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“If You Find Yourself in a Hole …”

“… Stop Digging!”

Mary-Jo Kranacher, MBA, CPA, CFE

The collapse of the subprime mortgage market in the United States, followed closely by the banking crisis and credit crunch, has sparked many discussions among those seeking to determine where to place blame for the mess that has unfolded over the past year. Should it fall on the shoulders of the mortgage brokers, who encouraged high-risk borrowers to apply for loans they couldn't afford? Or does the fault lie with the lenders, who didn't provide adequate oversight because they were selling the loans' risk to investors through collateral-ized debt obligations (CDO)? What about the credit rating agencies, for not properly evaluating the economic soundness of the securities they were rating? Do we look to the government, for failing to implement and enforce adequate regulations on the financial industry? Or the borrowers, for digging themselves into a hole of debt?

Regardless of who's to blame, the “R” word—recession—has been mentioned more frequently of late. Some argue that we're not “technically” in a recession because we haven't had two consecutive quarters of negative growth in real gross domestic product (GDP), the commonly accepted definition of a recession. Most would agree, however, that even if we're not technically in a recession, it sure feels like one. The unemployment rate has risen over the past six months, while the cost of essentials is going up. Many people are using short-term credit to pay for necessities such as food, gas, insurance, and heating oil. Others are dipping into their retirement accounts to make ends meet without considering the many costs, now and later, associated with this wrong-headed strategy. While real estate prices were climbing, homeowners used their accumulated equity like a piggy bank— raiding it to buy items on their wish lists. Most didn't realize until much later that the interest and hidden borrowing fees associated with many of these loans brought the real cost of these items to more than double their nominal price. In a market of falling real estate values, that line of credit has essentially dried up.

We're also leading our children down the same path to financial ruin by promoting a culture wherein immediate gratification is paramount, regardless of cost or ability to pay. Credit card vendors set up tables outside college campuses and sell their “plas-tic money” to students, who are vulnerable to their marketing techniques. These young adults then carry their spending habits, learned early on, into their adult lives. As financial professionals, we all know that using short-term fixes for long-term problems is a recipe for disaster. Michael J.R. Hoffman, Karen S. McKenzie, and Susan Paris, the authors of “Paper or Plastic?: CPAs Can Educate College Students on Responsible Credit Card Use” on page 16, advise how CPAs can do their part to educate the American public on financial literacy and responsibility.

On a Larger Scale

Uncle Sam has been playing the same game of financial roulette with our tax dollars. The federal government continues to record annual budget deficits—that is, it spends more each year than it collects in taxes—which are estimated to reach a record $482 billion for the 2009 fiscal year. The national debt (the cumulative amount of all prior federal deficits) has swelled to $53 trillion and is growing at a rate of $2 trillion per year, when compound interest is considered. The unfunded obligations of Social Security and Medicare account for $41 trillion of this debt. To help the public get their heads around what these numbers mean to them, David M. Walker, former U.S. comptroller general and the current head of the Peter G. Peterson Foundation (www.pgpf.org), has estimated that each American owes more than $175,000 in federal liabilities and unfunded government promises. America's political leadership will soon need to choose between restructuring entitlement programs and raising taxes to pay for its generosity. As 78 million baby boomers near retirement, our society's unfunded liabilities and unfunded off–balance-sheet entitlement promises will grow exponentially if dramatic and fundamental changes are not implemented.

The economic soundness of a publicly traded company's financial condition is reflected in the price of its stock. Our country's “stock” is our dollar, and there's a reason why our dollar is falling. “We the people” need to get our financial houses, public and private, back in order.

As I write this editorial, a song from my childhood keeps playing in my mind; it was sung to the tune of “Heigh-ho, heigh-ho, it's home from work we go …” but the words were changed to “I owe, I owe, so off to work I go, with a shovel and a pick and a dynamite stick …”

Our debt, the result of our collective dig-ging—$53 trillion; rediscovering the value of living within our means—“priceless.”

As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA, CFE. Editor-in-Chief.

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