Phil-osophically Speaking: August 12, 2011


The Market Tsunami

The unprecedented downgrade of the U.S. credit rating ignited the market into one of the greatest sell-offs in its history. Persistent market anxiety has rocketed U.S. financial institutions into a fully-fledged, albeit temporary, nervous breakdown. The “Financial Stability Oversight Council” went into emergency session to discuss, what else, but financial instability. Meanwhile, like those drowning in flooded lowlands, there was a headlong rush of investors to higher ground to find sanctuary in gold, U.S. Treasury Bonds and supposedly the safer currencies of countries like Switzerland. Bank stocks plunged a precipitous 11 percent, which is particularly alarming since banks serve as an umbilical cord between borrowers and savers. An even greater slowdown in bank lending could easily trigger another U.S. recession if, in fact, we ever fully climbed out of the last one.  

As the nightmare unfolded, haunting visions of Greece and Ireland, Italy and Spain gripped the imagination, causing the markets to probably overreact, but this in no way dilutes the genuine systemic problem the U.S. faces with debts and spending. Until this problem is seriously addressed, an angry thundercloud will continue to menacingly hover over the U.S. economic landscape. How embarrassing is it to be lectured by China (of all countries!) on our spending recklessness?

On Feb. 7, 2010 when Secretary of the Treasury Timothy Geithner was asked whether chronic deficits put the United States in danger of losing its AAA credit rating he caustically replied, “Absolutely not, that will never happen to this country.” Perhaps, 18 months later, Geithner had some unwelcomed premonitions that accounted for him trying to resign early last week before the downgrade occurred but was talked out of it by the President.

Now that the once unshakable edifice of the U.S. Treasury Bond appears more like the leaning Tower of Pisa, he may regret being so suppliant in acquiescing to the President’s entreaties. Financial firms, after all, hold trillions of dollars in Treasury securities and this downgrade has sent them scrambling to raise new capital, which can only exacerbate Geithner’s mounting problems. While other majvor economic powers have government bonds that are AA or lower, the U.S. economy accounts for 25 percent of the world’s Gross Domestic Product. That’s a hefty sum and who can say for sure what the ultimate consequences will be.

In response to this calamitous event, President Obama said that the rating downgrade should “add a new sense of urgency for both political parties to tackle both the debt and deficit.” It’s a tune he should have been humming a long time ago instead of reading from the breviary of the “Liberal Book of Hymns,” whose lyric is to spend now and worry later. While I was gratified and wrote elsewhere (not in this column) that although the debt ceiling agreement was a step in the right direction, it was not enough to satisfy credit agencies who see government operating on a credit card with 2.1 trillion in debt this year and tens of trillions more in entitlement programs over the next couple of decades, which they see as unmoored from the debt ceiling agreement.

Meanwhile, the President can’t break out of his ideological box of spend now and tax later. Sure tax revenues are low relative to the GDP, but that’s because of a political decision to preclude 50 percent of our population from paying income tax, notwithstanding that the vast majority of benefits from government programs is paid for by the other half. This philosophy, which underscores the belief that money in the hands of government is better spent than when it is in the hands of private investors, is one of the great myths of social liberalism. The theory was disproven once again when the $850 billion stimulus bill, enacted after the most severe recession in more than 70 years, failed to catapult the economy into a heated furnace of job creating opportunities. It didn’t, and the multiple wounds of a bleeding job market remain unstaunched.

If a dogmatic president and his myopic epigones would put as much faith in market economies and in cultivating the environment in which it prospers as they do in inefficient union monopolies good for arresting job creation but little else, the country may well experience a resurgence of those “animal spirits” that Adam Smith had so clearly recognized as the engine of economic growth and prosperity. Instead, it inanely responds to the aftermath of a grievously severe recession by pouring trillions of dollars (Obamacare etc.) into new spending and debt as well as saddling our job creating institutions with some 2,000 pages of new rules (Dodd-Frank) which is tantamount to dropping an anchor off the bow of the financial ship of state and then wonder why the boat never leaves the harbor.

The market will probably self-correct (but the sclerotic economy may prove unhappily durable) since corporations are sitting on an Everest of cash, just waiting for the right signals from the Administration and Congress that they are serious about controlling spending and deficits. We’ve created an unhealthy political and cultural environment. People were better years ago, more selfless, less indulgent and with far less expectations. But things have changed and now we have more rights, fewer obligations and multiplying regulations. In times past, old men would plant apple trees knowing they would never sit under their shade or taste of their fruit. They were willing to give up their today for our tomorrow. There is nothing inherently wrong, though nothing noble either, in wanting the so-called “good life,” filled with entitlements of every flavor, but you should be willing to pay for it instead of balancing it on the backs of your grandchildren.

Just when you think that maybe, just maybe this market tsunami might bring some conception of reality into the political equation, we get instead the Secretary of Health and Human Services, acting under the Political Protection and Affordable Care Act, announcing another entitlement that requires insurers to provide women with contraceptive services for free. Another God-given right! It just makes you want to tear your hair out.   

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