This series will discuss the government shutdown and its effects on capital markets.
State of play in Washington
As of now, Washington remains hopelessly gridlocked. Unable to come up with a continuing resolution that funds the government as of the start of the fiscal year, the government has effectively shut down, although many functions continue as normal. The military will still be active, social security checks will still go out, and necessary services such as the FAA will continue, as will entitlements like Medicaid and Medicare. Some functions will halt, and we’ll see limited services from agencies like the Department of Commerce, the Department of Agriculture, the Department of Housing and Urban Development, the Treasury, and others. In many ways, it’s not as much a blackout as it is a brownout.
Receive e-mail alerts for new research on RWT:
Interested in RWT?
Don’t miss the next report.
The politics of the situation
The Tea Party wing of the Republican party has been demanding some sort of rollback of the Affordable Care Act (Obamacare) as the price of continuing to fund the government. In spite of all the drama associated with this demand, it isn’t really all that new. Jimmy Carter faced multiple shutdowns where politicians attached conditions unrelated to government funding and we were unable to reach an agreement. Ronald Reagan had one almost every year of his presidency. In fact, since the late ’70s, we’ve had 17 shutdowns, or roughly one every other year.
The question now is how to get out of it. Typically in these cases, people affected by the shutdown begin to complain, the media finds sympathetic stories to run, and eventually the party that was pushing for it in the first place backs down. In this case, any continuing resolution that affects Obamacare is pretty much a non-starter, as it has very little chance of getting through the Democratically controlled Senate and much less chance of getting signed by the President.
So how do we get through the impasse? Either House Speaker John Boehner relents and allows a clean continuing resolution to pass in the House with Democratic support, or Democrats relent and give the Tea Party some sort of concession regarding Obamacare. The medical devices tax is a good candidate, as many powerful Democrats are opposed to it as well.
This series will look at the effects of the shutdown on various real estate–related sectors like mortgage REITs—think Annaly (NLY) and American Capital Agency (AGNC)—and financial services companies—think Redwood Trust (RWT) and PennyMac (PMT)—as well as homebuilders like Lennar (LEN) and Toll Brothers (TOL). We’ll look at how the shutdown will affect the mortgage origination market, Fed policy, and capital markets.