The S&P 500 fell almost 4 percent last week as politicians in Washington argued about the debt ceiling. The Republicans and the President are finally close to cutting a deal to keep the government from defaulting. But, the deal smells more like a ploy to avoid the problem until the next election than a serious attempt to control runaway spending. As I was checking my portfolio amidst all of the political bickering I had a sobering thought; these are mostly the same fools that mishandled the financial crisis in 2008 and they are just as clueless about the debt ceiling.
How to Get a Balanced Budget
I love Warren Buffett because he has such simple and practical solutions to the most difficult problems. Although it sounds far-fetched to kick politicians out of office for running a deficit, it’s the best solution I have heard so far. Last year, the California state budget was over 100 days late and many government services were shut down. Angry voters passed an initiative that cut off paychecks to state congressmen if they miss the budget deadline. So, the California Congress, not wanting to miss a paycheck, passed an unbalanced budget and hid the deficits. The budget was declared unbalanced by the Controller, the Governor refused to sign it and their paychecks stopped. They were literally freaking out, because they run their personal finances as badly as the state’s and many members can’t afford to lose a paycheck. Before the next payday came around, a balanced budget was quickly delivered and signed.
Ending Deficit Spending
One interesting piece of news that has gone largely unreported is the Republican’s proposal, which passed the house this week, contains the requirement to vote on a Constitutional Balanced Budget amendment. This part of the bill was included to get support from Tea Party and other freshman congressmen, who were sent to Washington with a mandate to cut spending. I believe it’s a long-shot to pass at this time, but it’s a huge step in the right direction. If the 2012 election turns out anything like the 2010 election, I wouldn’t want to be the congressman on record voting against a balanced budget amendment. Voters have had enough of the arrogance and incompetence in Washington. Anyone up for reelection in 2012 is in real danger of losing their jobs.
Shady Union Deals
According to an article in the Washington Examiner, the Wisconsin Education Association (WEA) was forcing school districts to buy insurance from them at highly inflated prices. This was costing the Wisconsin school districts millions of extra dollars every year. But, with the recent law that bars some forms of public collective bargaining, school districts are now able to purchase insurance on the open market. Why would the WEA force the state to purchase highly inflated insurance from the WEA trust? One thing is for sure, that money wasn’t going into the classroom for kids or teachers. That money was going into the union’s pockets, instead of being spent on education. I’m glad this has come to an end and I predict much more scrutiny of these types of deals in the future.
Cashing in on the Default
According to an article in Politico, both Democrats and Republicans are using the debt ceiling standoff to hit up their donors for more election money. Both parties raised roughly 20% more in June than in May. The campaign supporters (special interests) have gotten so involved in the debate; they are a big reason for the partisan logjam. Politicians can’t seem to compromise, largely because their supporters don’t want them to. And, they can’t vote against the wishes of their supporters, while they still have their hands out. The wishes of voters don’t seem to matter much, at least until the election draws nearer. And, that annoying debt ceiling problem is just getting in the way of business as usual.
The Bottom Line
The bottom line is that the debt ceiling isn’t the issue, it’s the debt. Defaulting just raises the interest rates, compounding the problem. This is a bad time to play chicken with America’s future and a good time to cut spending.
“As I have traveled throughout my Congressional district, the one thing I heard loud and clear was simply please stop spending money you do not have, rein in spending, live within a budget.”
Tim Scott – (R) South Carolina
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