By John W. Schoen
updated 10/25/2004 3:01:34 PM ET 2004-10-25T19:01:34

July 30, 2004

This week, Answer Desk readers have small business on their minds. Bruce in Chicago recently took a corporate buyout and is trying to figure out how to check out franchise opportunities. Bob, who built a successful real estate business in Alabama, just moved to Wisconsin and is wondering how to start up again in his new home state.

As always, if you'd like to write to us, please include your first name and hometown. (And due to the rising tide of spam, please write "Answer Desk" in the subject line of your email.)

Franchise fears
After spending a career with ATT/Ameritech/SBC, I took a buyout a couple of years ago. I am currently doing telecom consulting but have looked at other ventures. I am beginning to believe that most "franchise opportunities" are nothing but veiled scams. There appears to be a franchise for everything one can imagine — including a franchise to help other folks find the right franchise!!  How does one go about determining is the franchise is legitimate?
Bruce B. — Chicago

It does seem like many franchises are structured to enrich the franchiser, not the people who actually take the risk and do the work. And even those franchisers that are dedicated to growing their business face long odds: according to a 1996 study for the U.S. Small Business Administration, most franchise businesses fail. There are certainly plenty of examples out there where franchisers have gotten wealthy (car dealers or McDonald's come to mind), but for every winner there are many more that sink without a trace.

That SBA study, though, identified several characteristics shared by successful franchise businesses. Among other things, the report recommended looking for franchises that are growing faster than the rest of the pack and that are devoting most of their energies to expanding the system and not spending a whole lot of time and energy getting individual  franchises up and running. (That's your job.) To help separate the scammers from the real deal, the report suggests you check to see the business is registered with state authorities or is a member of the International Franchise Association.

You'll also need to ask some fairly basic questions and, if you don't get straightforward answers, move on to the next opportunity. Does the franchise have a clear, viable market? What is the barrier to entry from competition? How much marketing and promotion is the franchiser committed (in writing) to do? What guarantees do you have that your territory won't be invaded by new franchisees? How much cash do you need tied up in the business (over and above any franchise fees)? What's the average turnover and profit margin? How much is the franchiser marking up merchandise before you sell it? Most of all: will they let you take a hard look at the books of several established franchisees (of your choosing) to get a realistic appraisal of how successful these businesses are (or could be with smart management)?

One other major problem to consider: the skills you need to be successful in running a small business franchise are not the same as those needed to evaluate one. For that you need to find a good accountant or business broker you can trust who (for a fee, of course) will help you evaluate these ventures before you take the plunge. This is similar to having a mechanic look over a used car, or a house inspector checking out a home you might purchase. It's money well spent.

Real Estate Relocation
Thirty-one years ago, I started in the residential rental business in northern Alabama.  I have always stuck with strictly single family residential homes on the lower side of middle income areas.  Business has been great as I was totally involved in all aspects of the business from buying, interviewing tenants and backgrounds, repairs, advertising, book keeping and taxes.  At one point we had upwards of 45 homes. 

But over the years I have sold some homes and taken back a mortgage which has been another profitable business venture.  My wife is originally from northern Wisconsin and she convinced me to move so that our children can remain close to grandparents, aunts, uncles and cousins. Now that we are settled in Wisconsin I have that itch to expand my rental business in this area.  Being older I feel overwhelmed with all the considerations i.e.: tremendously higher property taxes, different landlord / tenant laws, colder weather, different economy.  When I first started in this business I did not take many considerations so seriously and just honed my skills over the years.  What is your take on digging into and expanding my business in northern Wisconsin?  Also how do you feel about the apartment rental business?  Some friends of ours in Texas (Corpus Christi and Houston areas) own and manage only apartments and claim to be doing great.
Bob T. -- Peshtigo, Wisc.

We have no expertise in the apartment rental business, but our take is that it’s kind of like asking “how do you feel about buying a used car”? Some people fall victim to unscrupulous dealers; others save a lot of money buying used and come out ahead.

