Would Supercommittee Failure Roil Markets? | WAMU 88.5 - American University Radio

Would Supercommittee Failure Roil Markets?

Play associated audio

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 2011 National Public Radio. To see more, visit http://www.npr.org/.

WAMU 88.5

Art Beat With Lauren Landau, July 31

Today you can rock out to some familiar tunes or check out a local band’s debut album.

NPR

How To Order Pizza From A Nuclear Command Bunker

A trip to an underground Air Force nuclear bunker becomes a unexpectedly delicious culinary experience. Just don't order the gravy bowl.
WAMU 88.5

Jonnie Williams On Stand Again Today In McDonnell Corruption Trial

Former Star Scientific CEO Jonnie Williams will take the stand again today in the trial of former Virginia Gov. Bob McDonnell, and his testimony could be key in the case.

NPR

Can Pinterest Compete With Google's Search?

Pinterest has created a database of things that matter to humans. And with a programming team that's largely been hired away from Google, the company has begun offering what it calls "guided search."

Leave a Comment

Help keep the conversation civil. Please refer to our Terms of Use and Code of Conduct before posting your comments.