What we’re really facing now is a crisis of leadership.  It starts with President Bush, who knows little about economics.  Not that this is a problem because Americans imbue too much responsibility in the president.  Nobody knows all they need to know to lead this country because this world is too complex.  But, the president is supposed to remedy these deficiencies in knowledge by appointing experts who also champion the public interest.  The current president has failed miserably in this respect.

The chairman of the Fed, Ben Bernanke, appears to know one thing and one thing only -- how to lower interest rates.  (What will he do after he lowers interest rates to zero?)  The Fed has known about these toxic mortgages and the even more toxic credit default derivatives and did nothing.  Bernanke knew, or should have known, that trillions of dollars of off-balance sheet debt existed in the banking industry in the form of securitizations and financial derivatives.  He did nothing to improve transparency and he did nothing to curb the risky positions taken by corporate executives.  Furthermore, Bernanke now informs us that there will be more bank failures and there will be problems in credit markets.  Why did he not say anything while the bailout bill was being debated?

Treasury Secretary Hank Paulsen passes the competency test but fails the public interest qualification for public office.  After all, he is the former head of Goldman Sachs. It’s not a stretch of the imagination to consider that he pushed the bailout for his own aggrandizement.    The bailout, such as it is, will benefit Paulsen financially as well as his buddies on Wall Street.  That isn’t the same as helping Main Street.

SEC Chairman Christopher Cox not only is pro-manager on virtually every important investment issue of the day, but he took no action when the banking crisis began a few years ago.  He let managers do virtually as they pleased and seemed to care not a whit about the risk exposure of the financial derivatives with notional amounts collectively in the trillions of  dollars.

Unfortunately, most members of Congress are not any better.  Initially a few members of the House realized the inefficacious nature of the bailout plan and its self-serving purposes, but they too capitulated in the end.  Even worse, the Senate tagged on more than $100 billion of earmarks.  Maybe they thought that if Paulsen was helping himself, so should they.  Members of Congress failed the people in rushing through legislation without much study that commits us to enormous future payments. 

With a few exceptions, Congress and the President has failed to provide any leadership in this crisis, defaulting to a philosophy of letting future generations face national bankruptcy while they benefit themselves and their pals on Wall Street.  They have failed the American public and should be removed from office, Democrats and Republicans, alike. And they should take Bernanke, Cox, and Paulsen along with them.

The only question left, given the lame performance of our lame-duck president, is “What will the next president do?”  Will John McCain or Barack Obama be any better?  Clearly, neither so far has demonstrated that they possess much knowledge in economics.  But who would they choose to be their advisers?

McCain’s advisers leave a lot to be desired, as too many of them are from Wall Street.  They may be economic experts, but do they care about the American public?  McCain has, however, shown sound judgment in one instance, stating that he would appoint Andrew Cuomo to head the SEC. Given Cuomo’s record as Attorney General for New York, that would be an appointment in our country’s best interest.

Neither am I impressed with Obama economic advisers, because among them he includes Jim Johnson and Franklin Raines.  Johnson and Raines are former executives of Fannie Mae and helped to orchestrate the mess we are in.  Obama shows really poor judgment in seeking counsel from those whose track record includes committing accounting shenanigans.

We need real leaders to help us overcome this crisis.  They need to have courage and a strong moral fortitude .  And they need to know how to choose advisers with the right expertise, who are willing to put their own interests aside and have courage to do what’s in America’s best interest.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.

Return to The Accounting Cycle

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries. He is the co-author of a monograph, Fair Value Measurements: Valuation Principles and Auditing Techniques (with Mark Zyla, Managing Director, Acuitas, Inc.) to be published by BNA.