http://c.brightcove.com/services/viewer/federated_f9?isVid=1&isUI=1It’s no secret that politicians are afraid to make unpopular budget decisions that may possibly threaten their time in office, and Eurasia Group director Sam West says this is exactly what is driving policy inaction in Congress. He is sure nothing can or will get done before the 2012 elections, which means people will have to weather low returns on bank saving, higher unemployment and other problems that persist due to low interest rates. Mortgages rates will also remain low, but lack of buyer confidence resulting from continued unease about the market makes it a moot point for many. For more on this continue reading the following article from TheStreet.
The Congressional supercommittee failed to reach a deal to reduce the national budget deficit by $1.5 trillion, and unfortunately for bank savers, that means more of the same low interest rates savers have been seeing for more than a year now.
As for the debt committee, which was charged with reducing the massive $15 trillion public debt, the Breakout podcast from Yahoo! Finance hit the nail on the head this morning.
Sean West, the U.S. political risk director at Eurasia Group, noted on the program that politicians are reluctant to cut popular programs, at least while they’re still in office, and that significant cuts may well be made, but they won’t kick in until “eight or nine years down the road — when politicians are out of office.”
“The dirty secret around Congress right now is nobody seems too worried about the supercommittee because nobody is focused on the issue as much as they should be,” added West, who is concerned that no real deal can be reached until after the 2012 elections. The “partisan bickering” will poison any deal leading up to the elections, he says.
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So what can consumers — especially anyone with a savings account — expect now that the supercommittee didn’t reach a deal? A few things to expect, at least, are clear:
1. Not much will change in government spending.
Outside of a likely extension of the payroll tax cut into 2013, there’s not much Congress will likely do to spur the economy into a higher gear. As West told his Breakout audience, “There’s no sense of urgency right now” from Congress to change the status quo.
2. Interest rates will remain low.
With $15 trillion in debt threatening an already fragile U.S. economy, don’t expect the Federal Reserve to step in and hike interest rates. That, in the Fed’s long-standing opinion, would curb lending and further hamper the economy’s recovery. But with the average bank savings rate at a measly 0.125%, according to the BankingMyWay Weekly Savings Rate Tracker, bank savings customers continue to get a raw deal that doesn’t even beat inflation thanks to government financial policy. And that deal won’t get any better with the debt committee failing to act this week.
3. Mortgage rates will remain low.
Without a debt deal that would have, as most economists believe, sent a clear signal to global investors that the U.S. government has a good grip on its debt problem, the economy will remain stuck in neutral. That would favor creditworthy homeowners looking to refinance and help homebuyers get better mortgage rates as the Fed keeps rates low to stimulate the economy.
4. Consumers will remain anxious and uncertain, and spend less.
With no financial peg to hang their hats on, consumers should still remain skeptical on the economy: $15 trillion in public debt will do that to a populace, especially one that is well aware of the sovereign debt troubles dragging down the European economy right now.
5. Companies won’t start hiring until they’re sure the debt issue is taken seriously.
With no debt deal coming out of Washington, employers will likely place a vote of no confidence in Congress and batten down the hatches until a serious debt deal is in place — whenever that will be. Companies hire when the overall economic outlook is good, so if that outlook stays negative so should hiring prospects.
In the past few months, the Occupy Wall Street protest movement has been in the headlines (some good and some bad) raging against big financial institutions. But with such an epic failure coming out of Washington this week, maybe they should take the party a few hundred miles south on Interstate 95, where Congress is doing its own part to keep the economy from growing.
This article was republished with permission from TheStreet.