Financial markets are overconfident that the fiscal stalemate in Washington will be resolved in time to avoid major economic damage, White House economic adviser Gene Sperling warned today.
“There is a false sense of complacency among some in the market that somehow things will be always solved at midnight,” Sperling, the director of President Barack Obama’s National Economic Council, told Bloomberg News reporters and editors.
“Unless sensible people in the Republican Party are willing to take back control of their party,” he said, “there is a much more serious risk of a negative economic and financial event.”
Stocks rallied today as the federal government began its first partial shutdown in 17 years amid a deadlock in Congress over Republican demands to delay key provisions of the Affordable Care Act, Obama’s health-care law.
The Standard & Poor’s 500 Index advanced 0.7 percent to 1,694.01 as of 1:02 p.m. in New York after the benchmark index retreated 2.6 percent from its last record on Sept. 18. Treasury 10-year yields rose 2.5 basis points to 2.64 percent. The Bloomberg U.S. Dollar Index (SPX) recovered from a 0.4 percent earlier decline to trade little changed.
Investors are overly optimistic that Washington will avoid an economic crisis because a default was averted in August 2011 through a last-minute agreement, he said.
The partisan battle on spending is being waged as the government also approaches an Oct. 17 deadline to raise the legal debt limit. Republicans are seeking more concessions from Obama, who says he won’t negotiate on the debt ceiling.
Sperling said failure to approve the legislation needed to avoid default may tip the economy back into recession.
“Every independent economist believes that if this faction puts our economy into default they are putting us at risk of a recession,” he said. A prolonged government shutdown by itself would be an economically damaging “body blow” to the middle class, he said.
House Speaker John Boehner, an Ohio Republican, has issued a list of conditions to raise the $16.7 trillion legal debt limit, including approval of TransCanada Corp. (TRP)’s Keystone XL pipeline, major revisions to the tax code, a one-year delay of the insurance mandate in Obama’s health-care law, means testing of the Medicare insurance program for the elderly, and reductions in government regulations.
Republicans are “deeply misguided” if they believe Obama will bargain on the debt ceiling, Sperling said.
Obama senior adviser Dan Pfeiffer said the president wouldn’t repeat the decision made in 2011 to make concessions to win a debt-limit increase.
“That movie is over,” Pfeiffer said. ‘It’s never going to happen again.”
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