Oh, That Washington Show

Perhaps Mark Twain said it best: “Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.”

A partial shutdown of the federal government, the first since 1996, took effect on Tuesday. Some 800,000 government workers were furloughed. The extent of the negative impact on the economy is unclear.

In recent years, Congress has largely lost its ability to legislate and has abandoned its traditional budget/appropriations process. After three years of “kicking the can down the road” with last-minute deals that failed to address underlying problems, Congress finally so far has chosen not to do even that much this time around.

The ongoing White House policy of “leading from behind” requires no additional comment.

The bigger deadline and challenge will come later this month: the need to raise the nation’s debt limit.

The US Treasury says Congress must raise the federal borrowing limit, currently $16.7 trillion, by Oct. 17. Otherwise it will have just $30 billion left to fund government operations. Analysts say that amount could last for one or two weeks.

The continual self-absorption and air of crisis that now accompanies the basic tasks of governing have grown increasingly tiresome. Sadly, that in turn breeds indifference and detachment.

At least, that seems to be the message of the financial markets. After all, we’ve seen the Washington show all too many times. As of the close yesterday (Thursday), the Standard & Poor’s was down just 2.7 percent from its Sept. 18 high. And a pullback at this point, whatever the ostensible cause, is quite reasonable after the S&P 500′s 17.7 percent gain so far in 2013.

There’s precedent for a government shutdown. There have been 17 since 1977, according to the Congressional Research Service. Most have lasted one to three days. The longest ! was 21 days, in 1995-96.

But there’s no precedent for default.

A Treasury Dept. report this week said that if the debt ceiling isn’t raised or suspended, the impasse could cause credit markets to freeze, the dollar to plummet and interest rates to rise sharply. A default could potentially result “in a financial crisis and recession that could echo the events of 2008 or worse,” said the report.

It’s unclear whether that would really happen. But it’s widely agreed, both inside and outside the Beltway, that the consequences of a default could be severe. The willingness of the US government to even consider not paying its debts on time adds an element of political instability.

September, historically the worst month for stocks, turned out pretty well, with the S&P 500 rising 3 percent. This happened despite the uncertainties that loomed as the month began. These primarily concerned what the Federal Reserve would do regarding its $85-billion-per-month bond-buying program and the potential for a US military strike against Syria. But the Fed did nothing and the Syria strike was avoided.

Now October looms, with one significant threat: our politicians in Washington, DC. Moreover, October historically has been a month of some dramatic declines, notably the crashes of 1929 and 1987 plus the 17 percent drop of 2008.

But here’s another perspective. Since 2010, the bull market has been interrupted six times. Three of its significant pullbacks have been related to the European financial crisis. The other three came because of the political dysfunction in Washington.

In the spring of 2010, it was the fight over passage of the Affordable Care Act (also known as Obamacare). In the summer of 2011, it was the histrionics over lifting the debt ceiling and the first-ever credit downgrade of US government debt. Late last year, it was the uncertainty over the presidential election and then the battle over the so-called fiscal cliff.
If! history is a guide, we might see a significant market pullback amid the latest Washington crisis. But the historical precedent also points to an excellent buying opportunity if that occurs.

In any event, these troubles will pass.