The effects of a shutdown on the economy

Two days after the U.S. government and federal offices ground to a halt, a growing number of people are wondering what the effects of a shutdown might be on the economy.

Opinions differ significantly.

Elaine Garzarelli, head of Garzelli Capital Inc., believes the shutdown will essentially be a “non-event” for markets.

Garzarelli said “This has happened so many times before that the shutdown will not have much of a bearing at all. Over the last 20 years there have been 12 government shutdowns ranging from one day to 28 days, with the average being 9 days. The market has fallen prior to previous shutdowns, but then rallied for months thereafter.”

The effects of a shutdown could be serious, say bank chiefs

However, the more than ten heads of major banks who visited President Barack Obama today warned that a failure to raise the country’s borrowing limit could have some serious consequences.

Lloyd Blankfein, head of Goldman Sachs, said as he left the White House “There’s a consensus that we shouldn’t do anything that hurts this recovery. They shouldn’t use the threat of causing the U.S. to fail on its obligations to repay its debt as a cudgel.”

The Financial Services Forum, which represents Wall Street’s largest banks, set up the meeting with the President and other lawmakers, including Majority Whip Kevin MacCarthy (3rd ranked member of the house).

Blankfein, who is also Chairman of the Financial Services Forum, said he appreciated the opportunity to speak with President Obama, members of his administration and leaders of the two parties. He said they discussed a wide range of issues, including tax policy, the still-fragile economic recovery, job creation and other fiscal challenges facing the country.

Blankfein added:

“The CEOs emphasized the critical importance of reaching agreement on a budget to fund the government, ensuring our country is on a sustainable path over the longer term, and acting to maintain the full faith and credit of the United States.

While the current government shutdown is unfortunate, the impacts of a debt default would be magnitudes worse and should not even be considered a viable option. The economic damage associated with default or near-default would be severe and have serious consequences for the recovery of the U.S. and global economy.”

The bosses of Wall Street’s major banks who visited the White House today included:

  • Lloyd Blankfein of Goldman Sachs
  • Brian Moynihan of Bank of America
  • James Gorman of Morgan Stanley
  • Robert Benmosche of American International Group
  • Michael Corbat of Citigroup
  • John Stumpf of Wells Fargo
  • Gerald Hassell of Bank of New York Mellon
  • Anshu Jain, of Deutsche Bank
  • Jamie Dimon of JPMorgan Chase
  • Anshu Jain of Deutsche Bank

Shutdown could virtually kill off fourth quarter growth

Bloomberg News quotes IHS Inc., a Massachusetts-based global market research company. IHS estimated that a weeklong shutdown would reduce fourth quarter annualized economic growth from 2.2% to 0.2%. A 21-day shutdown could cost the economy up to 1.4 percentage points.

Mario Draghi, President of the European Central Bank, fears that a protracted shutdown of the American government may undermine economic growth globally.