01 Mar 2006 The Fed in Transition: Why It is Important to African-Americans, by Arica Young

What does the selection of Dr. Ben Bernanke to replace retired Federal Reserve chairman Alan Greenspan mean to the average American?

From those who already own a home or dream of homeownership, to anyone with a credit card, has a bank account, small business or pension, it’s very important.

Greenspan retired in January after nearly 20 years of leading the U.S. central banking system known as the Federal Reserve, or “the Fed.” This independent government institution was created in 1913 by Congress to increase the stability of the U.S. banking and financial system. The Fed strives to keep economic growth steady by decreasing the extremes of economic booms and busts. It is also charged with regulating the banking industry so it is equitable and accessible.

One of the most important Fed tools is setting the price, or interest rate, that banks pay for money. Banks and other financial institutions then set the interest rate – the price paid to borrow for home and car loans, credit card debt, business expansion and savings account interest.

If the Fed makes the wrong decisions, the effects could be devastating. Our nation could be pushed into a recession or a recession could become a depression if interest rates are too high. Mortgages would become too expensive. Companies could not afford loans to expand their business and increase employment. Car notes and credit card payments would become sky-high.

If one put $10,000 down on a house priced at $100,000, for instance, a monthly mortgage payment is approximately $568 if the loan interest rate is 6.5 percent. At eight percent, the monthly payment rises to approximately $660 and goes up to around $1,137 at a rate 15 percent. A house considered affordable at 6.5 percent, a fairly average rate over the past few years, requires a nearly-doubled monthly payment when interest rates are at 15 percent. This latter rate was fairly common in the 1970s.

When Greenspan headed the Federal Reserve, he successfully guided the economy through a variety of economic occurrences from the 1987 stock market crash to the dot-com boom and bust. Throughout, the U.S. economy continued to expand. Interest rates were low, and inflation is tightly under control. As a result, small businesses are flourishing.

Specifically, the economy worked for African-Americans. According to the Commerce Department’s Minority Business Development Agency Survey of Business Owners, minority-owned firms grew at a rate of over three times the national average between1997 and 2002. The number of African-American firms expanded at a rate of 45 percent, and total gross receipts increased by 30 percent between 1997 and 2002 – equaling $93 billion in 2002.

This stable, prosperous economy was no small feat given the economic mismanagement of the Carter Administration, when oil shocks and other crises slammed the U.S. economy in the late 1970s and into the early 1980s. Interest rates were in the high teens. Businesses could not expand. Hardworking Americans lost their jobs and their homes. Greenspan understood the challenges and, since his 1987 appointment, moved decisively to put the United States on a path of growth.

The Fed worked aggressively under Greenspan to push banks to increase community lending in underserved areas such as the inner city. It encouraged banks to increase loans to women and minorities and expand consumer education for homeowners – especially first-time homebuyers. Greenspan understood that a lack of access to funds was a primary barrier to development.

The results of Greenspan’s actions are clear. In 2004, after years of steady increase, minority home ownership rates surpassed 50 percent for the first time.

It is now important to watch what the Fed will do under its new chairman. Ben Bernanke has already had an illustrious career as an economist and policymaker. He chaired the economics department at Princeton University, served on the Fed’s Board of Governors and, most recently, chaired the President’s Council of Economic Advisors.

Dr. Bernanke is known as a brilliant thinker with a keen understanding of the Fed and its role. He is regarded as prudent by nature, yet is undaunted by the notion of applying creative approaches to problem-solving when necessary. After the announcement of his appointment, Dr. Bernanke emphasized that the careful and balanced monetary policies implemented under Chairman Greenspan would continue under his chairmanship.

President George W. Bush should be lauded for ensuring a smooth transition at the Federal Reserve. Moreover, African-Americans should take an interest in the Fed’s direction since it affects the growth and stability of the African-American community.

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Arica Young is a member of the National Advisory Council of the Project 21 black leadership network. Comments may be sent to [email protected].

Published by The National Center for Public Policy Research. Reprints permitted provided source is credited. New Visions Commentaries reflect the views of their author, and not necessarily those of Project 21 or the National Center for Public Policy Research.