The GOP Threat to Shut Down the Government: Why Wall Street Should Worry

 

This blog often looks at the GOP/Tea Party's desire to slash and burn government - and most importantly the social safety net - with little regard for the lives damaged.  With another fiscal confrontation in the offing, some are saying that Wall Street may be fooling itself if it doesn't take the insanity of the GOP House seriously and prepare for potential calamity.  A piece in Politico looks at the damage the GOP might weak on America.  Here are highlights:

Talk to anyone on Wall Street and they will tell you they really don’t care about the brewing fiscal storm in Washington. Possible government shutdown? Whatever. Debt ceiling crisis? Meh.

The prevailing view: When Congress returns in September, sabers will be rattled and threats will be hurled. But then, as usual, Washington will grind out a crummy deal that keeps the federal lights on and avoids a disastrous default.

But this time — wait for it — could be different. Really, seriously different.

Here is just a sampling of why Wall Street may be wrong: The House GOP is hopelessly fractured on spending strategy. Senate Republicans who might otherwise broker a deal face primary challenges that make compromise potentially deadly. Other Senate Republicans are jockeying for 2016. And congressional Democrats have no appetite for any bargain — grand or otherwise — that cuts entitlement spending.

And it is not just a government shutdown or debt-ceiling crisis that could cause a Beltway shakeup of markets this fall.

There is also the possibility of a nasty confirmation fight for the next chairman of the Federal Reserve just as the central bank starts to wind down its program of buying hundreds of billions in bonds to support the economy.

Wrap all this potential dysfunction together and there is a real chance that the fall of 2013 will be more like the summer of 2011, when a near-miss on the debt ceiling led to a ratings agency downgrade, a huge sell-off in the stock market and yet another hit to an economy that might otherwise be heating up nicely.

Leadership in both parties seem to want a continuing resolution in September that would fund the government through the end of the year. They may get it. But it’s not obvious how.

GOP Sens. Marco Rubio of Florida and Ted Cruz of Texas, perhaps with an eye on the 2016 presidential race, are demanding that Senate Minority Leader Mitch McConnell block any spending bill that funds Obama’s health care law as enrollment begins Oct. 1. There is no chance Obama would sign a spending bill that takes money away from implementation of his biggest achievement.

Meanwhile, McConnell and Sen. Lindsey Graham (R-S.C.), who might otherwise help push a fiscal compromise, face 2014 primary challenges that may make them less likely to cut deals with Obama. McConnell has been pivotal in recent battles, including the fiscal cliff deal his office hammered out at the last second with Vice President Joe Biden at New Years. Don’t expect a replay this fall.

Former GOP presidential nominee Mitt Romney grew so concerned over rhetoric from Rubio, Cruz and others that he used his first significant post-2012 speech to urge Republicans to back down from the government shutdown rhetoric.   “We need to exercise great care about any talk of shutting down government,” Romney said at a fundraiser in New Hampshire on Aug. 6. “What would come next when soldiers aren’t paid, when seniors fear for their Medicare and Social Security, and when the FBI is off-duty?”

Republicans have not backed off their mantra of a dollar in spending cuts for every dollar of debt-ceiling increase. But if they were to pass such a bill out of the House, it would go nowhere in the Senate. Democrats have no appetite for more cuts, given that annual deficits have been sliced in half and the sequester spending cuts are already taking a bite out of economic growth with no compromise on the horizon.

Housing prices and equity markets have been rising, small businesses are showing more inclination to hire and spend, and threats from Europe are receding, leaving D.C. dysfunction as among the top remaining risks.

“There’d be a host of severe economic consequences associated with debt default. We’d have negative impact for growth, job creation, interest rates would spike, it would make our deficit problems even harder to tackle,” said Rob Nichols, president and CEO of the lobbying group Financial Services Forum. “Raising the debt ceiling is a critical and urgent task.”

All this means that the sequel Wall Street expects this fall could turn into a much scarier movie with unpredictable plot lines.