Wall Street: speak on debt ceiling debacle

The short-term fix agreed by Congress pushes the debt-ceiling debate closer to mid-term elections, giving financial institutions an opportunity to influence a deal.
John Boehner, the Republican House speaker.
John Boehner, the Republican House speaker.

Everyone is breathing a sigh of relief that the Republican effort to extort political gains from President Obama by threatening the full faith and credit of the US has failed.

For example, Mohamed El-Erian, Pimco co-chief executive – featured in this month’s edition of FinanceAsia magazine – writes that the deal this week means the US can avoid recession, job losses and threats to its international standing.

It’s a view typical across the financial community worldwide.

This costly disaster has already clocked in at the billions of dollars of losses in the US, not to mention a humiliating no-show at important Asian regional meetings by Obama. It has led Fitch to put the US on its credit rating watch for a downgrade, and has confirmed the logic behind Standard & Poor’s downgrading of the US in 2011.

Global finance, including the institutions in Asia, is centred on the pre-eminence of the US. China, for example, has been a beneficiary of an international system based on the dollar and open trade. It was the Chinese and Japanese, the biggest owners of US Treasuries, who stood the most to lose from a possible default.

The use of extortion by the Tea Party extremists running the Republican Party has called into question the full faith of the US as the world’s most important borrower. A default would have been catastrophic, but real damage has been done – to the US and by extension to the global financial system.

El-Erian writes: “The message from the American private sector (and international community) to Congress may best be thought of as a simple and urgent plea: Please put decisively behind you the shenanigans of the last few weeks and embark on constructive economic and financial governance – for neither our economy nor the plumbing of the global financial system would easily handle yet another set of self-inflicted crises in the next few months.”

But in Washington, DC, as on Wall Street, money talks and B.S. walks. It is money from the finance sector, more than any other, that in 2012 swung behind Republicans in races for the House, the Senate and the presidency.

Individual contributions from finance, insurance and real-estate individuals and lobby groups accounted for 15% of donations to all candidates, far more than from any other sector. For the first time in over a decade, most of this money went to Republican candidates.

The Center for Responsive Politics reported that Wall Street contributed a record $80 million to the 2012 presidential race, of which $61 million went to Romney and only $19 million to Obama.

This actually understates the contribution, because it doesn’t include money in legal vehicles called political action committees (PACs) – a non-profit organisation, Sunlight Foundation, reports that PAC finance money is tilted far more toward Republicans: for periods of the presidential campaign, 43% of Mitt Romney’s funding came from financial donations, the vast majority of which derived from securities and investment firms. Securities firms donated $94 million to PACs, almost all of which was funnelled to Romney. And that’s just the presidential race.

Nor is this all. If you consider the more than $1 billion cumulatively spent by Wall Street firms lobbying against Dodd-Frank legislation, the effort by the finance industry in America to oppose the second term of Barack Obama is clear.

Wall Street titans are not Tea Party radicals.

But what has done more to undermine the standing of the US and its role in the global financial order: Dodd Frank, or right-wing efforts to use the debt ceiling as a political tool? Obama’s desire to elevate consumer protection, or the loss of America’s triple-A credit rating? The costs of regulation, or the cost to the economic recovery due to the shutdown? The uncertainty of the Volcker Rule, a provision of Dodd-Frank meant to kick investment banks out of private equity and hedge fund businesses, or the uncertainty of a government shutdown and the fear of default?

And bear in mind, the deal struck this week in Washington only extends borrowing authority until February 7, so we could all come back from our lunar new year holidays to find ourselves in exactly the same mess.

The next political battle over government spending, taxes and debt will take place early next year, not too far off from the November mid-term elections that will see all of the House of Representatives and some Senate seats up for grabs. If Wall Street wants to put its money to productive use, it can start by looking at backing mainstream Republican candidates in seats held by Tea Party nutjobs.

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