11:01pm

Thu November 17, 2011
Economy

Would Supercommittee Failure Roil Markets?

Originally published on Fri November 18, 2011 3:34 pm

With Wednesday's deadline looming, the congressional supercommittee still seems far from an agreement, causing concern that failure could send financial markets into a spiral.

The bipartisan panel, charged with finding budget cuts or new revenues to reduce the deficit by at least $1.2 trillion over the next 10 years, is a child of the summer's debt-ceiling debate. It was an escape hatch for Congress and the president when they couldn't reach agreement on big deficit-reduction measures. That game of chicken helped to send the stock market sliding.

The debt ceiling was eventually raised at the last minute, with a compromise that created the supercommittee. But the political turmoil on display during the debate caused Standard & Poor's to downgrade the U.S. credit rating. That move, along with turmoil in Europe, sent stock markets plunging.

Could that happen again? Hugh Lamle, president of M.D. Sass Investors Services, says he thinks even if the committee doesn't make its $1.2 trillion target, investors will be heartened if it can detail credible progress by next Wednesday.

"[However,] if the deadline is met, but without a really credible solution, I think the markets will react negatively," Lamle says.

It could look a lot like the stock market losses surrounding the debt ceiling crisis. During the two weeks surrounding that debate, the Dow Jones industrial average dropped close to 2,000 points. Some of those losses were associated with the European debt crisis.

One effect of Europe's crisis was that despite the U.S. credit downgrade, investors continued buying U.S. Treasury bonds, so U.S. interest rates did not rise. Lamle thinks that could be different this time if investors are badly disappointed. He says if U.S. interest rates were forced up, it would signal serious negative effects for the U.S. economy and for the Federal Reserve's control over interest rates.

"So serious that I doubt that thoughtful members of Congress will permit that to happen," he says.

Lamle says the lack of a real plan from the supercommittee would further damage the credibility of the U.S. government.

"Losing credibility is like breaking a glass. You can't put it back together again very easily," he says, "and the markets depend upon an assurance that when Treasury bonds and bills come due, they will be able to be paid."

Anthony Crescenzi, a vice president at the big bond fund PIMCO, says markets already have very low expectations for the supercommittee — and for Congress as a whole.

"Just the idea that there is a supercommittee is evidence that there's dysfunction, because the normal process has broken down," he says.

That doesn't mean investors wouldn't be disappointed by a total lack of progress. There's also the possibility that one of the other rating agencies might decide to downgrade U.S. debt, which could unnerve investors further.

One other thing on investors' minds is the looming expiration of the payroll tax holiday and extended unemployment benefits on Jan. 1. That could take $170 billion out of the pockets of Americans next year and cost an estimated 1 million jobs. President Obama wants both renewed, but Republicans have hesitated.

"This is separate from the supercommittee," Crescenzi says, "but it's connected in the sense that if there's no agreement by the supercommittee, it's suggestive of the inability of the Congress to work together and an inability, perhaps, to extend this payroll tax holiday and extended unemployment benefits."

And a threat of slower growth in the U.S. could push stocks down.

There has been some talk of a deal that might include significant budget cuts, plus extension of the payroll tax holiday and unemployment benefits. Even if it totaled less than $1.2 trillion in deficit savings, it might soothe investors.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

In Washington, Democrats and Republicans are locked in different kind of conflict over reducing the budget by at least $1.2 trillion over the next decade. The congressional supercommittee charged with making that happen met again yesterday, but it seems the group is still far from an agreement. With a deadline looming - it has to make deal by Thanksgiving - there's concern a failure by the committee could send financial markets into a spiral. Here's NPR's John Ydstie.

JOHN YDSTIE, BYLINE: Remember that the supercommittee is actually a child of the debt-ceiling debate. It was an escape hatch for Congress and the president when they couldn't reach agreement on big deficit-reduction measures back during the summer. That game of chicken helped to send the stock market sliding.

(SOUNDBITE OF STOCK MARKET BELL)

(SOUNDBITE OF NEWS BROADCAST)

UNIDENTIFIED WOMAN: The combination of bad economic news and worries about a possible default was evident in nearly every measure of investor confidence Friday. All 10 industry groups in the S&P 500 stock index fell.

YDSTIE: Of course, the debt ceiling was raised at the last minute with a compromise that created the supercommittee. But the political turmoil on display during the debate caused Standard & Poor's to downgrade America's credit rating. That move, along with turmoil in Europe, sent stocks plunging. Could that happen again this time? Hugh Lamle, president of M.D. Sass Investors Service, says he thinks even if the committee doesn't make its $1.2 trillion target, if it can detail credible progress by next Wednesday, investors will be heartened. But...

HUGH LAMLE: If the deadline is met but without a really credible solution, I think the markets will react negatively.

YDSTIE: And it could look a lot like the stock market losses surrounding the debt-ceiling crisis. During the two weeks surrounding that debate, the Dow Jones Industrial Average dropped close to 2,000 points. Now, some of those losses were associated with the European debt crisis. And one effect of Europe's crisis was that despite the U.S. credit downgrade, investors continued buying U.S. Treasury bonds, so U.S. interest rates did not rise. Hugh Lamle thinks that could be different this time if investors are badly disappointed. He says if U.S. interest rates were forced up, it would signal serious negative effects for the U.S. economy and the Fed's control over interest rates.

LAMLE: So serious that I doubt that thoughtful members of Congress will permit that to happen.

YDSTIE: Lamle says the lack of a real plan from the supercommittee would further damage the credibility of the U.S. government.

LAMLE: Losing credibility is like breaking a glass. You can't put it back together again very easily. And the markets depend upon an assurance that when Treasury bonds and bills come due, they will be able to be paid.

YDSTIE: Anthony Crescenzi, a vice president at the big bond fund PIMCO, says markets already have very low expectations for the supercommittee and the Congress as a whole.

ANTHONY CRESCENZI: Just the idea that there is a supercommittee is evidence that there's dysfunction because the normal process has broken down.

YDSTIE: But that doesn't mean that investors wouldn't be disappointed by a total lack of progress. And of course, there's the possibility that one of the other rating agencies might decide to downgrade U.S. debt, which could unnerve investors further. One other thing on investors' minds is the looming expiration of the payroll tax holiday, and extended unemployment benefits on January 1st. That could take $170 billion out in the pockets of Americans next year, and cost an estimated 1 million jobs. President Obama wants both renewed, but Republicans have hesitated. Again, Anthony Crescenzi.

CRESCENZI: This is separate from the supercommittee, but it's connected in the sense that if there's no agreement by the supercommittee, it's suggestive of an inability of the Congress to work together and an inability, perhaps, to extend this payroll tax holiday and extended unemployment benefits.

YDSTIE: And a threat of slower growth in the U.S. could push stocks down. There has been some talk of a deal that might include significant budget cuts, plus extension of the payroll tax holiday and unemployment benefits. Even if it totaled less than $1.2 trillion in deficit savings, it might soothe investors. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.