CHEAPER BOOZE----GOOD NEWS?

Hallelujah! The Federal Reserve Bar and Grill has today lowered the price of a good stiff martini by 50 cents, to just $3. This is the second price cut in just the last eight days---on Jan. 22 the price was cut from $4.25 to $3.50. Ben Bernanke the Bartender also hinted that more price cuts could be in the offing. But why wait? If you're feeling nervous about being able to pay your debts, your worries are over. Just tap your plastic for another advance and get blotto! You've been spending money like a drunken sailor for years now. Why not keep the party going. Drink is cheap, so........ Wait. Wait! WAIT! I got a bit carried away for a moment. Of course you knew the realities---that the Federal Reserve cut interest rates, not martini prices, for the second time in eight days. But the harsh reality is that the last thing our economy needs is a cheap way to stay on our national spending binge. WANTED: NATIONAL HANGOVER What we really need is a solid, blistering, head-crunching hangover. We have to put a brake on our excessive spending. That goes across the board, from the government to each individual and family, and all points in between. It's fiscal rehab. Detox the spending frenzies from our systems. Sweat out the urges to buy, buy, buy. It only hurts for a little while, and we can come through it with a fresh realization that prudence and moderation and restraint can be healthy. Cutting interest rates will only encourage more spending---that's the point of it, after all---and that can be devastating, because we have forgotten how to spend wisely. We have forgotten how to budget sensibly. We have forgotten how to evaluate risk intelligently. Putting a bottle of booze in the hands of a drunk can give him another day or two of revelry. But the added damage to his liver will creep ever closer to the fatal stages. The teenager sneaks a gulp of rotgut whiskey from his parents' liquor cabinet. Next thing he's hustling someone to buy him a sixpack at the nearby 7/11. Then he's a regular at the local booze hall ("Honest, I just went in to watch the game. How could I know it would go into three overtimes?") Then he's having a few drinks at lunch, a shot or two in the afternoon, a stupor in the evening and a blackout on the weekends. It's a cycle that goes on forever. We started out a few years ago getting suckered into signing up for half a dozen "too good to be true" credit card deals. When we hit our borrowing limits, the banks lured us with home equity loans, which we tapped to the max because our homes had surged in value. When the mortgage payments got too high we refinanced with the fat guy from the TV ads. When the interest rates on those loans got boosted, we yowled for the government to bail us out of our dilemmas. MONEY FOR VOTES And along gallops government to the rescue. In addition to the interest rate cuts, the President and Congress are girding up to put hundreds of billions more in our pockets. All this in an election year, when "what have you done for me lately?" is all our elected pimps hear. Oh, yes, these government programs will result in huge ongoing annual deficits. Today they are estimated to be around $400 billion for 2008 and 2009, giving a new incoming President a royal red ink carpet. As our deficits soar, so does our national debt, and the interest thereon, which we increasingly pay to foreign investors. Then we reach a point where we have to say, "No more deficits." So we simply print more money. Literally. Too much money floating around is an open invitation to inflation. We panic at the thought of rising prices, so we borrow in order to buy, buy, buy before prices go up. Our panic buying indeed causes prices to go up. And the wheel has come full circle. Once a drunk, always a drunk. Deal with it. SHOP BANK'S QUALITY OF SERVICE AS WELL AS COST OF SERVICE By the way, the Fed's interest rate cuts will be felt first by banks which borrow from the Fed on a regular basis. The banks' lower borrowing costs will be passed along, in part, to their prime borrowers: the big businesses which will hopefully spend the borrowed money on job-creating projects. Very little, if any, of the banks' lower borrowing costs will filter down to the public. Why not? The banks' first priority is to boost their profitability. They might offer tiny cosmetic rate drops on credit card debt, but they'll increase their other charges swiftly and decisively. Then, in time, as their profit pictures improve, competition for your business will stimulate the possiblity of lower banking costs. Meanwhile, shop carefully, not just for the costs of a bank's services but, perhaps more importantly, for the quality of a bank's services. This article supplements Chapter 1, pages 16-18 in Personal Finance. Access the textbook by clicking on the box in the right column.