The Debt Ceiling Debate, From Washington to Wall Street

Posted on May 31, 2011. Filed under: Uncategorized |

By Scott Orr

The raging fight over the need to raise the federal government’s debt ceiling may, at first blush, look like your typical game of political brinksmanship, with the Republicans and Democrats drawing lines in the sand and waiting for the other to blink.

But there is another player in this high stakes game, one that could help shape the 2012 elections and the future of both parties. Wall Street is in the thick of what may appear as a strictly Washington row. And lawmakers are playing close attention as they seek to determine how far they can push the gambit before Wall Street revolts.

For months now, the Congress has known what’s at stake if the debt limit is not raised by August 2, the date Treasury Secretary Timothy Geithner has said the government will no longer be able to pay it obligations. Both sides say that will not happen, but the Republicans are holding the debt ceiling legislation hostage as they try to extract spending cuts of $2 trillion over the next 10 years.

But some experts believe the economic damage could begin much earlier than the August 2 default date, as investors around the world begin to question the United States’ credit worthiness. And the consequences of that damage would be political as well as economic, as Wall Street decides who it will back in 2012.

Wall Street money generally backs winners: it helped Obama win the White House in 2008 after tiring of George W. Bush’s economic stewardship and it helped Republicans make big gains in 2010 amid concern about over-regulation by the Obama administration. This is why Obama has been courting Wall Street and the Republicans in Congress are taking Wall Street’s temperature on the issue.

Rep. Paul Ryan, a Republican of Wisconsin and House Budget Committee Chairman, told CNBC recently that “lots” of Wall Street players aren’t concerned about a debt default so long as it lasts just a few days.

“I think most people think that’s nuts,” Nigel Gault, the chief U.S. economist forecaster at IHS Global Insight, told McClatchy Newspapers. Still, this kind of thinking is fueling Republican hardliners in their zeal to slash federal spending in the name of deficit reduction. At the same time there is fear among mainstream GOP leaders about overreaching on the issue.

The Washington Post reported the other day that House Speaker John Boehner (R-Ohio) “has had conversations with top Wall Street executives, asking how close Congress could push to the debt limit deadline without sending interest rates soaring and causing stock prices to go lower.”

Congress has raised the debt ceiling 10 times since 2001 and economists agree that failing to raise the limit would be a disaster, with a reinvigorated recession being the least of the worries. Stock markets would plummet, credit would seize up, the government’s credit rating would drop and interest rates would soar, they say.

We believe Congress should settle the issue now, instead of risking long-term damage to the economy for the sake of political gain.

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