Same with real estate. Some people (like you) make a bundle on rental real estate; others lose their shirts. But people will always need rental apartments. And there will always be good deals and bad: the question you're really asking is whether you’ll able to enjoy the same success in finding them in your new neighborhood as you did in your old one.

Major Market Indices

The fact that you’ve already identified your shortcomings in the new market is a good sign. Part of your success in Alabama came from your knowledge of the local real estate market: a feel for the economy, figuring out where to advertise, relationships with plumbers and electricians, etc. There’s no way to replace that quickly in your new location. In that sense you’re “starting over.”

But 31 years of experience, in our opinion, is much harder to come by. For starters, it means you know exactly what you need to learn to get started again, making that knowledge much easier to replace. Beyond that, though, many skills and instincts are very transferable: how to size up the financial details of a rental property in a flash, what to look for in a good tenant, how to handle the various crises that best all landlords at some point, etc.

And that gives you a competitive edge in whatever market you land. (The competition, in this case, is between you and other investors for the best properties and the best tenants.)

There may be reasons why the new market you’re in has much less potential than the one you left. If that’s the case, you’ll have to work harder or wait longer to find good properties. You’ll also have to be patient in getting up to speed on the knowledge than doesn’t transfer (local laws, local economy — all the issues you cited.) But if you’re willing to put the effort in, we can’t see why it wouldn’t work out for you.

July 23, 2004

With Fed Chairman Greenspan once again holding the market's rapt attention this week, Michael in Oregon is wondering: Just what exactly does the Fed do? And how does it do it? Phil in Los Angeles doesn't buy the widely held belief -- bolstered by The Chairman this week -- that inflation is under control. He wants to know why the "official" inflation numbers don't match the price rises he's seeing when he goes shopping.

The Fed mystique

We all are aware that the primary job of the Federal Reserve is to manage the money supply.  In simplest terms, if the economy is growing at 3 percent per year, as an example, then the money supply needs to also grow at approximately that rate in order that there be the currency in the market to support the additional economic activity.  When the money supply grows too fast, relative to the economy, we have inflation.  When the money supply grows too slowly, it can throttle economic growth, as there isn’t enough money to go around in support of real economic needs. 

OK, all sounds good.  My question is, then, what are the exact mechanisms the Federal Reserve and the U.S. Treasury use to expand or contract the money supply?  It has to be more complicated than, “Well, they simply print more money and put it into circulation,” because, who would get this new money then?  It can’t just be given away!  I have heard and read that money supply growth occurs in two ways: (1) Banks are allowed to lower the percentage of deposits they must retain – this allows them to lend more money as a function of existing deposits; and (2) the U.S. Treasury (or is it the Federal Reserve, or some arrangement of the two?) actually buys back outstanding, previously purchased, U.S. Treasury bonds and bills, which puts more money into the system than existed previously.
          Michael G. -- Hillsboro, Ore.

You’ve got the mechanics of the Fed’s job down cold and explained very simply. (Hey, would you mind filling in for us when we go on vacation?)

Of the two levers you describe, by far the Fed’s favorite is open market operations -– where it adds or drains money by buying or selling Treasury debt that's already been issued and is trading in the "open market." Every six weeks or so, the Fed's Open Market Committee meets to give the Fed's New York trading desk its marching orders. When it buys Treasuries, for example, the billions in cash it uses to pay for that paper is then available for banks to lend. So the money supply in the banking system (and the U.S. economy once that money is lent out) goes up. Reverse the process –- sell securities -– and money gets sucked out of the banking system. Seems like a foolproof way to manage the economy.

The problem is that the system was designed and set up early in the last century –- when most lending and borrowing was channeled through banks. Alas, that’s no longer the case. Take the mortgage market, for example, which is dominated by two federally-sponsored entities, Fannie Mae and Freddie Mac. These two institutions lend money to home buyers, bundle those loans as mortgage-backed securities, sell those securities to investors and then lend the proceeds to the next home buyers. This credit creation process takes place outside of the Fed’s control.

