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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Great Recession - Politicians Still Don’t Get It!

Stock-Markets / Financial Markets 2013 Mar 02, 2013 - 12:35 PM GMT

By: Sy_Harding


In the early 1990’s, in the aftermath of the 1990-91 recession, the outcry to politicians was “It’s the economy, stupid!”

With the economy currently recovering, but anemically, an apt cry-out might be “It’s the politicians, stupid”. Or perhaps more accurately, “It’s the stupid politicians!”

The recovery from the 2007-2008 ‘Great Recession’ has been taking place for four years, but doing so in spite of the propensity for Washington to repeatedly throw fear and uncertainty in the way of the recovery, making it difficult for private sector spending to take over for the initial massive government spending that launched the recovery.

In spite of pleas from Fed Chairman Bernanke that Congress do its share from the fiscal side, each of the last three summers has seen the recovery stumble until the Fed finally rushed in alone (with another round of QE type monetary easing) to get the recovery back on track.

Each time the economy stumbled Congress remained gridlocked by political ideology, unable to act on even routine bills like extending the debt ceiling (so the bills covering spending Congress itself had previously authorized and spent could be paid).

It was only when the stock market showed its growing concern, by rolling over into corrections each spring, that politicians awakened to reality and in panicked late-night sessions reached last minute agreements on whatever was the worrisome issue at the time.

Obviously nothing has changed. The year-end fiscal cliff threat was ended only by a last minute late-night session to kick it down the road after the Dow tanked for five straight sessions in the final week of the year.

The amnesty was short-lived, and bickering and name-calling has resumed, this time over resolving the so-called ‘sequester’ issue and its automatic spending cuts.

So far there has been no pressure from the stock market (the only pressure source Congress seems to respond to), and so no effort to act as the March 1 sequester deadline approached. That is even though both sides agree the spending cuts as currently spelled out will cause significant fiscal harm to the economy.      

It’s important to realize what has happened in Europe.

The U.S. does not have exclusive rights to inept politicians. Over recent years, European politicians also reacted only to periodic scary plunges in their stock and bond markets, taking belated and panicked actions each time to repeatedly kick the euro-zone debt crisis down the road.

Meanwhile, U.S. Fed Chairman Bernanke warned European leaders a couple of years ago that they were cutting government spending and introducing austerity measures too soon in the global recovery. Sure enough, the 17-nation euro-zone economy slid back into recession, and shows few signs even now of coming out of it.

Congress might do well to listen to Bernanke’s similar blunt warning this week that the costs of the automatic spending cuts and already adopted 2% tax on the wages of those earning less than $114,000 would just about wipe out the positive impact on economic growth expected from the Fed’s ongoing easy monetary policy. It’s estimated that between the spending cuts and tax increase, 2013 economic growth would be reduced by 1.1%. That’s not a pretty picture for an economy that grew only 1.5% over the last six months of 2012.

 Bernanke wants Congress to work on a compromise that would lessen the effect of the automatic cuts so as to give the private sector more time to recover and be able to withstand larger government cuts and austerity measures later.

He noted in his testimony before Congress this week that the recovery is close to faltering again, and Congress should “avoid fiscal actions that could impede the ongoing recovery.”

And indeed we have seen potential warnings in recent economic reports. For instance, mixed in with ongoing positive reports, this week we learned that the Chicago Fed’s National Business Activity Index fell to -0.32 in January from +0.25 in December; Durable Goods Orders fell 5.2% in January; construction spending unexpectedly fell 2.1% in January; and personal incomes fell 3.6% in January, the biggest monthly decline in 20 years.

It’s not like Congress has to learn by making its own mistakes. It has only to look across the water to Europe to see how failure to manage the withdrawal of stimulus in an orderly manner can push economies back into recession, making it that much harder to tackle the ultimate goal of lowering government debt.

However, since Congress and the White House only seem to act when the stock market shows concern, the lack of concern shown by the market so far seems to have them again lulled into a sense of being under no pressure to do anything. That will allow any negative impact to get a firmer grip.

 I and my subscribers remain on a buy signal for the market from last fall, but those surrounding situations do nothing to change my expectation that the stock market will again run into problems as April and May approach and the market’s ‘favorable season’ ends.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2013 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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