This column was printed in the Aug. 12 edition of the Mansfield News Journal and the Aug. 10 edition of the Ashland Times-Gazette.
My family was in Europe last week on vacation when we heard there had been a deal struck in Congress to raise the government’s debt ceiling by $2.4 trillion and to lower its spending by $900 billion over 10 years. While this should have been done several months ago with the public no wiser, I didn’t think much of it except that $900 billion in governmental budget cuts over 10 years really isn’t that much. But, then, as I was looking at the financial news on Friday morning, Aug. 5, I saw on Bloomberg that the Dow Jones Industrial Average lost 512 points the previous day. We hadn’t seen a drop like that since 2007-2008 and that started me thinking…why?
Looking at the results of the Dow Jones from the beginning of 2010 through the first few days of 2011, it is evident that there has been no sustained growth in stock prices as its averages have “waffled” between 10,000 and 12,800, but nothing more than that. With no growth in the stock averages, it is apparent that the market was not impressed with the current economic policy of the United States, even though the country had come out of the great recession of 2008 very quickly and corporate earnings have been strong. Yes, the unemployment rate is still high, but generally, it had seemed like things were good, financially, but the market didn’t think so. And, on Thursday, Aug. 4, it lost 512 points. Was it the debt ceiling deal that caused it or was it something more?
If it had been the debt ceiling deal itself, the markets would have shown weakness on the Monday after the deal was announced. That didn’t happen. So, there had to be more to it. But, there was something about the debt ceiling fight that was a concern. The bitterness of the Boehner–Obama stalemate was over their own political agendas, and it did not seem that they had the good of the country in the forefront of their thinking. Didn’t they realize that the world’s financial markets were looking for strong, coordinated leadership from the policymakers of the world’s strongest country? The last thing they wanted was political bickering that was put ahead of the importance of market stability. So, maybe the debt ceiling argument was not the cause of the market reaction, but maybe it was the signal of something bigger that triggered the significant sell-off.
Predictably, the first vote on the debt ceiling package passed the House and failed the Senate right along political party lines, again taking direction from their leadership: Mr. Obama and Mr. Boehner. That suggested that rather than thinking about what was best for the people of the United States, and also the world, they were more concerned about their party line agenda. And, then, we were two days away from default. Then, Sen. Mitch McConnell (R-KY) comes out and says that things can happen very fast on Capitol Hill. They had to have known about this issue for months and could have resolved it very quietly, but they waited until the last minute for an ideological statement on their political purposes, which the financial markets definitely did not like, losing 512 points, or 4 percent on Aug. 4, 2011. And, then, Standard and Poor’s downgrades U.S. debt two days later from AAA to AAa+, the first time since 1917 that the U.S. was not AAA. Serious losses were expected on Monday on Monday, Aug. 8, which was confirmed as the Dow was down 635, or 5.55 percent.
The markets looked at what was going on in Washington, knowing that the increase in the debt ceiling should have been done quietly and efficiently earlier this year. The political side of it could have been handled with a long term plan to balance the federal budget (and, no, we do not need a Constitutional amendment to accomplish that). And, to stimulate growth, we need tax breaks for small business, the real engine of economic growth in this country.
So, here’s the problem that the world sees, Watching Mr. Boehner, Mr. Obama and the rest of Congress bicker and fight publicly for their own political agenda has shaken the confidence of the world’s financial markets in the U.S. Instead of worrying about the economic welfare of the country, it appears that they are concerned about their own agendas. The bottom line…they would default on the debt of the strongest country in the world for political reasons. That shook the world’s confidence in the ability of Washington to lead the global economy, raised questions about its ability to solve the problems of 2011 since it hasn’t solved the ones from 2008, and posed ethical questions about the policymakers who would rather put their own agendas before those of the good of the country.
It wasn’t the debt ceiling crisis that started this financial concern, but the debt ceiling pointed out the shortcomings of American economic and financial policy. The world looks to America for financial leadership, which is based on confidence and trust. It doesn’t look like the financial markets believe that they have either one. The question becomes systemic: how to restore that confidence and trust? The answer is easy to say, but apparently difficulty to achieve. Only true bipartisan cooperation and compromise of political leaders, in conjunction with the Fed and Treasury, will enable it. However, that will take a long time, and I sincerely hope we have it.