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Terry Connelly

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Scratch Syria -- Now Congress Can Shut Down the Government and Default on Our Debt in Peace!

Posted: 09/12/2013 2:54 pm

The financial markets made very clear that they did not like the prospect of a punitive strike on Syria for using chemical weapons on its own people any more than the vast majority of Americans or members of Congress. And it looks like the markets are getting their way thanks to loose lips on the part of our billionaire Secretary of State John Kerry and quick thinking on the part of that noted capitalist Vladimir Putin (who is also busying himself fixing up the old potash cartel and thus boosting fertilizer stocks). Who knew Vlad the Impaler would turn into Vlad the Investor?

The proposed vote in Congress to wreak "unbelievably small" havoc on the dictator Bashir al Assad (shock-and-awe light?) may well never happen, especially in the House of Representatives, which is spoiling for a fight with Obama. Short of impeachment (which has been mentioned), nothing will satisfy the Tea Party wing of the controlling Republican caucus other than imposing an embarrassing defeat on a key item of President Obama's agenda. The markets obviously would have momentarily enjoyed a "no" vote on Obama's Syria proposal almost as much as the Tea Party -- but now "no vote" may be more likely. What's a Tea Party to do?

Fortunately for them and unfortunately for most investors, there is an opportunity -- actually three -- immediately at hand. The Obamacare insurance exchanges open for business October 1, so if there is any defunding to be done, it needs to be done in the next couple weeks. The "leverage" to force that issue actually comes in two parts: the expiration of government budgetary funding authority also on October 1, and the breaching of the federal debt ceiling just a couple of weeks thereafter. Emboldened by their success in leading a broad coalition of former hawks and committed liberals against the president on Syria, the Tea Party Limbaugh wing of the Republicans now will rush to force the rest of Congress to accept Obamacare defunding in order to keep the government operating and paying its debts when due.

It appears that while the Syria debate has perhaps called into question the military "full faith and credit'" of the United States in some quarters, it seems we are about to again call into question politically our financial full faith and credit, as well as the president's ability to maintain basic government functions. This is not sequestration; it's more like financial castration. The financial markets definitely will not like this type of surgical strike -- especially at exactly the same time the Federal Reserve is contemplating removing the life supports it has been providing our still-nascent economic recovery.

With the impression that Obama has been forced by his own public to say "uncle" to Putin, the Obamacare hawks think they can force him to cave to avoid a shutdown and debt ceiling "crisis." That word is in quotes here because most Tea Party officials do not believe that a U.S. government shutdown or even a debt default would be that big a deal. Indeed, if you think, as Limbaugh does, that the financial crisis of 2008 was phony and manufactured to satisfy a liberal big government agenda, it gets easier to live in alternative reality in 2013. But Limbaugh controls opinions of many voters who elected the Tea Party Representatives, and that bodes ill for investors who live in the real world. We saw this movie before -- in 2011 -- but last time we didn't get to see the train-wreck ending because cooler heads prevailed. After a while we got sequester, but not a market crash.

There are cooler heads around this time, including the official Republican House leadership, which is trying to concoct a legislative ploy that would allow the Tea Party folks to vote a tandem bicycle of a budget package that would defund Obamacare in a companion but "detachable" provision that the Senate could ignore and pass on the "unicycle" government funding extension to December, deferring the fight on the debt ceiling to another day. But if this compromise fails to gain Tea Party acceptance in the coming few days (like the similarly compromised farm and transportation bills did earlier this session), the financial markets will quickly up the threat level for a shutdown and/or a near term debt ceiling crisis to at least orange, if not red.

So-called Speaker Boehner (to borrow a Rumsfeld phrase) will have to cave even before Obama. The markets have to understand that Rush Limbaugh is the real Speaker of the House, because only he has got everything he wanted from it so far this year (after the fiscal cliff crisis was averted).

The Senate, of course, will not cave, as the Democrats will assert their control to defend Obamacare to make up for their apostasy to Obama on the Syria fight, and the disdain of many liberals for the president's telegraphed intention to nominate Lawrence Summers to head the Fed. The latter prospect also gives some in the financial markets the shivers: for a smart guy, Summers seems to make a lot of mistakes in judgment. Perhaps the Syrian experience will temper Obama's apparent enthusiasm for a high-risk nomination: but the real reason he favors Summers is that he actually likes Summers' "take-no-prisoners" approach to issues. Because of the Tea Party, he wants a wartime consigliere testifying to Congress on the economy in the 2014 and 2016 election years. Sure beats Kerry and Hagel. (But I digress.)

There is no Putin or UN weapons inspector around to save the financial markets from renewed volatility at the prospect of complete gridlock in the Congress on September 30 over the government's operating and capital budget. Maybe only Ben Bernanke can once again step into the breach by taking "taper" off the table until the fiscal situation is clarified. More likely, however, the Tea Party won't say "uncle" until the financial markets themselves -- as they did in 2011 and also back in 2008 over the TARP vote -- again provide their own form of targeted shock-and-awe.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

 

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