What do economists want and finance managers need?

Even though economists and finance managers have similar objectives to pursue actions those result business growth and economic prosperity, tensions regarding suggested development solutions may arise due to different approaches those economists and finance managers apply in estimation of progress and sustainable development. The minutes of the Federal Open Market Committee held on March 19–20 2013 set the continuation of the low interest rates policy till 2015 and purchases of the Federal Reserve’s assets till 2014. Moreover, according to the Bloomberg records, an investor and philanthropist George Soros who delivered speech about the financial crisis management in the conference at King’s College of Universiity of Cambridge suggested to the leaders of European Union to accept Eurobonds. He expressed believes that low interest rates are essential to assist undermined European countries. However, why low borrowing costs those economists suggest are not always the most important factor that finance managers concern about in decision making?

Minutes of the Federal Open Market Committee held on March 19–20 2013 revealed that the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percentage and continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The committee anticipated that such low rates and assets purchase programme is appropriate as long as the unemployment rate remains above 6½ percentage and projected inflation is not more than a half percentage point above the Committee’s 2 percentage longer-run goal. The potential increase of the target federal funds rate was set in 2015 and the end of the Federal Reserve’s asset purchases was foreseen in 2014.

Additionally, George Soros acknowledged that during the distortions in the financial markets borrowing costs may be inadequate high. So, countries those implement strict austerity measures in order to reduce budget deficits suffer with the pace of recovery. However, the reason of tensions regarding suggested solutions may depend on different approaches to the same problem.

The general economic indicators such as the GDP growth, created jobs and inflation target could be improved by additional injection of financial resources into the system. Id est. economists may see the solution in the additional amount of assets required to stimulate development, while finance managers estimate the demand of products or services, required professional skills, optimisation of business processes and management of business development costs.

Thus, facilitation of lending to private sector with low borrowing costs is not the prime concern of finance managers. More sophisticated decisions are made regarding the scope and efficiency of business. From finance management point of view, the strength of business emerges from sustained demand of products or services and capacity to manage business costs. So, the first decision is made regarding what to produce and how to sell which follows with the decisions of how to fund activities?   

Low borrowing costs are only a fraction of weighted average costs of capital which is estimated by finance managers in financial decision making.  The other costs those finance managers assess are the costs of equity related to the shareholders’ assets allocation, as well as estimation of costs of bankruptcy and financial distress due to possible business losses.