The Lessons of Unintended Consequences.

July 27, 2011

While the stalemate in the debt ceiling discussions presents a precarious situation for financial markets, most expect that congressional leaders will arrive at a last minute deal. Until then, we will all be forced to watch, wait and wonder.
Assuming the situation is resolved, should we be all the happier for it?
The sophomoric handling of this debacle has already set up a potential downgrade of U.S. Treasury debt in the coming months. At this point, it seems almost pre-destined.
Six months ago, the very thought of this would have been inconceivable. Today? It is indicative of the craven, scorched-earth politics practiced by both parties. Diplomacy be damned. They would rather drag us into their stage drama as unwilling extras. Pawns in a politically charged power grab. Even though the final act has been written, we're still forced to endure the maddening middle acts.
It is not the lack of a solution that most threatens us. It is the unintended consequences. The affect this story has had on the other audience members. Those who tired of the drama long ago. Major investors. Hedge and private equity funds. Sovereign wealth funds. Central bankers around the world. Our creditors. They may keep their mouths shut, but they're watching. Intently. And once the final curtain drops-their reviews will be scathing.
Yet, our duopolists sit atop their perches in D.C. and lament that business refuses to put capital to work. Why? Larry Fink, head of Blackrock, the world's largest money manager, recently gave the following appraisal:
'Some of our clients are actually de-risking and are slowing down their investment decisions. What is driving much of this confusion and uncertainty is politics globally. I believe the private sector is doing a very good job, evident by growth in earnings, and yet, what is the greatest inhibitor to the economic vitality right now of Europe and the United States is essentially politics.
"We have to face this great uncertainty as politicians determine the outcomes of, in the United States, of our deficits, of our debt ceiling, which puts greater uncertainty with businesses, it puts greater uncertainty about job creation, and we need to move beyond this. Nevertheless, it is very impressive for me to watch how corporate earnings continue to be driven. And importantly, this is why I believe those customers who are de-risking because they're focusing on today's headlines ... are making a mistake."
Steve Wynn, CEO of Wynn Resorts, went much further in his assessment of the president's performance. During the company's quarterly conference, Wynn said the following:
"You watch television and see what's going on this debt ceiling issue. And what I consider to be a total lack of leadership from the President and nothing's going to get fixed until the President himself steps up and wrangles both parties in Congress. But everybody is so political, so focused on holding their job for the next year that the discussion in Washington is nauseating.
And I'm saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime. And I can prove it and I could spend the next three hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right. A President that seems, that keeps using that word redistribution. Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they are frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America.
You bet and until we change the tempo and the conversation from Washington, it's not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the President."
You can't have it both ways. Creating uncertainty. Demanding action. Until our government steps out of its own way, fear, indecision and insecurity will continue to be the unintended consequences.
The law of unintended consequences--step in its path at your own peril. It does not forget or forgive. It has no regrets. And long after the news has ceased to discuss the events of these last few months, it will continue to haunt us like an economic poltergeist. A demon never fully exercised. A debt never fully paid. Stay tuned.

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