The markets will be watching the vote on Speaker Boehner’s bill in the House this afternoon. Congressional sources tell me there are GOP members afraid of being “Primaried” if they vote in favor of raising the debt ceiling.
Many of my contacts are telling me they fear many of the members do not understand the ramifications of their inaction and this political game of chicken they are playing. To get the C-Suite perspective I asked John Allison, former Chairman and CEO of BB&T Corporation and Distinguished Professor of Practice at the Wake Forest University School of Business, for his take on this crisis of confidence.
LL: What is your opinion of the debt ceiling/deficit reduction talks going on in Washington?
JA: The debt ceiling crisis is primarily the responsibility of President Obama. As Harry Truman so aptly commented; “The buck stops here.” It is the President’s responsibility to lead a bipartisan solution to solve this basic operational issue, not to advance his ideology or to politicize the process.
He had the opportunity to do so based on the excellent work done by his appointed commission headed by Erskine Bowles. If he had aggressively pursued the plan offered by the Bowles team, which he created, the Republicans would have had to follow (although there would still have been a debate).
LL: Do you have confidence in Congress in terms of them understanding what their inaction would mean to the U.S. economy?
JA: The tea party element in Congress believes that unless government spending is radically reduced, the U. S. faces a real financial crisis in the next 15 to 20 years. Unfortunately, they are correct.
Unless entitlement costs are brought under control, the U. S. will not be able to service its debts. Government spending as a percentage of GDP is the highest in history (except during world wars).
However, the debt limit is probably the wrong place to fight this fight. They probably should have avoided creating this somewhat artificial crisis and fought for significant reduction in government spending in the budgeting process.
LL: If the U. S. is downgraded that impacts the lending of all Americans and the expected downgrade of some 7,000 municipalities which could lead to more layoffs. Do you think this downgrade could be a contributing catalyst to a double dip recession?
JA: We already have a very slow recovery driven by extremely poor government policy decisions. Reducing spending and eliminating the risk of substantial tax increases will improve the economy.
It is important to recognize that the down grade is not fundamentally based on the debt ceiling issue. The credit rating agencies are focused on the long term deficits faced by the U. S. government. Raising the debt limit may (or may not) help in the short term. However, if federal government spending and deficits are not reduced U. S.
government debt will be downgraded and rightly so. The government will ultimately default on some of its obligations unless spending is brought under control.
LL: Is corporate America prepared for a downgrade?
JA: Corporate America is fundamentally concerned about the financial instability of the U. S. government and the very destructive regulatory environment, which is why businesses are holding so much excess cash. It is impossible for a business to be fully prepared for a downgrade, but CEO’s see the government deficit problem, and out of control spending as far deeper than the debt limit fight.