell last week from $1.45 to $22.52. Financial analysists never realized how deep the financial strife had gone until now despite assurances that AmEx is well caplitalized.

The Feds decided that American Express could not fail as such a loss would have been a critical impact to the economy and millions of customers. These are scary times in the world of finances when you see well known stand-alone banks on Wall Street declaring bankruptcy for themselves.

In order for the economy to right itself once more, President-elect Barack Obama will have to revise a new plan to get the ball going. Until we have the ability to stand on our own two feet once more, more and more companies such as American Express will see future hardships as the credit crunch increases. Less money in circulation means many credit card companies might see the end of their days sooner rather than later.

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Was AIG Worth Bailing Out?

November 16th, 2008

The U.S. Government has found themselves face to face with an enormous money pit popularly known as American International Group or AIG. AIG is one of the largest insurers linked to retirement held by millions of Americans, mutual funds and U.S. mortgages which made it neccessary to fund the company with an $85 billion bailout loan.

Without the bailout, the global economy would have faced a much larger scale of financial crisis. This is the only fact to ease taxpayers minds about the money spent to save the floundering insurance giant from inevitable failure.

Even after the $85 billion loan, AIG was still in need of more money so in October, the Feds added another $38 billion. Treasury has decided to pitch in $40 billion to purchase partial ownership of perferred stock giving taxpayers the opportunity to stake a claim ownership. Another $53 billion is to be given to AIG on top of this by the government who has decided to buy up mortgage backed assets and various other AIG contracts in debt. The leading question is, how will the government recover from the extra burden of debt themselves?

The Feds seem fairly confident that the money loaned to AIG will eventually be payed back to taxpayers. The lenth of repayment seems to be in the very distant future since AIG has been given the opportunity of a long term loan with a lower interest rate, therefore they have more time to pay back the money without further troubling themselves financially by having to sell off assets at firesale prices.

AIG Chief Executive, Edward Liddy, is quite pleased with the new plan and has stated that he feels as though the bailout loan will recover AIG to a more stabalized state while reassuring him that the company does hold value and importance to the American people. The question is, how do the American people feel about the bailout?

Americans across the nation are very displeased with companies being able to hold out their hand to an already misaligned government in order to get themselves out of financial trouble. This means these companies are being bailed out of the crisis they have brought upon themselves and side-stepping the repercussions of their faulty systems and frivolous spending. Instead they are being handed an easy out to the problem paid for by taxpayers dollars without questioning the people how they felt about the bailout in the first place.

Now that the AIG bailout has swelled to more than $150 billion, Americans are scratching their heads asking if it was really worth it. AIG has become so interconnected with a number of firms that it has made them the cornerstone of American finance.

Failure of AIG would lead to disruption of the economy and global devastation, leaving us even worse off than we are now. Choosing to leave AIG to their own demise was never even an option for the government or the American people considering they have become the backbone of the insured.

AIG feels confident that they will be able to turn their situation around and get back on their feet once again although there is speculation that they might still need more financing in order to keep from failing. It is the hope of Americans across the nation that AIG re-adjusts their system to better keep up with cashflow in order to prevent this from ever happening again. One good thing is the fact that there has now been restrictions put on executiving spending at the firm, ensuring the fact that company cannot continue their frivolous spending and fall under once again.

With any hope at all, the President-elect Barack Obama will have a new plan in order for the government that will better our own financial crisis and enable us to right the cash flow within our economy, prevening a number of companies from going under. Until then, AIG should be well on their way back to success with all of the government funding they have received.

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The 9 Banks of the Bailout

November 14th, 2008

The news has been dominated in recent weeks by talk of the massive government bailout of the commercial banking industry. The government didn’t just throw this money around aimlessly, though. Instead, they have slotted the funds for the 9 banks of the bailout, which are all in desperate need of federal help in order to keep their operation viable. So who are these 9 banks of the bailout and what is their current situation looking like? This article will detail each of them.

Bank of America
Bank of America received a $15 billion investment from the federal government. This is one company that has been in trouble for quite some time, as they have seen their entire operation saved by the money provided with the bailout plan. Though they did not get as much money as some of the other banks out there, Bank of America did get enough to survive. What the bailout means for them is that they will have the ability to operate and probably dominate the changing global economy over the next few years.

Wells Fargo
This is one bank that benefitted from a large federal investment. They received $25 billion from the government in an effort to hang on for dear life. Wells Fargo recently purchased the assets of Wachovia when that bank went bad during the last month and the economic bailout has put them in a position to succeed relatively well in the near future. They did not seem to have as many bad loans out there as some of their competitors.

