Why Wall Street should rethink its alliance with the GOP
In light of the US government shutdown and looming debt ceiling deadline, Wall Street should shift its traditional GOP alliance to Democrats. Republican extremism is threatening US credibility and markets. Wall Street's clout can help reshape America's fiscal future.
It is no secret that Wall Street likes the Republican party. The GOP’s platform of low taxes and small government generally serves the business community very well, while the Democratic party’s preference for higher taxes and more business regulation can be a thorn in the side of the private sector. During the 2012 presidential elections, Wall Street contributed three dollars to Mitt Romney for every dollar that it gave to President Obama, and in general the banking industry has favored the Republicans for decades.Skip to next paragraph
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However, in light of the government shutdown, ongoing budget battle in Washington, and looming debt ceiling deadline, it may be time for Wall Street to rethink its alliance.
There is no arguing that the US national debt is too high and that the current level of government spending is unsustainable in the long run. But as a recent report by the non-partisan Congressional Budget Office predicts, current budget cuts will not prevent a spike in the federal deficit again in 2016 (due to increased demands on Social Security and Medicare by an aging population).
The implication is that the budget cuts may not be the right ones to begin with. In addition, the Republican push to repeal or defund Obamacare is misguided, since the CBO’s study of the health-care law has already determined that it will be deficit neutral at worst and would actually cost a lot more to repeal.
Moreover, several economists – including those on Wall Street – have made clear that the best path for cutting the debt over the long term mandates a robust economic recovery in the short term. This calls for a balance of cuts and spending, not the sort of austerity many Republicans seem to be pushing for.
These considerations, not to mention the GOP’s willingness to gamble with the federal debt ceiling, which has been raised 79 times since 1940 as a matter of policy, should give Wall Street pause.
Of course, some will be quick to point out that the Republican Party has been commandeered by its most extreme elements, and that tea-party members don’t represent the party’s ideals as a whole. But as long as those elements are setting the agenda in Congress and House Speaker John Boehner concedes to their demands, that difference is irrelevant.
While the banking community may be concerned about the long-term impact of rising national debt, it should be even more worried about the impact of Republican extremism and intransigence on the markets – and many are. America’s credibility and ultimately Wall Street’s own bread and butter are at stake.
Market uncertainty can benefit some investors in the short term – especially if they bet the right way during a crisis. But as a chronic phenomenon, it is a disaster. (Prolonged or frequent uncertainty causes turmoil in the capital markets and can lead to billions in lost wealth for investors, massive trading losses, decline in consumer spending, rise in unemployment, and general economic downturn.
The current crisis in Washington will pass eventually, but the prospect of further crises looms large. The debt ceiling deadline is Oct. 17, and another showdown is virtually assured. As long as a Democrat sits in the White House, the GOP is highly unlikely to back off these types of fights and will likely escalate them as we near the 2016 presidential race. That, in turn, means that a climate of uncertainty will continue to permeate the markets, and thereby dampen Wall Street’s profitability for the foreseeable future.