There are other vast pools of money that are outside of the Fed’s reach. Money market mutual funds take in billions of dollars worth of deposits and buy various forms of paper -– in effect, lending that money out -- at which point it goes back into the system. The derivatives markets also “create” money. An option (the right to buy or sell a stock at a fixed price within a set period of time) is simply a piece of paper created by an investor willing to place a bet on the direction of that stock’s price. As soon as that piece of paper starts trading, it has a monetary value over which the Fed has no control. And consider the vast wealth that has been created in the housing market. As homeowners tap that wealth with home equity loans, they're monetizing their paper profit. The creation of all of that “new money” is also outside the Fed’s control.

Strictly speaking, this expansion of credit and paper wealth is not the same as printing money. But it has essentially the same impact on the economy -– it increases purchasing power. And, since consumer spending represents roughly two-thirds of U.S. economic activity, increased purchasing power has a much great impact than the relatively few dollars in the banking system over which the Fed exerts direct control.

Even if the Fed were granted vast new powers over any and all dollar-denominated transactions (now there’s a scary thought), it still wouldn’t have complete control over inflationary pressures. For that, we’d have to have a global central bank; much of the current inflationary pressure is coming from outside the U.S. Oil prices, for example, are rising because global demand is approaching production capacity -- or at least oil traders are convinced that’s what’s happening. China’s booming economy is sucking up excess capacity for raw materials like steel and copper, which is pushing up prices of those commodities. No matter what the Fed does, these higher prices cut into the purchasing power of every U.S. dollar.

It’s not that the Fed is powerless – far from it. But the Fed’s control over the money supply – and the U.S. economy – is often overstated.

What low inflation?
I live in Los Angeles.  They say that the CPI for the area is around 3 percent.  Just go buy groceries, insurance, or eat at a restaurant, actual prices in many enterprises locally have increased 10-20 percent.  How can we believe that prices are really going up only 3 percent when the store prices for just about everything has risen over 10 percent?
          Phil M. -- Los Angeles

It’s a little like the economist who has one hand on the stove and the other in a bucket of ice. He’ll tell you that, on average, he feels pretty good.

And that’s all the CPI statistics show: an average. The Bureau of Labor Statistics collects monthly data from 87 urban areas throughout the country, including about 23,000 stores and businesses (for prices of goods and services) and some 50,000 landlords or tenants (to calculate rents).

Aside from big regional differences, price change vary widely from one category of products and services to another. Since Jan. 1998 (through May of this year), for example, food prices overall were up 16.5 percent. But medical care services were up 29.9 percent. Apparel prices, on the other hand, fell by 4.5 percent during that period. And within each category, prices changes vary as well: beef and egg prices have risen sharply in the past few years, but coffee prices have actually fallen (not counting Starbucks).

You’re also correct in your assumption that prices in Los Angeles are rising faster than the national average. Since Jan. 1998 (through May 2004), prices in LA have risen 20.4 percent, while the national average is up only 16.6 percent. It turns out our national economy is very regional -– especially when it comes to the cost of living. Just ask anyone from who’s moved recently from the Midwest to the east or west coasts and gone house hunting.

Then there’s the matter of how much weight to give each item in calculating the average CPI, which the BLS calculates based on overall (there’s that average again) spending levels. But few people, if any, spend exactly these “average” amounts in each category. So if you spend more of your money on clothes than I do and don’t have college tuition bills to pay, you’re personal inflation rate will be a lot lower than mine. (Here’s how the BLS weights each item.)

So why bother crunching all these numbers and coming up with an artificial average that has little connection to real life spending by individuals? Because these averages are useful in making judgments about changes in the overall U.S. economy – especially in monitoring changes over time.