Citigroup
This is a company that, when compared to some of the others, made out pretty well in the economic bailout plan. They got a $25 billion investment from the treasury, which came as a result of their position within the market. While other banks were dropping like flies, Citigroup has been there to purchase them. They stand to survive this financial crisis and hang on into the future.

JP Morgan Chase
This huge banking conglomerate has also been in the business of buying up assets from other banks that are going down the drain. They got $25 billion in help from this bailout plan and seem to have gotten back on solid footing. There was some speculation that this bank would fall under with the economic crisis, but they have managed to do relatively well for themselves since that time.

Goldman Sachs
This bank did not need as much help from the federal government, as they only received $10 billion in the help package. They are prospering, however, as executives announced that more than 400 of the company’s top employees would be receiving huge bonus checks valued at a total amount of $7 billion in the coming months.

Morgan Stanley
The economic buyout has had an interesting impact on Morgan Stanley. They were one of only two investment banks remaining in the United States, but announced along with Goldman Sachs this fall that they would turn into a traditional bank. The bailout has forced them into another mode of operation, but it has not stopped the company completely.

Bank of New York Mellon
This bank received $3 billion in federal assistance and it looks as if they are going to survive the financial crisis. They have a particularly strong position for such a small bank and this money only helped them get on even stronger footing. They are poised to become a player in the commercial banking scene to an extent even greater than what they were.

State Street Corp
This bank received an even smaller amount, getting only $2 billion in money from the federal economic bailout. They were hit particularly hard in some areas because of their focus on industrial banking. Still, this company is global enough that with the help of the government, they are currently in pretty good shape regarding their future.

Merrill Lynch
This bank went into the tank as a result of the financial crisis. They received $10 billion from the federal government, but their assets were purchased by Bank of America for stock in September. They are currently completely under the control of Bank of America.

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What is a Money Market?

November 12th, 2008

If you have been following the global economy and its downturn over the last few months, then you have probably heard people talk about a problem with the money market and how this problem is impacting the economy at large. What is a money market and why is it so important?

On its most basic level, the money market is where banks and individuals go in order to lend and borrow over the short-term. While there are larger markets dedicated to the long-term lending and borrowing of things like equity, the money market is dedicated to bailing out financial institutions in their times of short-term need.

When a large bank or other financial institution needs short term liquidity, they head to the money market. Most financial trading happens with an eye on the long-term health of an investment, but these loans are not more than 13 months in most cases. Who are the players in this all important money market? As you might expect, the banks play a huge role in the investment proceedings.

They trade with each other, giving each bank the liquidity that it needs in order to cover its obligations. They aren’t the only ones playing in this high stakes, short-term game, though. Local, state, and even the federal government gets involved in the money market, as they need to issue “paper” in order to met the funding requirements of their given budgets. Paper can come in many forms, such as deposit notes, treasury bonds, federal funds, and municipal notes.

The entire idea behind the money market runs on what is known as paper. For the purposes of the economy, paper is the term given to these short-term investments made by banks and other entities. Even some businesses get into the business of needing paper, as they provide the basis for their own funding by issuing paper. In those cases, the paper is backed by reputable assets within the company and its investors.

The ability to get this paper is something that all banks and financial companies depend upon. In the last few months, we have seen a tightening of the money market more than anything else, and this has been the primary impetus for the economy’s slowdown.

The reason this tightening of the money market has had such a devastating impact is that banks are not able to meet their own obligations. Interest rates on these bank-to-bank loans have gone up and fewer banks have the ability to help each other out in this way. With no paper at their disposal, financial institutions don’t have the ability to offer loans to customers that would typically qualify.

When there is less money available for the banks to do their business, the trickledown effect means that there will be less money for customers. This has had an impact on not only personal loans, but also on commercial loans. The liquidity just is not there for customers who would have liked to have expanded their business or even started a small business.

When financial pundits talk about the Federal Reserve board cutting interest rates, they are primarily referring to the interest rate that banks use in their dealings with each other. This pertains directly to the money market, where banks have to get their hands on paper. The financial crisis will not get any better until something is done to add a measure of liquidity to the mix for these financial institutions. With their ability to interact in the global money market being restricted by the overall credit squeeze, things are difficult on both ends of the spectrum.

