Plunging markets reflect ugly political paralysis

August 4, 2011

By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Thursday’s market plunge reflects, as much as anything, an ugly political paralysis. This phenomenon, rather than any particular headline, seems to have freaked out investors, sending U.S. stocks down around 4 percent at one point, Treasury yields below 2.5 percent, oil under $90 a barrel and even gold off 0.5 percent. Politicians’ brinksmanship in Europe and the United States makes for great theater, but it has done little to resolve what most troubles the global economy: too much debt and no clear plan to pay it off.

Take Uncle Sam. Some lawmakers seemed willing to risk a self-inflicted catastrophic default. Yet the last minute agreement did nothing to address the long-term healthcare and Social Security burden — by far the biggest danger to the nation’s finances longer-term. The $2.4 trillion in hoped-for but nebulous spending cuts falls short of the $4 trillion needed to stabilize the U.S. debt-to-GDP ratio. And the deal ensures that the clearly slowing pace of economic growth can’t be tackled with fiscal stimulus.

Europe, meanwhile, still looks lost in the weeds of its much more real and immediate debt crisis. The region has been trying to set things right for nearly two years since Greece’s oversized debt load first appeared in the market’s crosshairs. A series of EU-wide rescue packages may have been political achievements of sorts, but their failure to address the problem fully has left peripheral nations vulnerable to bond market sharks, with Italy the latest to feel their bite. Calls for a bigger European rescue fund and the European Central Bank’s decision to intervene in markets again show the political classes floundering.

Predictably, many investors are holding out hope that central banks will ride to the rescue, as they have for the last four years, with further monetary stimulus. But it’s no surprise their limited tools are no longer right for the job. Flooding the market with more cheap money surely can’t be the right fix when the Bank of New York, for one, is now charging big depositors a fee to park cash in its vaults.

What’s needed is a genuine effort to reduce debt, not just delay repayment one more time, as with the latest Greek bailout. Unfortunately that means making unpalatable choices, like opting for austerity and even tax hikes, at least temporarily. While the West’s leaders instead flail and fudge the numbers, it’s no wonder if investors lose faith.

Comments

Gold is falling. Perhaps the sell off was overdone.

Posted by BDIH | Report as abusive
 

Ms. Crane – you are EXACTLY right.

In Europe investors are riding in the back seat of a car speeding down a winding mountain road that is being driven by an idiot in denial who’s not watching the road or the signs, because he’s too busy picking the lint out of his bellybutton.

In the U.S. it’s the same car and same conditions, but it’s being driven by two guys in the front seat that hate each other and that are fighting over the steering wheel.

Under such conditions, what else should we expect investors to do but panic???

In Europe, the latest Greece bailout package, the convoluted tangle of spagetti that it was, showcased for investors how inept their leaders are.

In the U.S., the recent debt ceiling debate showcased for investors how divided and paralyzed the government is. So even though an agreement was reached and signed, the damage was done, and now we’re seeing it expressed in the markets.

The crash is imminent for the two cars speeding down the mountain. No matter that investors are SCREAMING from the back seat for the drivers to get a clue and avoid the crash. They aren’t being listened to.

Posted by NukerDoggie | Report as abusive
 

So, the problem is that the debt deal didn’t make the confidence fairy confident ENOUGH? How about if the Social Security and Medicare folks just die. Would that do it?

This column reminds me of the old joke about Mr. Stupid, The Carpenter: “I keep cutting, but it’s still too short!”

Posted by lambertstrether | Report as abusive
 

To speak about the “Social Security burden” when social security is solvent for the next 20 years at least, is ridiculous and just demonstrates your inability to rise above partisan talking points and do some real, independent thinking. Doesn’t say much for the kind of columnists Reuters hires.

Posted by Medusa | Report as abusive
 

One way of correcting this nation’s problem is dump all current politicians, select “none of the above” in next election. Campaign needed to be funded by public money to get minimize the influence of small group of money. They are partnered with politicians, ruining this country. Politicians are corrupt, taking money from bankers and judicial branch is clueless, all the way up to the Supreme Court. Founding fathers of this country would have mourned of this dreadful fight between parties and self serving individual politician. None of them deserve my vote.

Posted by ihk888 | Report as abusive
 

I’m fascinated by the statement “Social Security problem.” Until the government started robbing the people of their SS funds that they, the people, had put in through payroll deductions there was no “problem.” The problem is NOT SS. It is the greedy politicians who robbed the people. If they would have left it alone, the SS Trust Fund would have been worth trillions. Blame EVERY President from LBJ to BO. Blame EVERY Congress, both houses, both parties (Republican and Democrat). Blame the powers behind them,mostly the Big Bankers.

Posted by neahkahnie | Report as abusive
 

“Unfortunately that means making unpalatable choices, like opting for austerity and even tax hikes”….
or “selected default” :) :):).

There are not many choices – complete default, hyperinflation, tax redistribution of wealth, or global war/revolutions. I would say a really progressiveness in tax is the easiest AND cheapest for investors way of resolving the mess, but somehow they don’t want to embrace it. It is better to pay 10% more in taxes than to witness stock market PERMANENTLY plunges 20-25%, for example.

Posted by Ananke | Report as abusive
 

Why is no one asking the most obvious question?:
Why has consumer sentiment (which is driving the majority of the other economic variables) continued to decline in recent months?

It is pretty clear to me that US consumers have been constantly reminded of the Congressional impasse in regard to the US National Debt.
During all of this time ‘No News was in fact Bad News!’ Furthermore, we had to live with the ever-present knowledge that for the 1st time in US History our National Leaders were deliberately threatening to cause a grave economic crisis. Wow! That is how to start a recession when we least needed it!

Posted by HAP | Report as abusive
 

Agnes, Medicare is a far larger problem than Social Security, and far sooner. So lets’ have at least a small amount of journalistic integrity here….
Secondly, if unemployment would drop from 16% (total unemployment) to around 5%, much of the annual budget deficit would be wiped away, and you know it (or you should).
However, I do give you credit for naming a major problem – Hate, vitriol and extremists are the norm in Washington now-a-days, and that hasn’t helped confidence…

Posted by edgyinchina | Report as abusive
 

There are two ways to reduce deficits. You can spend less or you can increase revenues or you can do both. Why is everyone so terrified by taxes?

Posted by Ralphooo | Report as abusive
 

I think political paralysis is apt term used by author if last moment recent debt deal is kept in mind. In democratic set up the ability of negotiating in the best interest of the nation without wastage of much time & energy, of course after detailed meaningful discussion is a must acquired syndrome by any party.

Posted by vksaini | Report as abusive
 

A well written article – but touches only on one aspect of the reasons for deadlock.
A second reason is that no one has a clear plan.

The only out is a reverting to a fixed exchange rate regime and falling back to Gold as the current Bretton Woods II floating rate regime and fiat money and pegging to the Dollar days are ante-deluvian.

Posted by libertariantr | Report as abusive
 

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