Larry Fink: Washington Needs to Prove the Political System Still Works

Oct 21, 2013

As the dust begins to clear from this month's political battle over the debt ceiling and government shutdown, there have many reports of businesses waiting to make key investments until political stability returns. Today, in a new op-ed in the Financial Times, BlackRock CEO and Chairman Larry Fink notes the partisan wrangling in Washington may been doing real, lasting damage by weakening investor confidence in the stability of our political system. Even with some economic fundamentals suggesting that the recovery is taking hold, Fink argues that economic uncertainty is doing damage:

The market environment is still challenging. Uncertainty is high and political wrangling is pushing the fundamentals to the backburner. You cannot overestimate the impact of this on confidence at a time when business leaders should be making decisions that drive growth. It has put the US economy in a holding pattern that, if it persists, could lead to a global slowdown.

As others have written, one way that political uncertainty threatens growth is when businesses choose to put off on investing in new facilities, employees, or equipment for a more stable fiscal climate. When that politically-cautious attitude moves to the bond market, Fink argues, the impact is far worse:

Many foreign investors are rethinking their approach to investing in US debt. Even a marginal change in the willingness of governments, pension funds, insurance companies and other institutions around the world to buy America’s bonds will incrementally raise interest rates and drive up the costs of financing our deficits. That will not only worsen the fiscal situation at federal, state and local levels; it will also mean higher borrowing costs for anyone buying a house or other big-ticket items. The end result: slower growth."

But Fink also notes that lawmakers can avoid further endangering US political credibility by coming together and compromising during the upcoming budget conference.

"The short-term damage has been done; the next round of budget discussions needs to show that the American political system still works. If our leaders can return to the standards of good faith, civil deliberation and mutual respect that have always provided the foundation of our global economic leadership, we can restore the confidence of all Americans – as well as business leaders, investors and markets worldwide – and with that the potential for a long-term US economic resurgence.

A positive economic impact would be a major benefit of successful bipartisan negotiations over the budget -- the capital that companies have been keeping "on the sidelines" would help speed the recovery, and a healthy bond market will help drive foreign investment in our economy over the long term. Fink's arguments suggest that dealing with the debt will have an expansionary impact on the economy, creating jobs and building a prosperous future.

Click here to read the full op-ed.