But they aren’t meant to track how your personal spending has risen or fallen. The BLS collects millions of bits of data each year, but even their computers can’t keep up with the individual spending habits of nearly 300 million Americans. Nor, it’s safe to say, would we want them to.

July 16, 2004

MCI, which is what's left of telecom bad boy WorldCom after its trip through bankruptcy court, was in the news again this week as a possible buyout target — just months after it began trading again under a new stock symbol. That has Blair in Florida wondering: Who were the winners and losers in this saga? Jim in Michigan, meanwhile, wants to know how companies chose which exchange they want their stock listed on.

MCI Moneytrail
MCI [formerly WorldCom] goes into Chapter 11 after several questionable actions. They are now the object of a bidding war, AFTER they got rid of $35 BILLION in debt. Who lost? Who won?
          Blair -- Miami Shores, Fla.    

The losers are pretty easy to identify. You can start with the nearly 30,000 employees who lost their jobs. Then there are the investors who lost their money and now hold worthless shares of WorldCom stock.

The losers list includes all those people who were owed money when the Worldcom hous of cards finally collapsed. Most of that $35 billion in debt represented corporate bonds that investors paid for expecting to get all their money back, plus interest. These investors got a little more warning than employees or shareholders.

Corporate bonds are rated for "creditworthiness" — the likelihood you'll get your money back — and these ratings fell steadily as the company's troubles unfolded, eventually drawing a "below investment grade" rating — also known as "junk bonds." You can buy them cheap and hope the company pulls out of its problems — if it does you can make a lot of money. So many of those who lost were speculators who knew what they were doing.

The list, however, also includes many others who were owed money — and who got burned. Anyone who sold MCI supplies, provided services on a contract basis, etc. became a creditor — and had to get in line once the company filed for bankruptcy. Most creditors are typically paid cents on the dollar for what they were owed.

As for the winners, they're a little harder to spot. The U.S. government is temporarily $750 million richer after the company agreed to pay that much in fines to settle fraud charges. That money will eventually be paid out to investors who were victims of the fraud. (If you think you're one of them, you can get more information on the payout on the SEC's Web site.)

But following the money trail for investor winners is not as easy. When a company successfully reorganizes under Chapter 11 bankruptcy protection, it usually issues "new stock" in the "new," reorganized company. Many of those shareholders are former debt holders who swapped their (now worthless) debt for shares. Based on the stock price at the end of this week, the company's stock is sworth about $5.4 billion — a fraction of the $35 billion originally owed creditors, many of whom have probably already sold their shares of "new stock."

But one group was clearly in the win column: The lawyers, accountants, and consultants who billed the company for a reported $800 million in fees while it slogged through bankruptcy reorganization. They got paid in cash.

Making the list
It was mentioned that Google is going to be listed on the Nasdaq instead of Dow. Could you explain why a company would be listed on one instead of the other?  How does the NYSE or Nasdaq benefit by listing the companies?  Is there some kind of bidding process?  What does the newly listed company get out of the deal? I don't really understand the behind-he-scenes details.
Jim H. -- Warren, Mich.

You're not alone. The inner workings of Wall Street are a lot like the political process or the manufacture of sausage: Most people would prefer not to look too closely. And Wall Street, for its part, prefers it that way. The less you know about the mechanics of buying and selling stock, the easier it is to charge you fees you're probably not even aware of. (Which is one reason we write the column.)

As for stock trading regulations, there are several layers — some set by the SEC or state securities regulators, others by the exchanges that "list" shares for trading. In general, the New York Stock Exchange requires that companies have a greater market capitalization (the total value of all shares being traded) than the Nasdaq.  These exchanges have various sources of income, but one of them is the fees they charge companies to be listed.

In the past, most companies "moved up" to the NYSE as they grew. But following the tech bubble of the 90s, many larger cap tech stocks chose to remain on the Nasdaq.

