Friday, October 18, 2013

Budget War Winners

Budget War Winners

Reading yesterday’s newspapers, you’d think the Tea Party was soundly defeated in the last few days as Congress raised the debt ceiling and passed a continuing resolution.  I have a very different take on the winners and losers in this saga.  I think the Tea Party is continuing to win big,  and while it’s not the Tea Party’s intent, they are providing Wall Street with a fertile environment.

Here’s the case for the Tea Party.  For the better part of two weeks, they brought the government to a standstill and dominated the debate.  While they weren’t able to defund the Affordable Care Act (ACA), they were able to ensure that the budget debate is argued on their terms.   Our government no longer operates based on a proper budget, as the appropriations process no longer functions.  Instead, the Federal government is governed by continuing resolutions and sequestration, which inhibits the agencies from functioning properly.  Government funding has become a short-term proposition.  Try running a private company if your revenues and expenses were subject to renegotiation every three or four months.  This method of impairing the government is the direct of the Tea Party’s ability to shape the budget process in Congress.
Asian Strategy (1999)
In addition to the next budget battle, the Tea Party will be able to wage the debt ceiling fight all over again in mid-February.  While defunding the ACA will probably no longer be an achievable goal, I’m sure the Tea Party will find other means to handicap the ACA or some other administration program to attack.  By raising these other issues, the Tea Party will ensure that proper budget is never properly discussed or implemented.  Rather the federal government will continue to fray and shrink, which is the Tea Party’s aim.    The party will only lose when and if voters begin to turn them out of office.  Until then, the Tea Party may lose a skirmish or two, but it is winning the war.

Why is all of this good for Wall Street?  With government crippled and shedding employees, the economy continues to sputter along.   Moreover, the partial government shutdown probably sapped the economy in the fourth quarter.  As a result, the Fed is more likely to keep short-term interest rates low and continue purchasing long-term securities.  In short, the Fed is keeping Wall Street’s borrowing costs low, which is great if you are an investment bank, hedge fund, or private equity manager.  In addition, the on again off again funding of the federal government keeps the regulatory agencies from fully and effectively implementing Dodd-Frank and other enforcement programs.

It’s a strange alliance.  Obviously, Wall Street doesn’t want Washington flirting with default, so the Tea Party’s most extreme tactics give the Street a case of the jitters.  Although an impaired Federal government hurts many Americans across the United States, Wall Street isn’t among them.  The big banks can sit back and let the Tea Party do their work.  I doubt that’s what true believers of the Tea Party intended.  However, the party’s financial backers have to be very pleased with their return on their investment.

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