Obama vs Romney: Election 2012 Will Keep a Divided Congress, So Expect More of the Same

I agree with President Obama, when he said in his 2008 acceptance speech, “The greatest risk we can take is to try the same old politics with the same old players and expect a different result.” It is a riff on a similar definition of stupidity.

Stupidity is too easy and probably not accurate. Calling the entirety of elected officialdom stupid (perhaps followed by a nice expletive) might feel good, but it does nothing. Our elected officials are not stupid, and they have learned to live with the expletives; they just don’t seem to want to do the job of governing the country. In that, we might not be alone.

Consider a few recent events:

Congress was in session this week. It had been on a five-week recess and on Friday, it adjourned until after the election. In the three months from early August through Election Day, they will have worked for one week. Don’t despair; it was not a whole week. They took Monday off.

Another Downgrade Threatened. Emphasizing political dysfunction, Moody’s Investors Service has threatened a downgrade of U.S. debt if the Congress does not act. Newspaper accounts included volleys of partisan talking points from elected officials casting blame on their opponents.

The Stock Market is Up Sharply. In recent weeks and continuing today, the stock market has risen to new highs. Does it know something Moody’s does not? No, it is reacting to something different: two things actually.

Federal Reserve Board. The Fed announced this week that it would purchase $85 billion of bonds each month and that it would keep short-term interest rates near zero through the middle of 2015. It is doing so to rebuild confidence in an anemic economic recovery, but there are two costs to this strategy. First, those who prefer safe returns will have to sacrifice one or the other. They will either have to accept some risk or a zero return. Older people fall into this category. Second, in case you are wondering where the money is coming from to make these purchases, it is being printed. Since the “economic vitality” of the country is not changing, representing that “economic vitality” with more paper means only that the value of the paper will decline. This is called inflation.

Federal Constitutional Court. The Federal Constitutional Court in Germany ruled that Germany could contribute to the European Stability Mechanism, which will be used to bail out Europe’s more profligate countries. According to the decision, Germany must legally retain essentially veto rights over decisions of the European Stability Mechanism. Though there would be much blustering at the suggestion, it is difficult to argue that Germany is not in charge of all of Europe.

The Deficit Hawks. There are many organizations in Washington that would fit this general description and some have recently reached out to the business community enlisting CEOs to support “fixing the debt.” As a result, $29 million has been raised and staff has been hired. They are coalescing around the idea that revenues must be raised and spending – including entitlements – must be cut. Do not expect to hear these words on the campaign trail. That would require leadership.

What to make of it? In an effort to come to grips with all of this, I met with a senior portfolio manager at a major investment management firm the other day. I asked him if his firm had changed its thinking on the importance of government action to investment performance. Historically, this firm has believed that, in the long run, investment returns are overwhelmingly driven by company performance rather than government action.

He did not back down from that view, but we agreed that governments simply do not wish to act because acting will require them to say “no.” Our election is mostly about determining which group of people will eventually hear that word. The reelection prospects of an individual candidate are far more important to that candidate than the prospect of a financial meltdown.Since neither party is likely to sweep the White House, the Senate and the House, we should probably expect more of the same for at least the next two years.

Given this mindset, the only solution is for the central banks to do the best they can to solve the problems that have been punted to them. In Germany, the fear is inflation because that is their defining experience. In America, the fear is unemployment because that is our defining experience. All central banks now have the so-called dual mandate of maintaining employment while limiting inflation.

Resolving the conflict between these two goals is a delicate process but, if faced with the prospect of a bad outcome now, or the possibility of a bad outcome in the future, central bank decisions are more understandable.

Given this state of affairs, few have sufficient confidence to make the investments necessary to increase hiring and get the world economy moving again. Government leadership might provide that confidence, but leadership does not appear to be in the job description of those whom we elect to provide it.

How much do you trust the information in this article?

Haven Pell

Haven Pell is the CEO (Chief Everything Officer) of www.libertyPell.com Formerly financial advisor, investment banker, lawyer and Navy Officer

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