Why John Boehner Needs to Reassure Wall Street

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REUTERS/Jim Young

House Speaker John Boehner will address the Economic Club of New York City on Fifth Avenue in Manhattan on Monday night. Though Boehner has long been an avowed friend of business – he received a 94% Chamber of Commerce rating in 2008 — it will not be a pleasant visit.

The Ohio Republican made his fortune, estimated to be between $2.5 million and $7 million according to congressional disclosure records, as a small business entrepreneur at a plastics packaging company he helped to start. He has been an unabashed friend to lobbyists on K-Street, which is populated by many former proteges, a tight-knit circle known as Boehnerland. His occasional breaks from the party line have been on business-related issues like immigration and China.”It’s been an advantage as business people come in and testify about laws being proposed. I can appreciate where they’re coming from,” Boehner told the Small Business News in Dayton in 1995. “Far too many members of Congress have never had a job in the private sector.”

But there can be a big difference between a pro-business Republican and a fiscally conservative Republican. And that rift will be on display over the next few months. Most U.S. business groups have been pushing for Washington to pass the debt ceiling well before August, when the Treasury Department estimates the limit will be reached. Congress rarely leaves much time between action and deadline, but Wall Street has been issuing increasingly dire warnings not to run out the clock on this particular negotiation. From a recent J.P. Morgan report entitled, “The Domino Effect of a U.S. Treasury Technical Default”:

Even if Treasury avoided a default, we think the delay in raising the debt ceiling is likely to negatively impact markets, as investors undertake risk-management actions in preparation for a potential Treasury default. Already, some market indicators are showing considerable odds that the debt ceiling won’t be raised by July. Because the tail risks from a technical default are so large, a prolonged delay in raising the debt ceiling seems likely to impact markets well before a default actually occurs. These effects could include liquidity shortages over the late June/July period as borrowers attempt to raise additional cash and increase the tenor of their borrowings, large auction concessions especially if Treasury were to postpone an auction, increases in option volatility that cover the June/July period, and generally weaker demand for Treasury securities as uncertainty on whether the debt ceiling will be raised grows. Indeed, when the government shut down in November 1995 due to similar debt ceiling issues, Treasury delayed the 3-year and 10-year note auctions by eight days. As a result, 10-year Treasuries cheapened 25 basis points.

Finally, we highlight that these seemingly prudent risk management activities in preparation for a potential default could unintentionally bring about the very run on liquidity that these activities are meant to prevent, as one firm raising additional cash provokes similar action by other large firms.

Personally, Boehner probably agrees with the business community, but his is only one vote of the 218 needed. And his freshmen are Tea Party conservatives who care more about slashing the size of government than how that might affect the economy. Most freshmen are demanding that Dems give them some concessions in order to vote for the measure. Some have asked for a balanced budget amendment and others have asked for deeper cuts than the $38.5 billion they extracted in the 2011 budget fight.

Last week, Boehner said the time has come to talk “trillions” in cuts, not billions. And on Monday night, he is expected to underline the importance of overhauling Medicare. His remarks will come less than a week after Majority Leader Eric Cantor had to reaffirm that Medicare reform was still on the table after an apparent gaffe* where he seemed to back away from Paul Ryan’s contentious plan in an interview with the Washington Post. Still, Boehner isn’t expected to say that Medicare reform is a must-win in the debt ceiling negotiations.

Republicans have thus far drawn only one line in the sand: They will not accept any tax increases. President Obama has proposed slashing $4 trillion from the budget over 12 years, but that’s achieved in part by allowing Bush-era tax cuts on the highest income levels to expire — a non-starter with the GOP. Negotiators are looking at cuts far less than $4 trillion — more like a few hundred billion dollars. That number could go higher if Republicans agree to more revenue increases, something GOP leaders have thus far said they are not willing to consider.

So, Congress is back in a similar position it was a month ago: haggling over the size of cuts attached to a must-pass bill. But this time, the worst-case scenario wouldn’t shut down the government, it would wreak havoc on the economy — something most Republicans, including Boehner, say they don’t want. Few have yet pledged to vote to avoid this scenario. Wall Street watched in horror as abortion almost derailed the 2011 budget talks. With small business credit and 40% of the federal government’s operating budget on the line, not to mention a potential stall in the global economic recovery, the very last thing business groups want to see is Republicans holding the debt ceiling hostage. It is these concerns that Boehner must address Monday night. For Boehner, Fifth Avenue never looked so grim.

*I say gaffe here because, frankly, there’s no way the GOP will get the Medicare provisions of the Ryan budget passed, so Cantor was just speaking the truth — the definition of a Washington gaffe.

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