September 9, 2011: Market Update
The Price of Honesty
After going higher much of the week, the markets fell today on speculation surrounding Greece. When the European Union (EU) was formed in the early 1990’s there was one small oversight. The framers didn’t think to create a mechanism allowing a country to leave. Although it would have been pragmatic, in their delight they couldn’t envision a day in which one or more countries could get so far off track as to threaten the very establishment of the union. Unfortunately, this oversight leaves the EU with some very difficult choices in the months ahead. We may be witnessing the slow unraveling of decades of unification in Europe.
At issue this week are questions over Greece’s ability to meet the terms of its first rescue package as bondholders weigh whether or not to participate in a debt exchange that is crucial to a second bailout. German Finance Minister Wolfgang Schaeuble said Greece won’t get its next bailout installment unless it meets goals under the first aid package. The deadline is today and it does not appear that Greece will meet those goals. Adding to the anxiety, Jürgen Stark, the only German member of the European Central Bank’s (ECB) executive board, announced plans to step down today. This was the latest sign of deepening disagreement over how to solve Europe’s economic problems. And lastly, a memo was leaked which suggests that the German government is putting plans in place to support its banks in the event that Greece does ultimately default. None of this news was reassuring to a market already on edge.
In other news, President Obama unveiled his much anticipated proposal to generate U.S. jobs. His ideas included renewal of many aspects of the first stimulus package. Of the estimated $450 billion, some $240 billion would be allocated to the extension and expansion of the payroll tax break with another $50 billion going to an extension of unemployment benefits. However, questions remain about how much of the proposal would pass Congress and whether Republicans would require spending cuts elsewhere to offset the new spending. Ironically, the cost of this plan is roughly half the $1 trillion savings Republicans and Democrats fought so hard over during the debt ceiling debacle last month. In the end, despite the president’s assurances that the bill will be paid for, there is no guarantee that programs that will clearly increase annual deficits in the near term will be paid for in the long term.
With risks in Europe increasing and a slowing U.S. economy, all eyes are squarely on Ben Bernanke and the Federal Reserve. He spoke again this week but continues to confound expectations that there will be further easing. It remains likely that the Fed will do something after its September 20-21 FOMC meeting but Mr. Bernanke seems unwilling to let the cat out of the bag before their meeting.
The story of the week is about a Minnesota boy. You may have heard the story about the miracle $50,000 hockey shot last month. Nick’s name was drawn in a fund-raising raffle with a $50,000 prize. All he had to do was hit a hockey puck 89 feet down the ice and get it through a hole six inches wide. He hit a once-in-a-lifetime shot and the puck sailed through the hole perfectly. However, there was one hitch. It wasn’t Nick who took the shot but instead his twin brother. By chance, Nick was outside the arena at the time his ticket was drawn and his brother stepped in on his behalf. This presented a quandary for the father who wanted to teach his children a lesson about honesty. The father came forward the next day and admitted to event organizers about the twins’ switch. Last week the company that insured the event said that due to “contractual breaches and legal implications” it was unable to pay the claim. It turns out honesty does have a price.
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