Ropes
Over the course of the past several weeks, there have been numerous measures aimed at reviving the nation’s struggling economy. Most of these actions are still ongoing, and their success level will not be known for quite some time (although signs of modest progress are around). While several of them have been historic and even unprecedented, at least one has followed the same tack often taken when faced with economic difficulties – lowering interest rates!!
The Federal Reserve (Fed) was created in 1913 primarily to provide liquidity to the economy which was suffering from the results of the Panic of 1907. The central bank gradually morphed into a watchdog with special attention given to both inflation and availability of monies for normal business operations.
The Federal Reserve requires all banks and financial lending institutions to maintain a certain amount of cash (reserve balance) on deposit at their local Fed branch office. The Fed Funds rate is the percentage of interest banks are assessed for overnight loans of these reserve balances to one another. When you hear all of the fretting about the Fed raising or lowering rates, this is the rate being manipulated. This flow of money among banks is essential to the smooth functioning of the economy.
When the Fed raises the interest level, banks are often more hesitant to borrow money to keep their reserves at the required level. In addition, the rates they charge when they do make loans are directly related to the interest level established by the Fed. As rates go higher, loans are usually more costly and difficult to acquire. Therefore, businesses are less inclined to borrow and, thus, such action slows economic expansion. Raising interest rates is a tool to help cool the economy when signs of inflation begin to surface. It is generally pretty effective in that higher rates get people’s attention and can virtually force them to come into line. It is like pulling on a rope; you get some traction.
On the other hand, when the Fed drops rates, the idea is that banks open their coffers wider, businesses expand, and home loans are less expensive. Often during such times, homeowners take out home equity loans, using the money for purchases of goods or services, which in turn generates growth in the economy. This tool, therefore, is used when the goal is to stimulate the economy and speed the pace of economic growth. The problem is that, while this approach is sometimes effective, it can only encourage firms and consumers to borrow and spend: it cannot compel such actions. Lowering interest rates is more like pushing on a rope; it does not have the same clout as going the other way.
When the Fed drops the cost of money, it has the effect of making loans less expensive, but if companies aren’t borrowing or banks aren’t lending, the initial result may be negligible. The Fed can offer the incentive of lower rates, but sometimes it isn’t enough. If folks remain too concerned about the future to take on additional debt, lower interest rates won’t do much good. This situation, which seems to be a part of the current credit financial crisis, is what British economist John Maynard Keynes referred to as a “liquidity trap.”
To make matters worse, there’s also a signal problem. If analysts, who pour over every nuance of the Fed’s monthly announcements and listen to the tone of every speech of every member, believe the rate might fall before long, the market response begins almost immediately – never mind that it sometimes takes more than a year for the impact of the rate change to percolate through the entire economic system. Because of such a hint, there often is also a delay in making purchases in hopes that prices and loans might go lower in a short period.
To combat a possible recession in early 2001, the Fed began lowering interest rates. Three years later, to combat potential inflation, the central bank reversed course. By August 2006, the Fed stopped increasing rates because concerns about inflation were muted and signs of an economic slowdown were on the horizon.
A year or so later, as the credit crisis became more invasive, the Fed began to lower the Fed Funds rate from the high of 5.25% in efforts to increase liquidity to financial markets and improve confidence in the overall economy. Last month amidst the myriad efforts to pull the economy out of its funk and improve the credit markets, the Fed lowered the rate to 1%.
There is little doubt that the Fed’s actions help steer the economy’s course, but it is also evident that there’s only so much the Fed can do. While recent drops in interest rates are an important part of the process and will likely help to accelerate the expansion once it begins, they will not be sufficient to jump start business activity nor will they be the most significant facet of the various rescue efforts being implemented. As a result, the more exotic initiatives now being put into place must be a part of the process.
posted @ 08:06 PM CST [link]
Friday, November 7, 2008
Rewriting the Dictionary
Every so often, new English words are coined. Some of them eventually make it into the vernacular and even into authorized dictionaries. Normally, it takes many years for a word to become so common and widely used that it is easily understood by others around the world. On the other hand, the journey from creation to everyday usage can be much shorter.
Such is the case with the word “Google,” the giant Internet search engine company that recently celebrated its 10th anniversary. The word was uniquely recognized by its placement in the Oxford English Dictionary in June 2006—as a verb!
Coined by two Stanford computer science graduate students in 1997, it replaced the original terminology for their search engine brainchild—BackRub—which they ran on Stanford servers for more than a year. Once the program began taking up too much of the university’s bandwidth, the students launched out on their own.
The first step was to develop a new name. After a lengthy period of brainstorming, the term Google was adopted. It was a play on the word “googol,” which is a mathematical term for the number represented by the numeral “1” followed by 100 zeros. The new name was representative of the vision of the two young men who wanted to organize the almost infinite amount of information growing exponentially on the web.
Initially, Google set up workspace in a garage in September 1998 with a staff of three people. It became an instant success and was recognized by PC Magazine as the search engine of choice in the list of Top 100 Web Sites for 1998. A few months later, the operation moved to a larger space with five additional employees. (Today, Google has approximately 19,000 employees worldwide and consistently ranks as one of the best places to work.)
Almost immediately, plans were made to move to even larger quarters. Within two years, 15 language versions of Google.com were released, and it was on its way to worldwide usage. (Currently, Google.com is available in over 30 languages.) By June 2000, Google was the world’s largest search engine.
New concepts emerging from the Google brain trust were put into operation almost monthly. Each of these led to substantial expansion and greater in-depth information sharing opportunities. By the end of 2001, Google had grown to more than 3 billion web documents.
Not content with being the largest in one category, the leadership of Google set out on a fast pace to expand into multiple areas, ranging from e-mail to video to maps to online access to books to numerous business applications to its latest release, an Internet browser named Chrome, which was created to engage with various new web applications.
Google entered the financial realm big-time in August 2004 with its initial public offering. The opening share price of $85 rose almost tenfold over a short period and currently is in the mid-$300s per share.
During its first decade of operation, almost everything Google launched met with success. Even this year, as the national economy has faced historic challenges, Google has continued to move forward. Revenue for the third quarter of 2008 was 31% above the same period in 2007 and a 3% increase over the April-June 2008 timeframe.
Recognizing that its success has been due in great part to ideas emanating from variant sources and as a way to celebrate its 10th anniversary, Google set aside $10 million to encourage and support ideas to improve people’s lives. Regardless of whether the ideas were big or small, technology-driven or basic, the only criteria for receiving financial support to bring the ideas to market was that they have a substantial impact on everyday existence. The top 100 ideas are to be announced in late January, then pared down to 20 by Google users. The five selected for funding will be decided by a panel of judges and announced in early February.
In a brief 10 years, Google has gone from a concept to a nonpareil reality. Its many applications have transformed life to such a degree that we might even wonder how we ever got along without it; information on practically anything is available with a few clicks on a computer keyboard.
Today, a common expression when one is seeking simple information or answers to complicated questions is to “Google it” to get the desired results. So, what’s ahead for Google over the next decade?
Will it continue to take giant leaps through cyberspace or will emerging challengers begin to take bigger and bigger pieces of the pie? As it has grown from kooky little company to Wall Street behemoth, it has managed to keep its essential personality and innovative spirit. Only time will tell how it fares against the next generation of smart kids in garages. Whatever happens, few companies have managed to provide the language with a noun and a verb in a single decade.
posted @ 07:55 AM CST [link]