The Only Constant Is Change

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 time soon. 
• 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 could last.

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.