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Wall Street Plummets on Debt Fears

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

Recommended Reading

Money Crashers – Will the U.S. Raise the Debt Ceiling, or Default?
Moneyvator – The Default Drama is in the Details
Beating Broke – Debt Ceiling Crisis?

This post was featured on the Carnival of Personal Finance over at Canadian Finance Blog.  If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the greatest carnival on the net.

This post was also featured on:

Intelligent Speculator – Financial Ramblings 77
Don’t Quit Your Day Job – Carnival and Links – Week of August 1, 2011

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12 comments to Wall Street Plummets on Debt Fears

  • It would be nice if there was some ability to take action on national spending outside of government action, but sadly this is the one issue where we probably have to have an elected official deal with it.
    Bankruptcy Ben recently posted..Private Schools making parents literally bankrupt is it worth it?My Profile

    • Ben,

      I’m hoping for a balanced budget ammendment. We have it for our state and it keeps the deficits from piling up. People have stopped spending themselves into debt and now it’s time for the government to do the same. A lot of the money is either swindled or wasted anyway.
      Bret recently posted..Wall Street Plummets on Debt FearsMy Profile

  • Bret,

    Great article! When it comes to all of these shady dealings, the best thing we can do is shine a light and watch the insects scatter.

    I’m pessimistic on the potential of the BBA to pass Congress, but at least it will get a vote. The funny thing is that only Vermont doesn’t have a similar mechanism at the state level (http://www.ncsl.org/?TabId=12651). If the states are truly a laboratory for democracy, isn’t it time to start a clinical trial?

    And you’re right – what is the debt ceiling stopping if it is just raised whenever the national debt gets near it?

    -Paul
    PKamp3 recently posted..How Much Does Noise Affect Real Estate Prices?My Profile

    • Paul,

      I read a really sad story today about another city Central Falls, RI declaring bankruptcy because of city pension liabilities. I predict this is going to be a growing problem for a long time. The unfunded pensions demanded by the public unions are a ticking time bomb.

      The BBA is a no-brainer and I’m glad the Republicans snuck it into the deal. No matter who is in power, they will be pandering to special interests and attempting to buy votes. A lot of the Federal budget is blatantly wasted or skimmed by the politically connected. This would force Congress to get real with spending once and for all. If a BBA does pass, there are going to be some tough decisions.
      Bret recently posted..Wall Street Plummets on Debt FearsMy Profile

  • Wow–very interested about what happened in California last year. Nobody wants to lose a paycheck:).
    Amanda L Grossman recently posted..New Car Vs. Used Car: Why We Will Buy UsedMy Profile

    • It was really fun to watch Amanda. The people up in Sacramento got a big wakeup call. They were late with the budget four or five years in a row. The last time, it really hurt a lot of people, both in the government and out. Once it started affecting their paychecks, it suddenly became important.

      I would love to see something like this become law at the Federal level. If their paychecks stopped unless a balanced budget was passed, I’m sure it would happen quickly. The people in Washington could use a wakeup call.
      Bret recently posted..Wall Street Plummets on Debt FearsMy Profile

  • I think a lot of the conspiracy theories about politicians “wanting” a crisis or wanting this downgrade we just got are just that – conspiracies. It isn’t beyond reason that certain politicians, especially in the Tea Party, just want the debt to move in the other direction. It’s really destroying our future before our eyes and few Americans seem to care – at least they’re not voting like they do. We can’t afford our current entitlements, wars and low tax rates. ALL must share in the sacrifice to get us back into the black. It’s been a decade since we’ve had a surplus. No business could survive like that, what makes people think the US can continue to run a deficit indefinitely?
    Darwin’s Money recently posted..US Loses Triple A Credit Rating – It’s About TimeMy Profile

    • Darwin,

      I’ve seen a lot of comments about this conspiracy, mostly by liberals blasting the Tea Party. I respect everyone’s ideology, but I agree those types of comments are misguided. In fact, I think the media is somewhat responsible for spreading this type of garbage. Nobody wanted to purposely cause a default, just to blame it on President Obama. They really do want to stop the out of control spending and I agree with them.

      I’m not a Tea Partier or even a Republican, but I get what they are trying to do. The current deal may have raised the debt ceiling, but it neither brought spending down to sustainable levels nor saved our credit rating. Thankfully, there was no default. But, we still have a long way to go before we can get back onto stable ground. And, neither party seems to have accepted reality on the situation. Taxes have to be raised and entitelements, the military and the government have to be cut. Nothing else adds up. That’s the reality. The people understand this, but the government hasn’t shown the courage to face the problems they have caused.

      At least, that’s my opinion from watching it unfold.

      Bret
      Bret recently posted..The Secret to Success for Working StiffsMy Profile

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