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Former CBO Director: The Fall Will Be "Very Scary", Expect A Market Crash

Rudy Penner, the former director of the Congressional Budget Office and the person described by MarketNews international as "one of Washington's most respected fiscal policy experts", told MNI Wednesday in an exclusive interview that he expects a "very scary" fall 2017 due to fiscal issues, with market-disrupting battles ahead on both the debt ceiling and fiscal year 2018 spending. Penner directed the CBO under president Reagan, worked at high level posts in the White House budget office, and the Council of Economic Advisers. He is currently a fellow at the Urban Institute and sits on the board of the Committee for a Responsible Federal Budget.

"There are so many politically hard issues and so little consensus on budget and tax policy. I assume we'll somehow get through this, but not without getting frightened on a regular basis," Penner said.

"Probably the best we can hope for is muddling through the (FY 2018) budget and the debt limit and getting very limited health, tax, and infrastructure legislation. There is not going to be significant stimulus coming out of Washington in the foreseeable future," he said, echoing what many other pundits have said before. Penner said a "bipartisan negotiation is badly needed" to forge even a limited FY 2018 spending agreement. But he's not certain this will occur.

"Even a very limited spending agreement might be an impossible dream. We may just stumble into a series of short-term CRs," he said, referring to temporary spending bills to keep the government funded.

While the "record polarization" rhetoric is familiar, the clock is starting to tick ever louder: the 2018 fiscal year begins on October 1, 2017 and extends until September 30, 2018. None of the 12 annual spending bills for FY 2018 have yet been approved by Congress.

On to the debt ceiling, the one item on the calendar which Morgan Stanley (and others) have said will be the biggest hurdle for the market in the next two months.

Penner said he believes it will be "very challenging" for Congress to pass legislation this fall to increase the statutory debt ceiling. Treasury Secretary Steve Mnuchin has asked Congress to lift the debt ceiling by the end of September. Penner countered that a "plausible path" for dealing with the debt ceiling is to pass legislation in September to suspend the debt ceiling until after the November 2018 mid-term elections.

However, such legislation, he said, may have to be negotiated by an unusual coalition assembled by House Speaker Paul Ryan, a Republican, and House Minority Leader Nancy Pelosi, a Democrat. Said such an agreement, Penner said, "could put Speaker Ryan's job in peril" by conservative Republicans who oppose it. He said he believes the debt ceiling is "an incredibly stupid law that makes no logical sense."

"It terrifies the world and frightens markets every few years--but does nothing to actually control spending or cut budget deficits," he said.

Penner said he sees little Republican consensus on tax reform and expects any package that emerges to include "some quite modest tax cuts" and the closure of loopholes.

Finally, Penner touched upon the market, and said that like virtually everyone else, he remains "totally  puzzled" by the surging stock market, arguing that markets soar even as it becomes more evident that major fiscal stimulus will not be coming out of Washington this year.

"The markets don't seem to have absorbed the reality of Washington yet," he said. "I have an uneasy feeling this will all end badly--that there will be a very major market correction."