While panelists at the Information Management Network's ABS East session “Identifying the Major Global Macro-Economic Risks to the U.S. Securitization Market” rattled off a number of harrowing scenarios, the fiscal cliff facing our government at the end of the year was probably the most chilling.
John Ryding, the chief economist and founding partner at RDQ Economics, said that if nothing is done and the tax cuts that are scheduled to expire do so, the economy would tip back into a recession. “It’s a tax hike on an economy growing less than 2%,” he added.
Of course, the animosity between Republicans and Democrats, no matter who is in charge come January, could itself push us over the edge of the cliff. And kicking the can farther down the road will not make it any easier. “In all likelihood we will go over the cliff to some extent and then pull ourselves back to the top again,” said Mark Fleming, chief economist at CoreLogic.
In a downside scenario, Moody’s Analytics Senior Director Tony Hughes said that unemployment could grind up to 10.4%.
The panelists believed that as acrimonious as the parties have gotten, the worst-case scenarios were unlikely. But they also believed that it could take a market shock — cratering equity prices or soaring bond yields — to motivate the politicians to reach a compromise.
Citing a recent survey of fund managers, Deutsche Bank Managing Director Jay Steiner said the fiscal cliff has become the main macro-risk preying on the minds of U.S. equity managers, beating out the euro crisis.
“It will be very unsettling for markets,” said Jeff Shafer, a consultant with Standard & Poor’s.