Just as the House of Representatives passed legislation Friday to keep the government funded through mid-December but eliminate funding for President Barack Obama’s health care law — setting off a heated debate with Senate Democrats and the White House — Washington insiders predicted that the prospect of a government shutdown this time around could “have a domino effect on the markets and investor confidence.”
In an paper released Thursday, researchers at Washington Analysis say that while a government shutdown itself has not had a negative effect on the markets in the past, the ever-growing prospect of one in coming weeks could rock the markets and investor confidence.
“If a shutdown were to occur, investors’ confidence that the debt limit will be increased in mid-October will be significantly eroded, as the prevailing belief of late has been that Congress and the White House always resolve their differences at the 11th hour,” the Washington Analysis analysts say. “Accordingly, failure by Washington to reach a last-minute agreement would breach that belief.”
The analysts say that the following five variables give them “great disquiet,” and make the upcoming fiscal debate unique compared to the fight in August 2011.
1. Senate Minority Leader Mitch McConnell, R-Ky., and Vice President Joe Biden were instrumental in reaching a deal in the highly contentious August 2011 showdown. However, McConnell will likely not have a role in this debate as he is facing a Tea Party candidate in a primary and a competitive Democratic challenger if he survives to the general election. In fact, for political reasons, he will likely have to vote against both the continuing resolution [to fund the government] and debt limit increase;
2. Speaker John Boehner’s relationship with President Barack Obama has not recovered since 2011. Moreover, Boehner, R-Ohio, has lost some key staff members that were his primary negotiators in previous fiscal fights;
3. Obamacare’s impending implementation/enrollment greatly complicates things. Even if there were to be a shutdown, however, we note that the vast majority of the law will still go forward, as it is not tied to discretionary spending and agencies have a great deal of flexibility in determining “essential” personnel and expenditures;
4. The politics this time are 180 degrees from August 2011. In that year, Obama couldn’t risk a default and the potential economic fallout for fears that it would doom his re-election chances. Today, the opposite is true. Obama has a lot less to lose, and as the polls show, Republicans would be blamed for a shutdown or default, either of which could cost the GOP their House majority. In fact, it appears that a shutdown or default are the only ways Republicans could lose the House; and
5. While Boehner has opposed a shutdown and default strategy since being elected Speaker, partly because of his experience in 1995’s shutdown, even some in the GOP who oppose such a move think he might have to go along with it, if only to show the Tea Party conservatives that getting the Senate and president to sign off on a bill defunding Obamacare is simply not viable. We obviously disagree that he’ll take this route, but it is a real risk.
Check out Friedman: ‘Twin Threats’ of Government Shutdown, Debt Default Could Roil Markets on ThinkAdvisor.