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As the nation slips deeper into the depths of economic turmoil, virtually every media pundit and politician seems to have a theory as to why this happened and who is responsible. The newsrooms and congressional chambers are filled with banter about collateralized debt obligations, mark-to-market accounting and swap spreads. The problem is that invoking these terms in the context of such discussions is not the same as understanding them. As evidenced by recent congressional hearings, it is clear that our nation’s leaders have less than a basic understanding of finance and accounting. If they are truly committed to solving these problems, they will have to educate themselves as quickly as possible.

In the last several months, we have witnessed the former and current heads of the Federal Reserve Bank, US Treasury and some of the largest financial institutions testify before congress. In the standard questioning process, there seems to be a recurring theme. A question is asked by a member of congress that relates to some aspect of the financial crisis and as the response is offered, more confusion seems to arise. In a recent discussion between Fed Chairman Bernanke and a notable congressional leader, Mr. Bernanke was lambasted for injecting capital into several of our nation’s largest banks. The members of congress were irate over the fact that taxpayers are paying to bailout these institutions. Mr. Bernanke tried to explain that this was a capital injection and not an expenditure. Its intent was to solidify the company’s balance sheet and allow them to lend money. Exasperated by the puzzled looks from the congressional leaders, he sought to clarify the difference between capital injections and expenditures, something that fell on deaf ears. Former Fed chairman Greenspan also encountered widespread consternation recently when attempting to explain the complexities of derivative structures and their role in the crisis. Recognizing the daunting nature of this task, he too conceded limited understanding of these structures.

My professional experiences have taught me that even some of the most accomplished professionals have difficulty distinguishing between income and cash flow let alone recognizing derivative structures. Our leaders in Washington need to acknowledge their deficiencies in this area and do their best to correct them. Given the magnitude of the current crisis and the role our leaders play in maneuvering it, perhaps it is time we consider devoting a portion of the stimulus package to financial education for our leaders. We at Telestrat are prepared to heed the call.

Reuben Advani is a former investment banker, founder of Telestrat Education and author of The Wall Street MBA (McGraw-Hill). 

To explore these and related issues, join us for one of our in-person courses (in major U.S. cities) inAccounting and Financial Statements or Corporate Finance and Valuation, or one of our webinars inUnderstanding Financial Statements, Financial Analysis, Stocks, Bonds, Options Online - Securities Basics for Lawyer, or Valuation, or one of our On-Demand programs (available 24/7) including our Financial Markets Update, which explains what brought on our current market issues.