Senior European officials met in Brussels this week regarding a bailout of Ireland that could reach $136 billion.  However, Irish representatives stated that the country wasn’t ready to seek help despite a huge budget deficit and sky-high interest rates on its government debt. 

The global stock markets reacted negatively to the news because there are fears that Ireland’s problems could spread the financial crisis into vulnerable members of the euro- zone such as Portugal and Spain.  Since Spain is one of the continent’s largest economies, it would greatly strain Europe’s rescue capacity and pose a severe threat to the euro’s survival. 

In regards to Ireland, unfortunately Dublin finds itself in a mess because at the height of the panic in September 2008, the Irish government thought it wise to guarantee the debts of all Ireland’s large banks—not just depositors, but senior and subordinated bondholders too.   Read more

This week the leaders of a White House commission laid out sweeping proposals to cut the federal budget deficit by hundreds of billions of dollars a year.  Some of the suggestions would be phased in over time are: 

• Cut defense spending by $100 billion
• Raise the social security retirement age to 69
• Raise gas taxes by 15%
• Lower corporate tax rates to 26%
• Repeal the alternative minimum tax
• Eliminate deductions on mortgages over $500,000
• Cut the number of federal employees by 10%
• Cut farm subsidies by $3 billion 

Unfortunately, before the ink could even dry on the paper, there were objections, especially cutbacks in areas that are considered sacred by some, such as social security and Medicare.  Some politicians and special interest groups are already arguing that some of the recommendations either go too far or not far enough. Read more

No one knows whether the election earlier this week will result in political gridlock, which many analysts believe will be good for the market.  This may be the case historically; however, currently we have real deficit issues that need to be addressed.  As such, some analysts and economic pundits are concerned that gridlock is not a welcome event since policymakers need to begin taking decisive action now and not keep kicking this problem down the road.  Meanwhile, others believe gridlock is just what this economy needs and will result in growth. 

Which viewpoint will prevail?  I don’t know, but what I do know is: 

• The Federal Reserve is taking steps to keep interest rates down, as well as the value of the U.S. dollar.  Its goal is to try and force investors out of government bonds and into corporate bonds and stocks, thus giving businesses a lift. 
• The U.S. stock market continues to improve, even though money continues to flow out of stock funds compared to bond, balanced, and international stock funds. 
• Another potentially big boost for stocks will be if there is some agreement on Capitol Hill and if the current tax rates are extended for at least another year or possibly two.  This one legislative gesture would do more to boost stock prices, as well as consumer confidence, than any other single item I can think of in the near term.  I believe this would possibly spur businesses to consider hiring and help nudge the unemployment rate lower. Read more