Academic journal article ABA Banking Journal

Impact of Brinkmanship

Academic journal article ABA Banking Journal

Impact of Brinkmanship

Article excerpt

Washington politicians could have second careers in Hollywood writing cliffhanger movie endings. Let's hope there isn't a sequel to last month's performance in our near future. Calmer heads prevailed as Congress just passed a bill ending the government shutdown after 16 days and increasing the debt ceiling to avert technical default on our national debt.

The sword of Damocles continues to hang over our economy, however. The last-ditch Reid-McConnell agreement took the risk of national default off the table only until Feb. 7 when the debt ceiling will need to be raised again. The federal government will remain open at least until Jan. 15 when Congress will have to find a more permanent solution to the 2013/2014 budget.

Not much was settled. The political divide between Democrats and Republicans appears just as wide today as it was several weeks ago. The real tragedy would be if the two sides just saw this bill as a temporary cease-fire, taking the next month or so as an opportunity to reload their weapons and update their strategies. If global investors, consumers, and businesses get the message that nothing has changed and more deadlines and threatened defaults loom, it will continue to hold back their willingness to spend, invest, and lend future money to the U.S. government. This is no way to run a national government.

Although the darkness of the economic abyss is further in the rear-view mirror, measurable economic damage has already been done. We estimate that the government shutdown has cut a little over 0.2 percentage points of GDP in the fourth quarter. The University of Michigan's consumer sentiment survey slumped in October to the lowest level since January--not a good sign for fourth-quarter consumer spending. My fear is the temporary nature of the government's solution will only extend the period of fiscal uncertainty hanging over our economy. …

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