Tuesday, September 17, 2013

Effects of Potential Financial Crises Forthcoming


     Our nation is yet again gearing up for another series of financial battles the likes of which could be disastrous. The immediate concern, and the lesser of the two evils, is the potential of a government shutdown. Our government is going to run out of money unless Congress passes what is called a Continuing Resolution (CR) to keep the wheels turning. Many Republicans are pledging not to sign a CR unless the Affordable Care Act is defunded. The irony in this entire situation is that if Republicans decide to effectively shutdown the government over Obamacare, Obamacare would be unscathed because it is immune from a shutdown. In other words, Obamacare is funded through mandatory spending which would be unaffected by a government shutdown. Programs that would suffer from the government shutdown would be Social Security, Medicare, and other social programs which require funds from the government to reach beneficiaries such as the elderly.
     The next problem, and the one which has a myriad of consequences, will be the fight over raising the debt ceiling. When the government reaches its debt limit, it is out of money to borrow. This is essential if the government wants to continue to pay bondholders and nations to which it is indebted. By not raising this debt ceiling, the United States government would be defaulting on its debt and the repercussions would ring throughout the world affecting all global markets.
     First, let’s examine the potential government shutdown. Ezra Klein of the Washington Post recently stated that a government shutdown “would not be a catastrophe” as not raising the debt ceiling would. He goes on to state, “If the GOP needs to lose a giant showdown in order to empower more realistic voices and move forward, it's better that showdown happens over a government shutdown than a debt-ceiling breach. A government shutdown is highly visible and dramatic, but it won't actually destroy the economy.” The whole notion of shutting down the government over Obamacare seems to be an exercise in futility. It is yet another symbolic gesture toward the Republicans' distain of the law and this president just as the 40 plus times the House has voted to repeal the law despite not having the votes in the Senate. As many in the media have also noted, Speaker John Boehner is the shepherd trying to herd radicals on the right to a comprehensive plan forward.
     Speaker Boehner and Majority Leader Eric Cantor have both voiced their dislike for shutting down the government over Obamacare. Not only is it irresponsible but as I stated before, it does nothing to the actual funding of the program. Republican leadership knows that a government shutdown will hurt their party in the public eye and with President Obama struggling with decisive action in Syria, the GOP cannot afford to lose the upper hand with the public right now. Republicans will surely be blamed if millions of Americans do not receive their Social Security checks because a CR has not been passed over the implementation of Obamacare. This week on MSNBC’s "Morning Joe," Illinois Senator Richard Durbin stated, “If you think this 'shutdown the government' philosophy approach is a great one, sit down quietly with Newt Gingrich, who invented this model and lost his speakership over it… it didn’t work that well.” Clearly, Republicans do not want to lose this battle but it is going to be up to Boehner and other high ranking GOP members to whip the party in line. Boehner may lose his speakership over this either way.
     The Center for American Progress recently published a report outlining Boehner’s plan for the economy. Their report reveals that Boehner is using post-sequester levels as the baseline for future funding. What this means is that Boehner has not intended to repeal the sequester and funding for defense and non-defense programs is significantly lower than before the sequester took effect. To provide some figures, pre-sequester level defense allocated spending was $552 billion while allocated spending for non-defense programs was $491 billion. Since the sequester has not been repealed, funds allocated for defense are now $518 billion and $469 billion for non-defense. If Congress can pass a CR, one of their primary objectives should be to repeal much of the sequester and not just government furloughs which affect them directly (Congress ended the FAA employee furlough which contributed to wide spread flight delays just as Congress was recessing for a long weekend.) Former Governor of Pennsylvania Ed Rendell who is now a co-chair on the Campaign to Fix the Debt, a non-partisan movement to put America on a better fiscal and economic path, notes that even the drastic and crippling sequester cuts are not enough to fix the debt problem facing the US. Many Republicans are also being fueled by irresponsible spending and our rising debt for their decisions in these upcoming financial disputes.
     Second, Congress is facing another debt ceiling crisis. This situation was made much more dire when Treasury Secretary Jack Lew stated the government would reach its debt limit by mid-October. It was originally thought that the debt limit would not be reached until November or even December. This week is the five year anniversary of the greatest financial crisis since the Great Depression. If the debt ceiling is not raised by Congress, the consequences will be cataclysmic. It would bring us back to 2007-2008 when some of the world’s largest investment banks went bankrupt. The US will need to raise the debt ceiling in order to continue to pay its bills. President Obama has already announced he is not going to negotiate on this as he did the last time in 2011. Raising the debt ceiling is a routine function of Congress, but as demonstrated in 2011, it was turned into a political football; a bargaining chip for Republicans.
     There is no doubt that entitlements must be reformed and the United States has a debt problem, but the solution is not to default on our debt. This would have global implications and our leaders in Congress must understand that this is bigger than their petty political differences.
     A third, more distant and out-of-reach financial issue is what is going to come of the Federal Reserve? Many believe that President Obama has procrastinated far too long on his decision of whom to nominate to take Chairman Ben Bernanke’s seat. This weekend, Larry Summers–the presumed front runner for the job, withdrew his name from consideration. Many in the financial industry believed Obama was going to tap him as the next Fed Chairman. This is not to say that Janet Yellen, the other contender, is a bad choice. The difference between the two was mainly fiscal ideology. While Summers is seen as more of a hawk and “trigger happy,” Yellen is thought to continue with the Fed’s bond buying method for the time being. Yellen is the Vice-Chair of the Fed currently and in terms of Fed experience, seems the most qualified (of the past chairs, she has been in the Fed system the longest serving in the San Francisco Fed and then being the Vice Chair.) However, given the risky decision of the Fed to continue purchasing bonds in order to keep interest rates low, many are speculating we are headed toward another financial apocalypse much worse than 2008.
     The markets have bounced back and the Dow has seen record numbers recently. Many believe this is simply a mirage and once the Fed yields it bond purchases, the markets will again tank. This skepticism has worsened given the most recent job numbers. The Fed was hoping unemployment would be better so they could begin tapering back bond purchases at a more drastic rate. Despite a quick fix for now, it is difficult to say if this method is helping or hurting the economy in real terms. This is especially relevant this week after the five year anniversary of the financial crisis with hopes of a resurgent economy have been lack luster. Many still believe things are not better and that another financial storm cloud is overhead.
     While these issues are pressing and worrisome, there are solutions. For the good of the country, these debates should not be used as bargaining chips but rather an opportunity to instill confidence once again in the Congress. When looking at the approval rating of Congress, it’s no surprise Americans feel disappointed with legislators because they too often act selfishly and against common sense. For the short term, the common sense thing to do would be to pass a CR (since it seems like one has not been passed in eons), let Obamacare live for now (the GOP must pick its battles when it comes to Obamacare – time and place), and raise the debt ceiling. Entitlements need to be reformed and our debt problem needs to be addressed but Congress has already wasted too much time and the deadline is here. It’s time for Congress to do the right thing for once.

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