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Analysis: Economic crisis averted — really?

Analysis: Economic crisis averted — really?

By Con Psarras | Posted - Aug. 4, 2011 at 9:30 a.m.



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The day after Congress finally took action on the debt ceiling, the stock market was nervously unstable and analysts talked about a double-dip return to recession.

And we thought things would be bad if the debt ceiling wasn't raised.

In truth, it's probably not fair to view the drop in the Dow as a referendum, per se, on Tuesday's debt deal, but it may very well be a gauge of just how uncertain our economic future remains - not necessarily because of what Washington did, but because of what it didn't do.

The messiness of the debate in Congress was just one leg of a triple-whammy that hit the markets all at once -- the worsening fiscal crisis in Europe being the first leg, and the release of lackluster economic data in the U.S., the second.


The handling of the debt crisis certainly did not instill confidence in Washington's ability to muster any cohesive, intelligent or consistent leadership on economic policy, now or in the foreseeable future.

But the handling of the debt crisis certainly did not instill confidence in Washington's ability to muster any cohesive, intelligent or consistent leadership on economic policy, now or in the foreseeable future.

A big reason for that is the giant chasm between the two distinctly different economic philosophies embraced by the two sides in the debate, which is at the root of why compromise has been so elusive. Democrats tend to embrace a Keynesian philosophy that calls for greater government involvement in monetary policy, while Republicans lean toward a free market, supply-side doctrine.

That is an admittedly very simplified conjugation, but the fact is, whichever approach holds the most hope for economic recovery is now a moot point, because the debt deal passed Tuesday really serves neither master.

Economist Paul Krugman, a Keynesian, argues the debt deal is a "catastrophe" because it doesn't call for increases in revenues and it cuts spending at a time when the government should spend more, not less, in order to pump blood into a moribund economy. Republicans - particularly of the Tea Party bent -- believe government spending is what got us into this mess in the first place. They hate that we bailed out banks and troubled auto companies and they argue that the huge federal deficit needs to be brought under control before businesses and individuals will feel confident enough to begin spending again.

There is no doubt that corporations and investment managers are sitting on lots of cash, wary to open coffers until there is a clearer view of the short-term and long-term landscape, here and abroad. What's causing the nervousness in the markets is the simple reality that the deal reached Tuesday does very little to bring any more clarity to that picture.

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Con Psarras

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