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How the Dollar Compares to Other Currency

November 10th, 2008

Everyone has to have money in order to live. We use money as trade for services that we receive, and purchases that we make. What happens if our currency becomes worthless? It’ll never happen, right? Well, it is a possibility for our currency to loose it’s value. As a matter of fact, other countries currencies don’t have the same value as the all mighty dollar now!

The value of the dollar is measured by it’s exchange rate. This means how the U.S. dollar measures up to the value of other currencies. The exchange rate changes daily due to fluctuation in the open market. Fears of recession causes investors to look for non-dollar involved investments. This causes the dollar value to drop. As dollar value declines, investors may choose to hold less assets until the dollar value rises again. Concerns about the national debt and deficit may also cause investors to think twice before investing. If the value of the dollar is allowed to drop, it in turn drops debt values, making payoff easier.

Another way the U.S. measures the value of the dollar is by Treasury bonds. Treasury bonds are considered a safe haven for investors during times of recession. Treasury bills, notes and bonds are sold at auction by the U.S. Treasury Department. The value of these bonds can be higher or lower than their face value. Bonds can also be sold on the open market. The greater the demand for these bonds, the less the government has to pay in yields to investors.

The value of the dollar is also measured against the reserves of foreign countries. Foreign countries also hold U.S. dollars in reserves. The reason that they do this is because of import and exports of their goods and services. When the value of the dollar declines, foreign countries release their U.S. dollar reserves because they aren’t as valuable.

When the value of the dollar lowers, it causes goods and services in the U.S. to be more competitive compared to those of foreign countries. This causes a rise in U.S. exports and the economy booms. Because of the boost in economy, inflation occurs because businesses are forced to raise prices to keep their profit margins at a high. This can cause a negative impact on the economy. The balance is hard to establish and maintain.

The declining dollar value as established by the exchange rate can lead to lower demand for U.S. treasuries. This causes the interest rates to increase. However, lower treasury yields leads to lowered mortgage rates and in turn helps the economy. The debt associated with the U.S. government continues to be a concern for investors. This may cause investors to seek other options besides the dollar dominated investments to get involved in.

How much is my dollar worth? This is a question that most people want an answer for, however, it is the hardest question to answer. There is no absolute way to measure a dollars value. The most common measurement used it the CPI. The CPI measures average amounts a household spend for goods and services. This average is then calculated by it’s current rise percentage to determine it’s value in the year designated.

There are several other ways that the value of a dollar is determined. The GDP deflator is one method used. The GDP deflator is similar to the CPI, except instead of checking individual households average spending, the GDP deflator averages “bundle prices”. Bundle prices include all goods and services in the economy.

Another measurement is the consumer bundle. This is the dollar value of yearly expenses of a consumer unit. The unskilled wage rate is also used to determine the dollars value. This rate is used to determine the amount of money spent to produce a product or the time it would take to earn it’s cost.

The value of the dollar is a constantly changing factor. What your dollar is actually worth is determined by a host of factors. The dollar amount is sometimes higher and sometimes lower than foreign currencies, depending on factors in the economy.

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The Fed and Interest Rates

November 6th, 2008

The Fed, or the Federal Reserve Bank, is the government’s bank. It is also considered the banks bank and is important to the balance of our economy. It handles all of the United States government’s money and banking transactions. The Fed also governs a number of banks, setting limits on the charges that they can charge their patrons. The Fed controls these banks charges for services, overdraft fees, loan interest rates, and also insures your money held in an account at one of these banks.

One of the main jobs of the Fed is maintaining a harmony in the economy. It does this by maintaining full employment. This means keeping unemployment at a minimum (around 4 or 5 percent), while keeping inflation low. This is a fragile balance that the Federal Reserve Bank must maintain for economic function. One of the ways the Fed balances these factors is by it’s ability to influence interest rates.

The economy constantly fluctuates, even during periods of economic stability and economic depression. When bank interest rates are lowered, the economy booms. This is because more and more people are able to invest more money at a lower rate of pay back. This is economic stability. Even though the economy seems to be flourishing, low interest rates can have a drawback. When interest rates are low and pay back rates are low, there is more money available to be spent on other goods and services. This in turn causes merchants to raise their prices, because they figure that if everyone has extra money to spend, they should see higher profits. This is called inflation.

Economic depression occurs when interest rates are high. This is because the purchaser is required to pay more to payoff loan balances. High interest rates also cause longer periods of time to pay back, hence keeping your money tied up. Because of this, people don’t have extra money to spend causing an economical recession or in worst cases, deflation.

