Here Comes Your 19th Nervous Breakdown
- Oct 02, 2013
Once again, policymakers are engaged in a battle of chicken, holding government funding hostage while Wall Street and Main Street watch nervously from the sidelines. The government partially shut down on Tuesday, the first day of a new fiscal year, and will remain so until Congress passes a measure funding operations. More seriously, the Treasury Department will not have enough to fund all government obligations past the middle of October unless Congress raises the debt ceiling.
Both the government shutdown and debt ceiling issues are tangled up with the impending rollout of the Affordable Care Act as House Republicans seek to delay implementation by a year while Senate Democrats and the Obama Administration have refused to negotiate.
At worst, policymakers could misjudge the mood of the markets and trigger a serious round of volatility in the global financial markets. At the very least, the ongoing stalemate and inability to compromise will heighten uncertainty, which delays spending decisions by households, businesses and investors. Recent studies by academics, private economists and Federal Reserve officials suggest that policy uncertainty is taking a significant toll on the economy, prevented the creation of as many as 2.3 million jobs that would have lowered the unemployment rate by as much as 1.5 percentage points. That would have been enough to recoup all of the jobs lost to the Great Recession and bring the jobless rate into the 6 percent range.
Renewed financial uncertainty could weaken faith in Treasury debt and cause interest rates to spike if global investors no longer view it as a bastion of stability. Or the reverse could occur; investors could once again flock to Treasury instruments in times of uncertainty and turmoil, ignoring the political drama unfolding in Washington and accepting on faith that policymakers will eventually do the right thing. This happened in 2011 and could happen again, driving interest rates lower. Two things are certain: the stakes are high, and the outcome is unknown.
The impact on the commercial real estate industry also is unknown. A sudden spike in interest rates and a follow-on recession – part of a worst-case scenario – would hurt the sector. An aversion to risk would hurt CMBS issuance and disrupt deals in the pipeline. REIT stocks, already hurting from the rise in interest rates over the summer, could suffer through another round of selling. If, instead of a spike, Treasury yields fall as they did in 2011, the benefits would be unlikely to flow into commercial real estate lending as banks and other lenders wait for conditions to stabilize. Conditions in the leasing market would be much slower to react given the lead time required for tenants to sign leases and occupy space. Relatively speaking, there would be one positive for the industry; to the extent it is viewed as a safe and stable asset – a hard asset not prone to oversupply – the sector is likely to hold up better than other financial assets such as stocks and bonds.