Current politicians deserve criticism

By DAVID MOON, Moon Capital Management, LLC
August 14, 2011

The headline from a newspaper story last week read “Dow collapse worst since 2008 crisis.” One would have thought an editor could have put Monday’s market decline in somewhat better perspective – or at least not in a misleading perspective.

The last major S&P 500 decline during the 2008-09 bear market was a five percent single-day drop. It occurred on February 10, 2009 – one month before the market bottom.

None of the real economic news of the past two weeks is new.

The US has been undeserving of AAA credit rating for some time. Standard and Poor’s merely acknowledged the long known truth, while Fitch and Moody’s should be embarrassed for not doing so.

The US economy is no weaker today than it was three weeks ago – and that is fairly weak.

Does this data suggest that this most recent stock decline is nearing an end? No. It is not possible to consistently predict short-term movements in the stock market.

Stock declines of these magnitudes are just as likely to be associated with the end of bear markets as they are a beginning or continuation of them.

I have regularly argued that with respect to the short-term dynamics in the economy, politicians are a lot like quarterbacks: they receive too much credit when things go well and too much blame when they don’t.

This current group has changed my long-held belief. They deserve every bit of criticism they are receiving.

The downgrade of the US debt was the trigger for this worldwide investor panic, but the ballooning US federal debt was not the reason for the downgrade. John Chambers, chairman of Standard and Poor’s sovereign debt committee was interviewed on CNN and said “we would not have lowered the credit rating if the US had raised the debt limit in a timely manner.”

A 1,000 point decline in the Dow was not specifically precipitated by the US financial condition. It was caused by officials in Washington who value partisanship and showmanship over leadership.

Due to a lack of real-world experience, some of those officials have proven to be grossly incompetent. Lest you think I am being partisan, there is plenty of incompetence in elected officials of both (all three?) parties, in addition to Ben Bernanke and Tim Geithner.

Gallup did a poll last week and found that 77 percent of Americans think the economy is getting worse. Repeated Gallup polls over the summer found that Americans’ perception of the economy correlated closely with the number of news reports about the debt ceiling argument in Washington.

It took decades for the balance sheet of the federal government to get into this precarious situation. However, this President and this Congress are squarely responsible for negative consumer confidence, the downgrade of our sovereign debt and the recent collapse in stock prices.

As further evidence that our politicians simply don’t understand how the real world works, a number of congressmen publicly expressed their anger following the debt downgrade.

They were angry at Standard and Poor’s.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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