The Fiscal Cliff and the Financial Industry

Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's hard not to have a knee-jerk reaction that something called the "fiscal cliff" is worth avoiding at all costs. In practice I tend to avoid falling off cliffs that are real or metaphorical (unless said cliff is no more than six feet in height, has a pillowed landing at the bottom, and I get a some sort of reward (hot fudge sundae?) for agreeing to go over the edge).

But at least when we're talking about the financial industry, it's hardly a straight-forward picture of "fiscal cliff bad" and "avoiding fiscal cliff good." If we're to believe the views of the (non-partisan) Congressional Budget Office, the short-term implications of going headlong over the cliff are certainly not ideal. A short recession and higher unemployment are the two "highlights" of that scenario. 

However, the CBO suggests that the negative impact would be somewhat short lived and that growth would resume around the mid-point of next year. Better still, the rather draconian measures that make up the cliff would put the government's long-term finances on a more stable footing.

The former (recession and unemployment) is obviously bad for banks and other financial companies -- think less commercial borrowing, less mortgage activity, higher default rates, etc. And the nature of the cuts were never meant to be something that was actually implemented. The latter, though, would help create a more stable banking environment for the future. The alternative -- that is, a continuation of unsustainable deficits and a mounting debt -- has the very real potential of leading us into some sort of fiscal crisis that would wreak havoc on interest rates. And since many financial companies base their business on borrowing short and lending long that's well... let's just say that's not an ideal scenario.

Of course it's not just a binary jump over the cliff or don't choice here. In a perfect world, Congress would come to some sort of agreement that would not pull the rug out from the economy right now while it's still in recovery mode (in fact, I'd even argue in favor of fiscal stimulus right now), but would put a real and reasonable plan in place to get the budget on a sustainable path over the longer term.

As we're all painfully aware at this point, when it comes to Congress and its ability to get much of anything done, the world we live in is far from what we'd call "perfect." The intersting thing to think about then, is that getting no deal and curling up into a cannonball for a jump off the fiscal cliff, might be preferable to some ill-formed "saves" that Congress throws together.


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