Here’s how a government shutdown can cause a major financial crisis

By Chris Matthews

As a government shutdown appears likely, Americans are preparing for disruptions to food aid, air travel, and much more. Worse yet, it’s also possible that a prolonged shutdown could contribute to systemic stress in U.S. financial markets. That’s according to Karen Petrou, managing director of the advisory company Federal Financial Analytics Inc. “Financial stability depends on part on critical financial infrastructure, particularly in the payment, settlement and clearing spaces, and a large and increasing amount of that infrastructure is outside the reach of the banking agencies,” Petrou said in an interview with MarketWatch……. Petrou also warned that recent fragility in the market for U.S. Treasuries, which has seen less liquidity and wider bid-ask spreads of late, could be exacerbated as global investors become less confident in the competence of the U.S. Congress. A third risk is that the millions of Americans who work for the federal government will have to without pay until the shutdown is resolved. Petrou said the ultimate hit to GDP may not be large, because federal workers are typically made whole after a shutdown ends. “But you’ve already got 60% of Americans living paycheck to paycheck, and we know that government workers in the 2018 shutdown were missing rent and mortgage payments,” she said. “That could undermine more vulnerable financial institutions, particularly nonbank online lenders.”