The Dow, on the other hand, is not an exchange: It's an index maintained by the publishers of the Wall Street Journal. It's simply a way to track the movement of the overall stock market. But it consists of 30 large companies listed on both the NYSE and Nasdaq, so many people prefer to watch a broader index (like the S&P 500) which tracks 500 stocks.

One reason we all still follow the Dow is that it's been around the longest, started over a hundred years ago by company founders Charles Dow, Edward Jones and Charles Bergstresser.  The three eventually settled on the shorter Dow, Jones and Co. as the name for their company — to the great relief of radio and TV announcers ever since.

July 9, 2004

This week, Answer Desk readers are pondering questions that face anyone who's ever bought or sold a house. Tim in Michigan is trying to decide which is better: a fixed- or variable-rate mortgage? Denise in Wichita, who's having trouble selling a house, is toying with the idea of spending money to fix it up to get her asking price. Speaking of prices, Jack in New York is wondering: what, exactly, is the difference between disinflation and deflation?

Mortgage dilemma
I am 25, single, and a licensed builder planning to build my first home in the next couple of months.  I am getting different opinions as to a fixed rate or a variable rate.  I probably wouldn't stay in the house for more than a couple of years, but you never know what the future holds. A variable rate would mean I would have a smaller payment, but I am also afraid I would be forcing myself to make a move or pay a substantially higher payment in a few years.
          Tim G. -- Grandville, Michigan

Well, you can’t have it both ways. When you take out a fixed-rate loan, you and the bank are both making a bet on the future course of interest rates — that’s why a fixed rate loan is higher than an ARM. The bank has to charge more because if rates go sharply higher, they lose.  Interestingly, Fed Chairman Greenspan was recently quoted as saying that premium bank charges for fixed rate mortgages — over the past decade or so — were higher than they needed to be to hedge that interest rate risk. In other words, during the low-rate period of the 90s, you were better off with an ARM than a fixed-rate mortgage.

But there’s no way to know if that will be true for the next 10 years. While rates are more likely to go up than down from here, there’s no way to know how high they’ll go. And one of the most important factors to consider is how long you plan to hold the loan. Few first-time homeowners stay in their house the full 30-year term, which means you may be better off thinking of a shorter time frame. There are, for example, variable-rate mortgages that lock you in for 3, 5 — sometimes 7 years. These ARMs typically offer lower rates than a 30-year fixed rate. So you get the security of a fixed rate at a lower cost. If you decide to stay past the fixed term, you’ll have an ARM (if you don’t refinance).

No sale
Our family has been trying to sell our parents’ house since March, with tons of lookers but no good offers. I hired a real estate agent about a month ago and her contract expires in about a month. The house is in one of the most desirable areas in town….  We're asking $99,000. But, it's old.  It needs work.  We have already spent $5,000 fixing things that were absolutely necessary to sell it. … So far, STILL no luck selling it.  Most of the comments are:  Too much work required, or think it's priced too high.  My question is:  After the agent's contract expires, should I put more money and more work into the house to be able to sell it? Or sell it as is and get what we can out of it? Before Mom died, I promised her that we could get $100,000 out of the house. After we pay various bills, what's left is to be divided between kids, with my disadvantaged little brother getting the bigger part of the lump sum. It's not going to be nearly what I expected to be able to give him and, in fact, will barely allow him to pay his own bills. My sister keeps saying that the house is only worth what someone is willing to pay for it.
          Denise - Wichita, Kan.

Your promise to your Mom notwithstanding, there are several choices involved in trying to get the best price for a house: fix up or sell as is, list with an agent or sell it yourself, take an offer below the asking price or wait and hope for a better one.

Unfortunately, there is no “right” or “wrong” way to go. Real estate is extremely “local” — what works for your neighbor may not be right for you. Whether or not to list with an agent, for example, involves decisions about how much time you’re willing to spend and how much expertise you have vs. how much an agent can help widen your reach, give solid information about other recent sales in your area, and offer smart advice about where to spend money fixing up and where to leave things alone for the buyer to deal with. Keep in mind, there’s no “fixed” commission for agents. If you think the fee you’re paying your current agent is too high, shop around. There are lots of agents, and they won’t cut their commission until you ask.

