The views expressed in this column are solely those of the
author and do not reflect the views of SVB Financial Group, or Silicon Valley
Bank, or any of its affiliates.
The accelerating rate of change in the deterioration of the
global financial situation of the last three years was not anticipated by even
the most seasoned forecasters. The scope
and severity of the current financial dislocation has not been seen since the
1930’s. The extent of the shadow that could be cast by the housing market
meltdown in the U.S. illustrates not only the contagion which is possible in
globally intertwined markets, but, perhaps more importantly, the lack of any
comprehension about the probability of such a crisis occurring.
The latest development, S&P’s downgrade of the sovereign
debt rating of the United States, reflects the severity of the financial situation of the U.S. in the context
of a global financial environment ,which will impair the ability of the U.S. to
recover as quickly as it may have been able to do otherwise. Fair enough, but
the text of the announcement reveals that the downgrade was prompted by a complete
lack of confidence in the government, not the economy.
Here is the S&P text I am referring to:
- The downgrade reflects our opinion that
the fiscal consolidation plan that Congress and the Administration recently
agreed to falls short of what, in our view, would be necessary to stabilize the
government’s medium-term debt dynamics.
- More broadly, the downgrade reflects
our view that the effectiveness, stability, and predictability of American
policymaking and political institutions have weakened at a time of ongoing fiscal
and economic challenges to a degree more than we envisioned when we assigned a
negative outlook to the rating on April 18, 2011.
- Since then, we have changed our view of
the difficulties in bridging the gulf between the political parties over fiscal
policy, which makes us pessimistic about the capacity of Congress and the
Administration to be able to leverage their agreement this week into a broader
fiscal consolidation plan that stabilizes the government’s debt dynamics any
- The outlook on the long-term rating is
negative. We could lower the long-term rating to ‘AA’ within the next two years
if we see that less reduction in spending than agreed to, higher interest
rates, or new fiscal pressures during the period result in a higher general government
debt trajectory than we currently assume in our base case.
The citizens of the United States have long believed that
they have a “government by the people, for the people and of the people.” If we
still feel this way, the current government is nothing more than a reflection
of ourselves. Every member of Congress and the President were elected by the
citizens of this country and are accountable to them, and we are also
accountable for having elected them. The polarization in Washington is certainly a reflection of the polarization
among the 37.8 percent of the population that voted in the last federal
election. This may also be what happens when the majority of a nation’s
citizens do not vote, leaving it up to the more motivated voters who tend not to
be in the center. There is no excuse for the behavior politicians exhibited in
Washington recently or probably in the preceding years when the deficit was
allowed to grow at an unsustainable rate. However, they were elected and there
was no national groundswell of protest either then or now to let them know how
disappointed their electorate was.
The current global epidemic of searching for who should take
the blame for this crisis is largely pointless. Financial markets and
institutions were initially singled out as main culprits by politicians and the
court of public opinion. Currently politicians, both in the U.S. and in Europe,
seem to also be in the crosshairs.
When did this behavioral phenomenon of looking for someone
else to blame start? We should start by looking at ourselves instead. Every
citizen of the countries affected should look at their own contribution to the
current situation. Americans, who spent
beyond their means and allowed their politicians to accrue unmanageable
deficits. Europeans, who allowed their elected governments to enter into a
monetary union without adequate preconditions or enforceable mechanisms for
correcting irresponsible financial behavior by its members. We all,
collectively, must accept that none of us is in a position to cast the first
stone. This view is perhaps seen as cold
and clinical, and it probably is (as well as being very unpopular), but it is a
fact. There has been irresponsible behavior by all concerned, politicians,
CEOs, traders, brokers, lenders, borrowers, investors and citizens. This
behavior is not new, it had been going on for years and we were all too
prosperous to question why things were going so well or how long the good times
Taking financial risks is a part of everyday life and the
ability to make independent decisions for ourselves is a cornerstone of
economic freedom. We all invest, directly or indirectly, whether we realize it
or not. We all are investors in the U.S. bond market through our Social
Security contributions and insurance policies. Our home, pension, 401K, IRA and
any bank account balance over the insured amount are all risk bearing
investments and may not yield the return we had counted on if there is an
adverse change in markets. The U.S. has historically had a very low savings
rate, which is currently at 5.4 percent of our disposable personal income. While the tax structure and the historic rates
of return of other investments make this more understandable, it does not
change the fact that the majority of the population of the U.S. does not have
an adequate safety net when economic circumstances change.
The largest risk we now face is a crisis of confidence and
it is vital to realize that this again is in our collective hands. We should
save a bit more, but we also must continue to invest and spend to fuel the
economic growth required to remedy the current situation.
The change that is inevitable will be positive if the
citizens of the countries currently in financial straits act in a responsible
way with their finances and their votes.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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