Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
June may be a time for drag racing on the back roads of teenage America, but it’s no time for a game of chicken in Washington DC regarding the full faith and credit of US debt obligations.
Credit rating agencies, fresh from dtheir spinal implants after their disastrous breakdown enabling the housing and Wall Street financial crisis are itching to be the first to put America’s triple A rating on notice of downgrade — a move that would shake the bond markets out of their complacency, make the Euro/Greek crisis look tame by comparison and put the chances of another one-day 700 point type drop in the Dow Jones Average at at least 50-50. You will recall that such a 700-point drop is what finally “convinced” Congress to approve the bitter medicine of TARP prescribed by the US Treasury for the financial mess the banking world was in. That Dow drop enabled most Republican and some on conservative Democrat opponents of TARP to hide under the barrel of saving individual investors from a market crash, rather than saving the bankers, when they relectantly voted for TARP. Is another such scenario unfolding in the nation’s capital now about the debt ceiling.
While common sense suggests we should not be playing with fire with the debt ceiling (which creates the specter of US credit default, or at least an alternative cessation of government programs like Social security payments, Pell Grants, pay checks for the military and domestic defense contractors, etc), it may be the case that some in Congress we need to actually bring on such a financial Armagedddon — reflected in a stock market/bond market combined crash — to justify their eventual vote to lift the debt ceiling and thus again “save” investors from the debacle that the Congress itself brought on!
If that is truly the case, get into cash (and maybe some dividend payers and quick! With the media cheering for a train wreck (far more interesting and newsworthy than a timely settlement of the issue), we can be sure that the scenario just outlined will soon sweep Greece off the front financial pages, and trigger the markets’ usual “discounting mechanism”
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