Political Volatility

Over the last few years the political scene has become more volatile, swinging from heavily Republican to heavily Democratic.  Now, it appears as if the political volatility is increasing yet again, with the recent election of Scott Brown and the unexpected hurdles Ben Bernanke is facing during his reconfirmation.  Many incumbents (and political appointees) who until recently seemed to hold “safe” positions may well find themselves open to losing elections.

Many would view this increased volatility as a positive sign the political system is “working.”  Of course there is credence to this view.

However, from an economics perspective, there are other consequences as well.  The implications are potentially vast. 

Desperate politicians may well feel an increased need to “do something” to prove that they are mindful of, and acting upon, our economic problems.  “Doing something” about our economic problems often entails some type of intervention or other variant of spending money.  As we have seen, the size of these interventions is often implied to denote their worthiness, with larger interventions purportedly more beneficial than smaller ones.  When one listens to politicians speak of their intervention legislations, it almost seems as if they view large interventions as a “badge of honor.”

I have written extensively about interventions, and will continue to do so.  They are very much misunderstood.  Of particular concern is that as time goes on and our financial problems grow in size, there has been a growing insensitivity to the ever-increasing size of the interventions.  Whereas just a couple of years ago a $150 Billion intervention would seem large, now that same size of intervention would be considered small.

While I have previously written that  interventions would continue, it is important to understand what factors are driving the trend.

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SPX at 1102.00 as this post is written