There’s a quiet whisper among Wall Street independents, and even some Democratic donors in the financial services industry: if House Republicans win, they better win big.
Why it matters: Investors are growing increasingly worried about what a narrow majority for House GOP Leader Kevin McCarthy (R-Calif.) would mean for the first big fight of divided government: raising the debt ceiling.
- In private fundraisers and investor conferences, many are concerned that a razor-thin GOP victory will yield a fragile McCarthy speakership — empowering conservative lawmakers to play chicken with the White House.
- On the debt ceiling, that means the full faith and credit of the United States could end up as roadkill, potentially cratering markets and wiping away trillions of dollars across a variety of asset classes.
What they're saying: "Investors are concerned by all the very public talk from McCarthy and the Freedom Caucus about taking us to the brink on the debt ceiling," said Charles Myers, chairman of Signum Global Advisors.
- "McCarthy winning by a wider margin would be welcomed by investors because it gives him more room to maneuver," he said. “Anything 20 [seats] or higher would be viewed as enough to give McCarthy the control and power over the most extreme part of the caucus."
Driving the news: As Republicans' prospects improve in the final stretch of the campaign, McCarthy's pronouncements — on both potential policies as well as his legislative strategies to achieve them — carry more weight.
- This week, he was explicit in suggesting GOP support on the debt ceiling would come with a political price. Democrats, he warned in an interview with Punchbowl News, would have to agree to spending cuts.
- Rep. Jim Banks (R-Ind.), who chairs the largest bloc of House conservatives and could be the next Republican whip, went even further on Thursday — calling the debt limit "a major leverage point" and insisting "we have to use a moment like that to do things that the administration wouldn't otherwise do."
The big picture: With a divided government, the big battles between Congress and the White House are about funding the government, responding to international crises and raising the debt limit.
- The U.S. is likely to hit the $31.4 trillion limit, which was last raised in December 2021, early next year, according to the Bipartisan Policy Center, which monitors tax receipts and Treasury flows to estimate the so-called "X Date." (Even Treasury officials privately marvel at the BPC’s accuracy.)
- But the Treasury Department has a few accounting tricks, which it calls "extraordinary measures," to buy some time, likely putting the actual "X Date" in the third quarter of 2023.
Flashback: In 2011, with a new House GOP majority staring down President Obama on spending and entitlement reform, the U.S. came so close to defaulting on the debt that S&P downgraded the U.S.'s AAA credit rating for the first time.
- After the 2011 debacle, Obama adopted a maximalist — and ultimately successful — position: he would not negotiate on the debt ceiling in 2013. Republicans ultimately caved.
- During Trump’s presidency, Republicans in Congress supported three debt ceiling increases without demanding policy changes.
What we're watching: The debt ceiling might arrive sooner than currently expected for two reasons.
- With the Fed raising rates, borrowing costs for the U.S. are surging, speeding the arrival of X Date.
- Plus, the administration still doesn't have a good estimate on how much Biden's student loan forgiveness will cost — and when the bill will come due.
The intrigue: Biden and congressional Democrats could raise the debt ceiling in a busy lame-duck session, when they control both ends of Pennsylvania Avenue. That would essentially spare McCarthy the headache of dealing with the demands from his members.
- But it's unclear what political incentive Democrats have — aside from keeping the U.S. economy from falling into the abyss — for solving McCarthy's potential political problem for him.