The Fed controls these situations in one of two ways, raising or lowering the discount rate or indirectly influencing the Federal funds rate. Interest rates charged to banks borrowing from the Federal Reserve Bank is referred to as the discount rate. When these rates are low, the bank charges you, the consumer, lower fees for services. This is because capital is less expensive. When interest rates on money borrowed from the Federal Reserve Bank are high, the cost naturally is passed on to you. This is in the form of more costly services and loan interest rates.

The Federal funds rate is the interest that banks charge each other for loans. The Fed can require banks to have a certain amount of cash on hand or a percentage deposited into a Federal Reserve Bank. The Fed also governs how much of these funds must be vaulted. When money is vaulted, it means that the money is basically in storage and makes it harder and more expensive to use. However, when the Fed releases this hold, more money is available, making it easier and less expensive to acquire capital.

The cost of the Federal fund rate charged to banks is also passed onto you, the consumer. This is in the form of the banks prime lending rate. The prime lending rate is the interest rate the bank charges it’s best customers. The prime lending rate varies from bank to bank, depending on the banks costs.

The delicate balance between the Fed and the economy is constantly changing. This is why we have periods of economical strength and weakness. The Federal Reserve Bank is responsible for keeping this balance in check. The Fed consistently keeps tabs on who is spending what and where and adjusts rates accordingly. Because of these measures, the balance is maintained and the economy can thrive. When this balance is upset in any fashion, our economy suffers. This, in turn, makes the Fed’s job all the more important.

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Global Recession - Is it Possible?

November 1st, 2008

“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” claims the International Monetary Fund (imf.org).

It appears that the IMF, the European Union, and World Bank have been quite busy bailing out one country or another. The latest $25 billion financing package for Hungary comes on the heels of two other financing packages distributed as emergency loans to Iceland and the Ukraine. These countries are dealing with their own problems of oversees borrowing and rapid credit growth.

The IMF has a $200 billion loanable fund and other resources from which to draw to stem the fallout from the global financial turmoil. The IMF works by parachuting in when a member country faces extenuating circumstances that threaten its financial stability. A rapid response is needed to contain the damage to the country or the international monetary system. Judging by all the money loaned out so far, there’s indication that some countries are either in a recession or tipping into one. In early October, the world’s central banks administered emergency measures, including a round of coordinated interest rate cuts.

If that weren’t enough, the financial turmoil is already beginning to slow growth in some emerging markets, such as China. When emerging and developing economies are feeling the impact of the global financial crisis, it is an indicator of a major slowdown in the global economy. This, coupled with global growth slowing down sharply, all point to a global recession. The following are some of the factors that can cause crises in emerging countries:

collapse of export prices
drastic increase in import prices
anemic foreign investments and capital flows
large depreciation or devaluation of the currency of a close trading partner. In this case, the U.S.
sharp increase in interest rates in world markets.

Despite China’s emerging role as the main cog in the world economy (it accounted for one-third of global GDP growth in the first half of this year), its economy is struggling. It is being hit by events in overseas markets to which it sells - namely the U.S.

The IMF said the U.S. crisis is likely to lead to “severe and protracted economic downturns around the world”. According to its report, World Economic Outlook, it now expects world growth to slow to three percent in 2009.

We don’t want to waste our energy at finger-pointing, but it is without a doubt that the global financial crisis emanates from the U.S. The economic consequences resulting from the collapse of the U.S. subprime mortgage market have spread beyond our American shores. This collapse has triggered a series of bankruptcies, forced mergers, and public interventions in the United States and Western Europe. As a result, the interbank markets have locked up, as trustworthiness in their counterparts have evaporated into thin air.

The world’s seven largest industrial market economies (G7) - the United States, Canada, Britain, Japan, Germany, France, and Italy- are either in a recession or slowly tipping into one. Some European countries have had their own housing and credit booms that have gone into reverse. The housing correction is beginning in the U.S., with the liklihood that it might be prolonged, but Europe’s correction began later and so will have a long way to go. Japan’s economy initially showed more resilience but has recently been affected by slowing exports while its consumer demand has weakened.

As the currency falls for countries such as Spain and Ireland, the burden of their foreign debt increases and so does the risk of defaults. All of this is dampened by high oil prices, tightening credit conditions, and the appreciating euro.

