Plunging markets reflect ugly political paralysis
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.