By Charles H. Green
The airways have been saturated lately with stories about the federal government shutdown, an eventuality that virtually everyone was assuming would be avoided at the very last minute by our Congress. And as if anyone needed reminding, only 17 days past the beginning of the new fiscal year, the borrowing limit is set to expire next week.
DealBook editor Andrew Ross Sorkin offered the most thoughtful but perplexing commentary about the approaching default date that lays out the universal expectation that this problem will be solved. Eventually.
“The United States government is not going to default, ever,” said Vincent Reinhart, former head of the Federal Reserve’s monetary division and now managing director and chief United States economist for Morgan Stanley, late last week.
“As political theater,” he continued, “the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default.”
Mr. Reinhart’s view has become conventional wisdom on Wall Street when it comes to whether the country will hit the debt ceiling limit on October 17. Warren Buffett put it this way: “We’ll go right up to the point of extreme idiocy, but we won’t cross it.”
The problem is, from a legislative process standpoint, the “last minute” is upon us. Only on
Thursday did reports emerge that the Republican Conference is planning to offer a stop-gap measure to extend the borrowing limit for six weeks predicated on the president’s agreement to negotiate a broader deficit reduction and entitlement reform deal. And this offer is not expected to reopen the government yet.
The problem is that Main Street is starting to feel the pain of the shutdown and the looming credit default threatens to affect interest rates immediately, which would cast a long shadow over mortgage financing and 504 loan pricing.
Uncertainty about the debt ceiling and the government shutdown can only have a negative impact on the fragile economic recovery.
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