Friday, July 29, 2011

Week in review 7.29.11

Thank you congress for that ugly, ugly week. 

The S&P 500 lost 3.92% as the all important debt ceiling deadline hung like a dagger over the head of the global economy.  All things considered though, 3.92% may not actually be too bad in relation to the gravity of the situation.  Between the relatively tepid decline in stocks, marginal increase in the VIX (to 25) and decline in treasury yields, securities prices don't seem to really believe that the government is going to default, or more importantly that a default would do too much harm to the economy.  

Still, Washington's lack of understanding of all things practical never ceases to amaze.  Even to a person who is in favor of a balanced budget amendment, it is stunning that congress would choose to take an ideological stand against the backdrop of a ticking-clock deadline.  Where were these principled politicians the last dozen times the ceiling was raised?  Why can't sensible policy be crafted in the absence of crisis, when time would allow for a thoughtful discussion of the future?  Why does the country have to be pushed to the brink of insolvency and beyond for politicians to take notice?

How lamentable that our politicians are only motivated to act with their backs against a wall.  Worse yet, is how once motivated Washington appears incompetent.  The US government should not be even close to the position that it is in today, 4 days from a "technical" default.  Set aside the fact that a compromise should have been made weeks ago, true leaders would have taken a stand years ago.  But now the stakes are too high, and the time for ideologues has passed.  Washington first must raise the arbitrary debt ceiling and then worry about how it's never going to come close to breaking it again.  Both do not need to be done at the same time, but both need to be done.

It's so difficult to give these politicians the benefit of the doubt, but even despite the theatrics, the rational observer must acknowledge that the most likely scenario continues to be that a deal will be struck.  This would obviously have positive implications for securities prices, which is probably why stocks ended the day off of their lows.  Even Washington isn't crazy enough to put political gamesmanship over the welfare of the US citizenry.  Let's hope.

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