Several economies depend on exports to the United States and Europe. These countries, which may also have current-account surpluses, are suffering from the G7 recession. They include China, most of Asia, and other emerging countries, such as Brazil and Russia. Countries that are part of Eastern Europe, which have large current-account deficits, are also suffering from the global credit crunch.

These global problems require global solutions, and that is why the round of simultaneous interest rate cuts from central banks including the Bank of England, the US Federal Reserve, and the European Central Bank were necessary. It’s batton down the hatches for everyone.

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Saving the Economy - Do we Spend or Save?

October 30th, 2008

Citizens may be feeling the pressure from the media or government to get out there and save the economy by spending – it’s their patriotic duty to spend. According to the Federal Reserve’s Beige Book report, consumers have been pulling back on spending since September, with a resounding moan from retailers. Keeping the wallet shut is not what’s causing the economy to spiral into a recession.

But the news media, such as the NY Times, would have people think otherwise about the decline in consumer spending, “Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.”

Whether the country is technically in a recession doesn’t matter. It’s whether you, the consumer, believes that it is. A recession is made up these components that all experience economic downturn simultaneously: employment, sales, income, and output. When spending has dropped, it leads to cutbacks in production, which leads to layoffs and unemployment. The drop in jobs leads to a drop in production, and the recessionary cycle continues. It would follow that you should be spending to create a disruption in the vicious cycle. In reality, the catalyst that spurs capital expansion is savings. Saving helps the economy in the long-term. Combining debt with high consumption and low savings doesn’t seem like the prudent thing to do during this economic downturn, especially for the individual citizen.

The answer to the question of whether to spend or save depends on who you ask and if you’re seeking a short-term or long-term solution. If you’re Joe Public from a middle-income household, you want to save as much as you can to withstand the economic forces that are pushing against you. In the long-term, your goal is to have future investment. You hope to set aside more of your earnings for investments in new assets for your future needs (.e.g. college, retirement, or house). When Joe Public saves money, his funds don’t disappear. Instead, the funds are allocated to borrowers through financial intermediaries. As a result, borrowers will have more capital stock and produce more goods in the future. In the short-term, your spending may protect jobs, and more jobs means more spending, which leads to more company profits, and larger output or production. At least, that’s the theory.

If you’re the government, you’re inclined to spend money, lots of it as in big “bailouts”, or by creating stimulus packages and lowering interest rates to promote investments. As a response to the 2001 recession, the Economic Growth and Tax Relief Reconciliation Act distributed tax rebates between $300 and $600 to two thirds of the U.S. households.

David S. Johnson and Soueles of the Bureau of Labor Statistics and Princeton economist, Jonathan A. Parker, discovered, through the Bureau’s regular Consumer Expenditure Survey, that the average household spent between 20% to 40% of its rebate on non-durable goods. However, low-income households spent 63% more on non-durable goods, such as food and health-related items. According to these experts, “Our findings imply that the rebates provided a substantial stimulus to the national economy, helping to end the recession of 2001.”

So how do we deal with these opposing forces and do what’s good for both the consumer and the economy? The only thing you can control is your spending and doing well within your job. Allow the market to adjust itself – that’s how free market works. A balance between saving money and spending money is what creates a healthy economy.

People who have been saving are now in a position to capitalize on bargains. Any kind of spending should be made on assets that you really need. During a recession, you should apply cash-flow planning. This means you track the money coming in and the money going out. If you spend less than you earn, this excess income should go toward saving and investment.

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The Federal Reserve

October 28th, 2008

The Federal Reserve, simply put, is the central banking system for the United States. The Federal Reserve is ran by an appointed board of governors, and is located in Washington, D.C. These individuals are chosen by the acting President. The Federal Reserve itself is composed of the Board of Governors, an Open Market Committee, and 12 regional Federal Reserve Banks. These banks act as agents to the U.S. Treasury.

Central banking was an idea iniated by Alexander Hamilton. The concept was born after several bank panics which caused a demand for a central banking system. The idea wasn’t without conflict, but eventually won and was finally realized in 1863 by The National Banking Act.

The Federal Reserve is considered the bank’s bank and the government’s bank. The main goal of the federal reserve is to protect the nations money. It does this with several functions. One is a check cashing system. During times of economical uncertainty, a lot of private banks refuse to honor checks drawn from other banks. The check cashing system in essence allows banks to cash these checks without fear of loosing money.

Another function of the Federal Reserve is to act as a last resort lender to other financial institutions. This ensures that private banks can stay in business, and still have the money it needs to operate. The Federal Reserve is basically the bank of banks. Because of this, the Federal Reserve operates the U.S. Mint and is responsible for all the money paid into and from the United States Government.