In some ways, your sister is right: houses (or stocks or bonds or any other investment) are priced by the market. It doesn’t matter if someone assigns a “price” to a house — whether a professional appraiser or an agent’s recommendation. Unless and until a buyer comes along willing to pay that amount, it’s just a starting point.

Minor improvements can help improve the “curb appeal” of a house, but many major renovations don’t pay for themselves. So if you know you’re selling, it doesn’t make sense to put a lot of money into the house just so you can get a specific asking price. And, of course, the longer you hold out for your price, the more you’ll pay in taxes and any mortgage payments outstanding.

If your main concern is how far the money will go in supporting your brother (which it sounds like it is, as it should be), it might make sense (if you haven’t already done so) to find a financial planner or advisor who can offer creative suggestions on stretching the proceeds of the sale of your Mom’s house. Steer clear of insurance agents, stock brokers and others who sell specific financial products. Ask around for references. Many independent advisors will meet with you at no charge for an initial consultation. You may be surprised to learn how far you can make the money go.

Price puzzle
Is there a difference between disinflation and deflation? 
          Jack G. -- Hoosick Falls, N.Y.

Yes. Disinflation is a slowing of price increases — or a drop in the inflation rate. And it’s almost always a good thing. Lower inflation generally brings lower interest rates because investors care most about the “real” return they get for their money. So if you’re getting 5 percent on, say, a 10-year Treasury bond, and inflation is running at 3 percent, your “real return” is 2 percent. That’s how much your buying power is growing. If inflation then falls to 1 percent, you can get the same real return from a bond paying 3 percent. So as inflation falls, borrowers get a break — through lower rates. And investors who bought those 5 percent bonds get higher real rate of return. That’s been the story for the U.S. economy for much of the past decade — a story that is apparently coming to an end.

Deflation is when prices actually fall — and keep falling, which can be a bad thing. A little bit of deflation here and there is good — especially if prices are falling because of better productivity. If you automate a widget factory and double production with the same number of people, your cost per widget goes down, so you can cut prices. What we’ve got now is deflation in some areas (shopping at Wal-mart) and inflation in others (a trip to the doctor or college tuition bills).

But if all prices fall — and keep falling for an extended period — that’s almost always a bad thing. First of all, your debts get larger. Say you go buy a big screen television on credit for $3000. If your neighbor buys the same television six months from now for $2,000, you both have the same TV but you owe an extra $1,000. If that effect flows through the entire economy, consumer debt (already very high) becomes a major burden, and we all cut back on spending. Since two-thirds of the economy is consumer spending, that’s not good.

Deflation is also harder to tame then inflation. The antidote for inflation is raising interest rates, and the reverse is true for deflation. But you can’t cut interest rates lower than 0%.


Ever wonder what a P/E ratio is and why it's so important? Are you confused about the official definition of a recession? And just what the heck is a derivative? We're here to give you the answers.'s weekly feature "The Answer Desk" helps you make sense of business, the economy and investing. So send along your questions to and we'll try to get you the answer. (Please include your home town with your question; we'll only include your first name if we use your question.)

Any question is fair game, with one exception: no questions about specific investment recommendations, please -- we'll leave the stock picking to the "pros."

Each week, we'll take some of the most-frequently-asked questions and answer them here. We may not be able to answer every question, but over the weeks and months we will provide a comprehensive resource for you, explaining some more puzzling aspects of business and finance.

You can mail in questions at any time and then check this column every Friday for the answers.

(All information will remain confidential in accordance with MSN's privacy policy.)

© 2013 Reprints


Discussion comments


Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 3.79%
$30K home equity loan FICO 4.99%
$75K home equity loan FICO 4.69%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.83%
Cash Back Cards 17.80%
Rewards Cards 17.18%