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Average Joe anxious to know: What happens if U.S. defaults?
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The normally quiet phones at BPU Investment Management were ringing off their hooks Thursday.
Calls poured in to the company's Downtown office all morning, as they had at the offices of financial consultants across the city. Most people had the same question: If the U.S. government defaults, what will happen to me?
"[Our clients] are not usually affected by headlines and market volatility, but this has probably been the most phone activity we've had since 2008," said Paul Brahim, managing director of wealth management at BPU.
As Congress works to negotiate a solution to the U.S. debt crisis and avoid an impending government default by the Tuesday deadline, the public can do little but watch and wait. The primary concern for some as the deadline ticks closer is the fate of life savings, investment portfolios and the health of the market. For others, it's a question of whether that next Social Security check will arrive.
Should Congress fail to reach a deal, people reliant on programs like Social Security and Medicare could see their financial support endangered as the government struggles to pay its bills. The reputation of U.S. government debt as an investment is also at stake, and the nation risks losing its nearly century-long triple-A credit rating, even if a default does not occur.
"Businesspeople feel paralyzed, people feel paralyzed, because they're just flat-out uncertain about the future," Mr. Brahim said. "When you lack certainty, there is an incapacity to be able to make decisions."
Financial consultants are advising people to stay the course with their investments, noting that the market until now has remained relatively stable. If anything, concerned investors can err on the side of caution, said Joe Balastrino, chief fixed income market strategist at Federated Investors, Downtown.
"Anytime one gets nervous, by definition, if it's keeping [him] up at night, [he] should get more conservative in [his] investment portfolio," Mr. Balastrino said.
Investors have generally remained level-headed in their investment decisions through the recent turmoil, said Mike Freker, a certified financial planner with AXA Advisers, Downtown, though the looming default has prompted many to re-examine their finances.
But anxiety is spreading, and some investors are running for cover.
A "fear index" known as the VIX, which measures expected volatility in the stock market, rose to 27.98 on Wednesday, up from 17.52 last Friday, before a breakdown in negotiations between President Barack Obama and House Speaker John A. Boehner, R-Ohio. The index is based on bets investors are placing that stocks will move sharply.
Increasingly, investors in garden-variety stock mutual funds also have been heading for the door.
Outflows from long-term stock mutual funds totaled $6.8 billion during the week that ended July 20, the Investment Company Institute reported Wednesday. That was nearly double the prior week's total, and it was before the debt ceiling showdown entered a more perilous stage.
While Mr. Freker and other financial experts say the public may be starting to overreact to the U.S. debt crisis, they don't blame people for feeling concerned -- especially those who rely on government support.
The same uncertainty that has baffled investors prompted Keisha Kenney, 30, to find a job two months ago, as she realized she could not necessarily depend on the Social Security support that pays the bills for her 2-year-old son's asthma. Ms. Kenney now works at Magee-Womens Hospital of UPMC.
For Sabrina Brown, an Allentown resident and 29-year beneficiary of Social Security, not receiving the regular check next month could mean the loss of her home. Ms. Brown said she called one of her elected officials to complain about the prospect of losing her support and said she planned to protest if the system is impacted.
"Hopefully, I'll be in a shelter, but I'll lose my place to live," she said Thursday as she headed into the Social Security office Downtown.
In a crisis that nearly all Americans have some stake in, a common hope has surfaced as they talk about the approaching deadline: that legislators will reach some agreement and avert economic turmoil.
Tom Meisner, 64, said the recent government haggling has seemed more focused on politics than on the debt crisis.
"This is a serious problem that is not being addressed in the spirit of cooperation in order to find a solution," he said. "To me, it's simply hardball politics."
First Published July 29, 2011 12:00 am
