Monday, March 31, 2008

Bad Financial Leadership in a Really Bad Recession

by Dr. Boyce Watkins -

The United States is respected throughout the world for its powerful economy. We are also, unfortunately, known for our arrogance. U.S. Monetary policy, headed by Federal Reserve Chairman Ben Bernanke, is both art and science, and the success of Alan Greenspan has forced any subsequent Fed Chairman to become a Financial Da Vinci.

The 2008 recession provides just the right landscape for an allegedly great monetary artist to strut his stuff. The US economy saw its financial chickens coming home to roost, and the recession was a long time coming. These financial chickens included excessive spending by American consumers, mixed with irresponsible borrowing and lending on the part of both individuals and banks. Personal responsibility is thrown out the window when discussing wealthy and middle class Americans, as financial leaders are called upon to bail out the banks, the consumers and everyone else.

Two great weapons in the arsenal of the Federal Reserve are government spending and interest rate cuts. Higher government spending increases consumer demand for the goods and services we continue to buy but almost never need. Interest rate cuts reduce the cost of borrowing for everyone in the economy. This marginal decline in rates serves to stimulate investment by all Americans, since the cost of borrowed money is lowered.

The government bailout package for 2008 included a massive spending bill, one that featured tax refunds and support to help consumers keep their homes, even if they were the causes of their own demise. Another financial steroid being employed has been the strong and consistent cuts of the Federal Funds rate by Federal Reserve Chairman Ben Bernanke. Bernanke has become known as “Bold Ben” by the media, who are consistently stunned by the Chairman’s massive and powerful attempts to control the economic downturn.

The strong and bold financial leadership by our government has been applauded by some, and demonized by others.

Republicans, known for being fiscally responsible, have created budget deficits our country has never seen. Between the Iraq War and the 2008 recession, spending continues to go up, even when tax revenues are expected to go down. The ready availability of additional lending to support our massive spending bills has our financial leaders behaving like teenagers holding a “really awesome” American Express card.

Continuously cutting interest rates may provide additional stimulation to the economy, but the problem is that cutting interest rates, allowing the value of the dollar to slide and frivolous government spending is a recipe for serious, horrific and uncontrollable inflation. Inflation is like a Pandora’s Box: Once it’s out, it’s extremely difficult to reign it back in. It’s hard not to feel that “Bold Ben” and “Big Bad Bush” aren’t gambling with our children’s futures and current taxpayer resources.

Sometimes, when you party too hard, you are forced to deal with the hangover. Americans have been blessed with a financial celebration that has lasted over a decade. We danced with lamp shades on our heads: not saving effectively, spending like crazy and borrowing to cover our financial insanity. But rather than simply allowing the party to end and letting everyone sober up, our financial leadership has taken on the irresponsible behavioral norms of American consumers. Their excessive rate cuts and spending increases have kept us pumped up on Financial Dope in order to avoid the impending crash.

This is not solid financial leadership, and something has GOT to give.

Dr. Boyce Watkins is a Finance Professor at Syracuse University. He is also the author of "Financial Lovemaking 101", the definitive guide to black love, black money and black relationships. For more information, please visit