The federal government slowdown threatens to reduce hiring, cut into consumer spending and poison public opinion about dysfunctional governing. But the threat of a showdown over raising the debt ceiling runs the risk of significant and sustained damage to investor and consumer confidence.
In the new week, the positions of each side on the debt ceiling debate will continue to be examined for any sense of cooperation. Markets will be listening for any room for compromise. As the government slowdown enters its second week, reaching the current $16.7 trillion debt ceiling becomes that much closer, reducing the negotiating time necessary to raise the ceiling.
The U.S. Treasury has warned a U.S. debt default “could result in a recession comparable to or worse than the 2008 financial crisis.” Granted, this is the same agency that failed to be concerned with massive amounts of sub-prime mortgages, shadow banking and very loose lending standards that led to the housing bust. The Treasury would be quick to point out it isn’t responsible for any of those misdeeds but it is responsible for paying the country’s bills.
Unfortunately, recent experience may embolden the stubbornness of each position. When Congress and the White House last flirted with the government’s ability to borrow money in order to pay for what has already been spent, the nation’s credit rating was cut. But no one really paid for that. Instead, bond prices rose, interest rates fell and stocks went on to hit record highs.
But those were the results. This time around the investment markets and the economy are not likely to be so forgiving.
Tom Hudson is a financial journalist. He hosts The Sunshine Economy on WLRN-FM in Miami. He is the former co-anchor and managing editor of Nightly Business Report on public television. Follow him on Twitter @HudsonsView.