The Board of Governors in the Federal Reserve system controls how private banks operate. This function keeps for profit banks in check by placing limitations on what they can do. The Federal Reserve system monitors for profit banks to ensure that you, the consumer, is treated fairly and not over charged for banking services. The Federal Reserve also acts as an insurance policy by helping you to recoup losses if your private bank fails.

The Federal Reserve also plays a role in the nations payment system. The Federal Reserve Bank provides services to both depository institutions and to the federal government. Depository systems maintain accounts and provide various payment services. Some of these include check cashing and electronic transfers of funds. The federal government uses the Reserve for all their banking needs. This includes all payments sent and received by the government and the issuing, transferring, and redeeming of U.S. government securities.

The Federal Reserve is self funded. This means that the Reserve operates on money that it makes itself. The Reserve makes money on services it renders, such as check cashing and electronic transfer fees. It also makes money on Open Market Operations. These include interest on Treasury securities and the buying/selling of securities.

Each week, the Board of Governors publish a Consolidated Statement of Condition of All Federal Reserve Banks. This shows the condition of all 12 Federal Reserve banks on one printed statement. The purpose of this is to show how our nations funds are being handled, thus making it easier to forsee an problems that may arise.

The Federal Reserve system as been the target of debate since it’s beginning and continues to be criticized by some. Some claim that a central banking system is unnecessary and counterproductive to the economy. Some argue that the Reserve should not have the control that it does. Some even claim that a lot of the Reserves practices are kept secret, having a negative impact on the economy because of misappropriation of funds. The Federal Reserve has systems in place to address and handle these claims.

Whether you support or oppose a central banking system, the Federal Reserve has persevered. The ideas and practices of the Federal Reserve have remained intact, and obviously, the system works. The Federal Reserve handles all of the nations money and controls the nations private banks, all with fail safes for protecting them.

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The Dow Jones Industrial Average

October 25th, 2008

The Dow Jones Industrial Average is one of the most important economic indexes in the world and has been that since its inception in 1896. This index is especially important not only because of its age and heritage, but also because of the fact that it is easily one of the most highly recognizable financial indicators in both the United States and around the world. When economic pundits on television talk about “The Dow”, they are usually referring to the Dow Jones Industrial Average, even though there are other market indexes named after Charles Dow. The fact that it holds this place in the economic nomenclature makes it something worth understanding.

The Dow Jones Industrial Average is indicated by a very large number and many observers (both casual and involved) base their opinion of the direction of the economy on what this number does. If the average heads up, then it is said that the markets are up. If it is down, like it has been in the last few months, then many fear for the future of the American economy. With this in mind, it could be said that the Dow Jones Industrial Average is simply a well-publicized indicator of economic fortunes.

What does this average include? These days, it is a composite of 30 of the world’s largest companies. There are no small names that get their say in contributing to the average. Each of the companies is widely held and it is well known to pretty much everyone around the world. In the past, these companies represented the crust of American society and its dedication to growing industry. Today, the name associated with the average is not much more than a name. There are few companies in the composite that deal with big industry, as most are more technology based in the wake of the changing global economy.

Many individuals fail to understand the Dow Jones Industrial Average on the basis of its actual value. Though it is meant to directly represent how the largest stocks in America are doing, it is not an exact representation of the value of those stocks. It is what is known as a weighted index, meaning that the numbers are based upon a different scale. For the everyday investor, this means that the actual value of the index is higher than the actual sum value of the stocks that this includes.

This has been one of the most important things in American economic history over the last 100 years. Each and every time the United States has fallen into a depression or some sort of economic recession, the Dow Jones Industrial Average has been there to indicate and warn America of the coming collapse. Its importance really extends beyond that, as well. It not only serves as an indicator, but it also has a fair amount of influence on the markets around the world. When America’s economy gets into trouble and the Dow Jones Industrial Average starts heading downwards, global markets have a way of following. Typically, these global markets do not take very long to respond to any drastic changes in the Dow. The flip side of that is also true, as global markets respond very favorably to any drastic improvements in this index.

Those who are worried about their finances and the future of the economy should keep a steady eye on the Dow Jones Industrial Average when making their investments. Though it is a somewhat simplistic measure of how the American economy is doing, it is a very important one. The Dow does not lie, so to speak, and any changes over the long haul in this index are usually a good sign of things to come in regards to the American economy.

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