Henes: Restructuring America—The 5 Top Economic Questions for the Remainder of 2011
The past week's market drops and swings are dizzying.
Everyday people are commenting that it is scarier than 2008. Now, that probably isn't true because no one is anticipating the inability to take money out of ATMs or the commercial paper market shutting down. Yet, there is something unnerving about the market declines, the uncertainty surrounding the economy and the lack of confidence in political leaders. Right now, people have more questions than answers.
Here are the top five questions for the remainder of 2011.
#1 - Will the Economy Get Better? The odds are against it. The "headwinds" are strong. We have high unemployment and incredibly high underemployment. To make matters worse, large corporations are not hiring, banks are laying employees off and state and local governments are cutting back dramatically. In addition, the housing market is in a depression and the recent decline of the stock market is hitting people's net worth. On top of it all, there is no comprehensive governmental plan for reducing debt and spurring growth. The Fed may be out of bullets and maintaining artificially low interest rates does not seem to be encouraging lending, hiring, home buying or consumer spending. Consequently, we may not see real economic growth for some time.
#2 - Will the U.S. Formulate a Plan to Put the Economy on Track for Long-Term Growth? The members of the "Super Committee" are starting to be slated. It is the Committee's job to formulate a plan for balancing the federal budget and improving the long-term fiscal outlook by reforming entitlements, implementing a pro-growth tax policy and reducing the federal debt to manageable levels. Once this plan is formulated, it goes to Congress and members of Congress are supposed to work together to reach a deal that the President can support. Will this will occur? From Thanksgiving to New Year's Eve will we be watching political finger-pointing and fighting? Have we seen this movie before? (It was called the "Debt Ceiling Debate" and it was not uplifting or inspiring.) Will we be watching the same movie again?
#3 - Will Europe Formulate a Plan to Protect its Banking System?
With each day that goes by it becomes more clear that Europe does not have a comprehensive plan for dealing with its debt crisis and protecting its banking system. At first it was Greece - a small player in the EU economy. Then it was Portugal, then Spain, then Italy and now France. European banks hold sovereign debt and are undercapitalized (and possibly insolvent). The ECB needs to realize that defaults are inevitable and that these countries cannot grow out of their indebtedness. The ECB's focus should be on protecting European banks from failing and allowing over-levered nations to reduce their debt. Will this be the focus? Maybe someday. But for now, it seems that band-aids will continue to be put on and more baby steps will be taken.
#4 - Will the Markets Remain Volatile? It sure seems that way. It seems unlikely that the markets will stabilize against the backdrop of tepid growth, continued battles in Congress fought in broad daylight over a debt reduction plan and the ECB and EU struggling to find answers. Markets crave certainty because they know how to place a value on certainty. Markets react to uncertainty with volatility. Market volatility and declines impact the psychology of consumers, leading them to pull back. And, as volatility increases, investors reacts to real news and ghosts. As the volatility of the markets does not appear to be ending, we should be prepared for a bumpy ride.
#5 - Will We See Social Unrest? We already are witnessing it across the globe, including London. How long before it hits the U.S.? As the economy sputters, the markets decline, jobs are lost, homes are underwater, politicians fight ideological battles, K through 12 education spending is cut, states and local governments slash budgets and retirees are at risk of losing their pensions, people are concerned and angry. Will the anger boil over? Let's hope not. But we may be sitting on a powder keg. Let's not light the match. Our political leaders should work together to put a real and comprehensive plan in place to let people now that our problems are being addressed and tomorrow will be better than today.
My apologies for such a dour blog, but it is time to get serious. We need to get our country back on track and fiscally sound. Doing it correctly means pain, but good pain. Pain that strengthens, not weakens, our foundation.
Jon Henes is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in the United States and abroad across a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics, federal, state and local fiscal issues.