The horror-comedy spectacle of American government that played out Wednesday is shining a rather awkward spotlight on an old Wall Street adage that gridlock is good.
Here's the thing: Investors collectively tend to root for divided government, which ensures that neither party swoops in and rams their agenda through. Wall Street likes a slower process, one in which the the outcome is a bit more predictable.
As my colleague Matt Egan writes, while gridlock can be good for markets and the economy, total paralysis is, um, not.
ICYMI: House Republicans have, at the time of this writing, failed six times (!) to anoint a speaker this week, leaving the country without a fully functioning Congress. Absolutely zero House business can be done until a speaker is named and members of the legislature are sworn in.
(My colleagues at CNN have all the latest on the absurd deadlock here.)
The petty squabbling over what has historically been a pretty smooth process (among people who can, by and large, agree on things) doesn't bode well for the truly thorny issues Congress is likely to face this year, like the debt ceiling and a legislative response to a recession. Two things upon which Democrats and Republicans don't exactly see eye-to-eye...
"We're watching a slow-moving trainwreck collide with a dumpster fire," Isaac Boltansky, director of policy research at BTIG, told Matt. "This is a clear indication we will have dysfunction for the entirety of this Congress, which heightens the risk around must-act deadlines such as the debt ceiling."
The 4,000-page spending bill passed by Congress last month removed "a lot of the sharp objects" that could harm the economy, said Chris Krueger of Cowen Washington Research Group. But lawmakers don't have a plan for the debt ceiling, putting the risk of a US debt default front and center.
Here's Matt:
It's not hard to imagine the ungovernable GOP majority clashing with Democrats and the White House this summer and fall over the debt ceiling — with the entire world economy hanging in the balance.
Even before the House speaker stalemate, Goldman Sachs warned late last year that 2023 could bring the scariest debt ceiling fight since that infamous 2011 episode that cost America its perfect AAA credit score.
As a reminder: The US has never defaulted on its debt. Ever. That's kinda, like, the backbone of America's credibility in the world economy (along with a military budget that reminds the world we're not to be messed with, but that's a topic for another day.)
The GOP of 2023 is very different from the one that engaged in past debt ceiling standoffs. If this week's speaker debacle is any indication, Corporate America may want to buckle up — the increasingly populist GOP may not be so loyal to Big Business as it once was.
So, what about a recession?
When the pandemic hit nearly three years ago, sparking the steepest economic contraction in modern history, the government moved swiftly to throw businesses and individuals a financial lifeline.
Don't expect that kind of support to come again if the Fed misses its soft landing and winds up slamming the brakes too hard on the economy. The GOP of today puts the blame for decades-high inflation squarely on fiscal stimulus that allowed Americans to spend their way through the pandemic. (That's spending that ultimately kept the economy humming and resulted in a much stronger recovery than just about anyone expected...but I digress.)
See Matt's full analysis of the congressional paralysis (a paralysis analysis!) here.
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