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Explainer: Fiscal hawks vs. fiscal doves

Nov 14, 2013
Why are those who want to fight inflation called 'fiscal hawks'?
Posted In: Bernanke, Yellen, Fed, Fiscal policy

Fed to banks: Get a bigger rainy-day fund

The Federal Reserve said today that it wants to “strengthen the liquidity positions of large financial institutions.” In everyday language, the Fed wants banks to have a lot more cash on hand than they do right now, in case of an emergency. Like an emergency fund. Or the air bag in a car.

Banks don’t usually have much cash lying around in their vaults, since they prefer to lend it out to people and earn interest on it. The only thing that cash in a vault accumulates is dust. But just like any other business, banks need cash to run their businesses. They need to make payroll, make bond payments, settle lawsuits.

But rather than have cash on hand to do those things, banks prefer to borrow the money … from other banks.

In order for one bank to lend to another, the lending bank has to trust that the borrower bank will be able to pay it back. And if the lender doesn’t trust the borrower, he won’t lend. And that leaves the wanna-be borrower with a liquidity crisis.

Trust can break down between banks for any number of reasons. Maybe the lender bank’s been tipped off that the wannabe borrower has bought too many toxic assets. Or maybe there’s a rumor that a big fund owned by the wannabe borrower is about to go bust.

There may be some truth to this ... or there may be none. But all it takes is the whiff of a problem for the money to dry up. And without money coming in the door, a bank can’t send money out the door. And if it doesn’t send money out the door, the bank goes bust.

The Fed doesn’t want banks to go bust.

So it’s come up with an idea.

Banks will have to estimate how much cash is going to go out the door during a short-term period of stress, and based on that, it will have to hold a certain amount of cash on hand. That will essentially allow a bank to operate on its own, without borrowing from other banks, for a certain period of time.

Does this mean that bank robbers are now feverishly working out plans to tunnel into the Bank of New York from the crypt of Trinity Church? Hardly. By cash, the Fed doesn’t mean bank notes necessarily, it means stuff that can be converted into cash very easily and quickly. Like Treasury debt, commercial paper, shares of blue chip companies and the like.


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Oct 24, 2013

Explaining capital adequacy requirements

Oct 11, 2013
Changes to capital adequacy requirements are a cornerstone of the government’s efforts to secure the financial system. Marketplace’s Paddy Hirsch explains.
Posted In: financial crisis

Can the government take on good and bad debt?

Oct 4, 2013
For personal purposes, there is a difference between 'good debt' and 'bad debt' -- but can the government make the same distinction?
Posted In: government spending, debt, investment

Obama & the debt ceiling: An explainer

Sep 26, 2013
The government is considering raising the debt ceiling -- again. But what exactly is the debt ceiling: Watch an explainer to understand what's at stake and what it means for you and me.
Posted In: debt ceiling, government spending, government shutdown

FHA: The next government housing bailout?

Sep 25, 2013
Reuters reports the Federal Housing Administration may need a bailout from the federal government.
Posted In: FHA, bailout, Fannie Mae, Freddie Mac

Twitter IPO rumors: NYSE not Nasdaq

Sep 24, 2013
Twitter’s a tech company, right? And tech companies list on the Nasdaq, right? So what the heck is Twitter doing listing on the NYSE?
Posted In: NYSE, Twitter, NASDAQ, linkedin

Explaining exchanges

Sep 19, 2013
You've heard of the New York Stock Exchange and Nasdaq. Do people really still stand around and yell out buy and sell orders at these places? Paddy Hirsch explains what an exchange is -- by taking us to the supermarket.
Posted In: stock exchange, stock, stock market

What's confidential about Twitter's IPO filing?

Sep 12, 2013
Twitter tweeted that it had "confidentially submitted" papers for a planned initial public offering. The news reached more more than 23.6 million people, so what's confidential about that?
Posted In: Twitter, IPO

Consumer credit rises, but no one's smiling

Sep 9, 2013
We're borrowing more, but neither as much as economists had hoped, nor for the kind of thing that will help the economy.
Posted In: consumer credit

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Have you ever wondered why you can buy a whole rotisserie-cooked chicken at the grocery store cheaper than a pack of two frozen chicken breasts? Or why hotels give you a mending kit but no toothbrush? What does the YKK mean on all of your zippers? Who invented the foam finger? If you’re like us, you’ve got a lot of questions about the small, simple, brilliant and ubiquitous things in the world of business, and we want to help answer them for you.