Defaulting to the fourth branch of government
Every school child knows that the U.S. government has three branches: the Executive, the Legislative, and the Judicial. And, as recent international test results have demonstrated, every school child is wrong. Because there is a fourth branch of government that operates alongside the other three and plays a central and increasingly active role in the ...
Every school child knows that the U.S. government has three branches: the Executive, the Legislative, and the Judicial. And, as recent international test results have demonstrated, every school child is wrong.
Because there is a fourth branch of government that operates alongside the other three and plays a central and increasingly active role in the system of checks and balances the founders designed to keep any one group from getting too much power.
This fourth branch however, has been gaining power in ways that the forefathers never imagined — largely because they didn’t conceive of it in their political calculus. You see they were focused on mechanisms that were created to reflect the will of the people and to advance their interests. This mechanism was created independently and serves only a comparative handful of individuals.
But make no mistake, it is as essential a player as the Supreme Court, either house of Congress or the White House. And when those players stumble or fail to provide leadership, this fourth branch quickly and decisively fills the void. Indeed, it has special powers that trump presidential vetoes, filibusters, judicial reversals, and all the other tools given government officials. It advises and in the end, it provides the necessary consents. It deliberates and decides and reserves the right to change its mind. It is not only where the buck stops, it is where it starts and where it goes round and round till it comes out here.
It’s the markets and if you merely take the time to look over the news of this week and last you can see it flexing its muscles and sending a message that it is prepared not only to contradict governments and institutions, it is, if necessary prepared to topple them.
Take the tax deal cooked up by the fiscal short-order cooks in Washington. Hot off the griddle, dripping with more excess than an obese nation can handle, the markets found it difficult to digest and spit it back up in the form of higher yields and a general message that it had lost its appetite for the old Washington menu. (Okay, okay, I’m starting to gag on the metaphor myself. But you get the point.)
If the message from bond traders wasn’t enough, there was also the threat from Moody’s to downgrade the United States due to our fiscal imprudence. Somehow these guys don’t seem to swallow the political arguments or get dazzled by all those photo op flashbulbs. They just do the math — $1 trillion more onto the deficit. There’s got to be a tipping point. And we have got to have gotten considerably closer to it. Danger danger, Will Robinson.
The message is if you can’t get your house in order we will take our money and invest it somewhere safer or we will charge you more for that money if you need it. We will penalize you until you get it right. We have the last word. Ignore us at your peril.
We are seeing it again today. Spain is not moving quickly enough to resolve its fiscal problems and the EU is not taking bold enough steps to ensure they don’t roll off the old mesa and break into a million pieces on the piso. So once again Moody’s said "look out below, prepare for a downgrade" and the markets started selling. The message was clear. Everyone still remembers Spain. The markets only give you so much time and then they render their unmistakable verdict … one for which there is no appeal.
During the Clinton years, it was clear that one of the reasons that Bob Rubin was such a powerful advisor and ultimately Treasury secretary was that he was Bill Clinton’s market whisperer. But unlike his wannabe heirs in the current government, not only could he actually hear what the market was really saying, he knew how to speak its language. Hank Paulson could do the same thing.
Of course, markets are not just financial markets … nor are they just local markets. Direct investors make key decisions too — as they do each day they keep those famous $2.4 trillion of corporate reserves sitting on the sidelines. And foreign investors play an increasingly important role in shaping overall market judgments. We overstate it when we say that we are mortgaging our entire future to the Chinese. It’s really just a very, very big piece of it.
The markets know when they are being played also. What’s more they are quite sophisticated. They see the hidden messages. When this administration says "we’re going to get along better with business" the markets say: Show us. And until then, our money sits on the sidelines. And they notice the little things, like the fact that at today’s jobs confab with CEOs, most of the companies were from the tech sector or Wall Street and despite our need for manufacturing jobs there really were only a couple companies that actually made anything (no auto companies, no steel companies.) They interpret this as not being serious. They interpret not finding a good replacement for Larry Summers after knowing he was going to be gone for well over six months as not being really serious about dealing with the biggest problem facing the country. They interpret not actually having a senior business person anywhere in the administration the same way.
So those who buy and sell for a living are not, at the moment, buying it from either our executive branch or our legislative branch or from foreign governments that are also failing to rise to the challenges the markets feel should be their priorities. That doesn’t mean the markets have their priorities right. But you see, that’s one of the advantages of being the market: There are no higher powers. In the end, they either get their way or, worst of all, they stop caring and move on.