Will Wall Street Snap?
For the past few weeks, as the debt-ceiling crisis has intensified in Washington, financial markets have been acting on the assumption that a deal will be done. This weekend, that changed.
House Speaker John Boehner’s decision Friday evening to walk away from the table (surely not coincidentally after the U.S. markets closed for the weekend) acted as the proverbial smelling salts that snapped global markets out of what had been a pleasant dream that all will be well before it’s too late. As the folly continued, slow motion, across the weekend, governments and market makers throughout the world seemed finally to realize what some had long suspected: Saner heads do not control Congress—and may not prevail.
Wall Street’s Shocking Debt Denial
"The United States is not going to default on any obligation. We are not a credit risk, believe me." Calm words, coming from the financial sage of Omaha, Warren Buffett, and words meant to keep the markets calm in the face of mounting hysteria in Washington over the debt ceiling and potential default of the U.S. government. This perception—that Washington may go to the wire on Aug. 2 but that in the end, sanity will prevail—is widely shared on Wall Street and on bourses throughout the world. That is almost as disturbing as the debt mania, because if Buffett and the financial community are wrong, they are wholly unprepared for the consequences.
It’s not as if this is a sudden crisis. It has been percolating for months, at least since the tidal wave that swept freshmen Republicans and Tea Partiers into the House of Representatives in November of last year. Or if that was too amorphous, at least since early spring, when the likes of Eric Cantor and Paul Ryan began laying markers in the sand that they would countenance no new taxes, would demand drastic spending cuts, and would use the debt ceiling as leverage.
Debt Police Go Rogue
As the debt-ceiling storm intensifies, some reports indicate that the White House, and perhaps the global financial markets, are less concerned with paying bills after Aug. 2 than with credit-rating agencies imposing their first-ever U.S. government downgrade, from AAA to AA+.
How did it come to this—that a trio of private-sector companies could wield such enormous influence? More specifically, a trio that has proven chronically behind the curve, analytically compromised, and complicit in the financial crisis of 2008–09 as well as the more recent euro-zone debt dilemmas? Somehow, these inept groups again find themselves destabilizing the global system in the name of preserving it.
Staying on Track
The past month in financial-land was dominated by two combustible fears: that Greece would default on its debts and plunge the euro zone into chaos; and that China would hit the brakes and bring much of global economic activity down with it.
The Greek crisis has subsided for now, but China fears remain, especially as recent data from the Chinese government has shown a moderate decline in the rate of expansion. These fears are overblown. At every point in the past decade, there have been warnings of an imminent China slowdown, of an im- pending hard or soft landing that will leave many people holding worthless assets, making the mandarins in Beijing tremble and the population of China angry. Yet the idea that there might be neither a hard nor soft landing of the Chinese economy but instead no landing, that China will maintain an elevated level of growth and activity that will continue to bolster the global economic system — that possibility is dismissed as undue bullishness, excessive optimism or outright starry-eyed naiveté.
Jobs Aren’t Coming Back
So yesterday’s monthly employment report, which showed a net gain of merely 18,000 jobs, once again confounded the expectations of economists—and sorely disappointed those in Washington by showing precious little job creation in the United States.
Nonetheless, Americans remain in denial. Economists rely on models that correlate GDP growth and other indicators with past patterns of employment and assume that because GDP is expanding 2 to 3 percent this year, job creation will follow. The political class continues to treat employment as a product of the recession and sees government policy as either helpful to future job growth (Democrats) or harmful (Republicans). We are stuck in a framework that treats unemployment today as a cyclical phenomenon, and assumes that employment will return as the overall economy recovers. The truth, it is becoming clear, is that unemployment is a structural issue, and that the tools being used are based on the wrong analysis and will therefore continue to fall short.