Why Wall Street should rethink its alliance with the GOP

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.

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.

While the exact benefits and costs of Republican policies to Wall Street are difficult to quantify, it is common sense that without fiscal stability in Washington, we will not have stable and healthy markets. In the absence of robust markets, even lower taxes and deregulation will have little value.

A major contributor to Wall Street’s success has been the international credibility of the US financial system, the relative stability of the dollar, and the implied safety of investing in American businesses. Historically, that has attracted capital to American companies, buoyed the domestic stock market, given Wall Street firms great power and influence, and helped our economy in general.

That credibility, however, is being eroded. The longer the GOP continues to play politics with tactics like threatening to throw the US government into financial default, the harder it becomes for other nations to believe that America will be a going concern, let alone a viable trading partner, in the future, and the less leverage we have on the global financial stage. That process then erodes the American banking industry’s power to call the shots and make the oversized profits that it enjoys.

Wall Street is in a very powerful position today. With its vast resources, the banking sector can exert a tremendous amount of clout in Washington, and help shape America’s fiscal future. If money really does talk, then Wall Street has enough to talk very loudly.

Republican supporters on Wall Street need to first exert pressure on Mr. Boehner to put his House in order and move away from extremist tactics. But if Boehner doesn’t bend, Wall Street should switch sides. The speaker's track record thus far as not been good. The 2014 midterm elections and 2016 presidential election will be here soon enough. Wall Street can put its money where its mouth is – and telegraph to lawmakers its intentions.

On the surface, the capitalist ideology of Wall Street clashes with the populist beliefs of the Democrats, but that, too, is more hype than reality. The Clinton administration, for example, was staunchly deregulatory, repealing the Glass Steagall Act of 1934, which limited commercial banks. And the Obama administration bailed out the banking industry after the financial crisis of 2008 despite public opposition.

Even the fuss over Democrats' push to eliminate the Bush tax cuts was overblown, since an increase in taxes on the wealthy amounts to only $80 billion per year, which is a pretty small percentage of the $27 trillion of wealth that is owned by the top 1 percent of Americans.

Working with the Democrats may require Wall Street to live with more regulation and higher taxes than it would like, but by using its influence wisely, it can also mitigate those very factors and negotiate a reasonable compromise. That will be to everyone’s benefit, and in any case, is far better than the alternative – ongoing market uncertainty at the hands of extremist Republicans.

Perhaps the best illustration of this paradoxical synergy is occurring right now, as JPMorgan Chase CEO Jamie Dimon meets with President Obama to discuss the debt ceiling. The president is expected to ask Mr. Dimon, whose bank is under investigation by several government agencies, to help the White House make the case to Republicans to avoid using the debt ceiling as leverage in budget negotiations.

Bedfellows may not get stranger than this, but this could be a harbinger of things to come.

Sanjay Sanghoee is a political and business commentator. He has worked at leading investment banks Lazard Freres and Dresdner, as well as the hedge fund Ramius. He has appeared on CNBC’s ‘Closing Bell’, TheStreet.com, and HuffPost Live and is the author of two thriller novels. For more information, visit www.sanghoee.com