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'Financially Challenged Legislators' Have No Clue What Default Would Mean: Bove

Tickers in this article: FMCC FNMA JPM

NEW YORK (TheStreet) -- President Obama seemed a bit annoyed that the stock market hadn't seen a major decline during the first two days of the government shutdown, when he said Wednesday afternoon that investors "should be concerned."

The broad market rose on Tuesday, the first day of the government shutdown, resulting from a budget impasse between the Republican-led House of Representatives and the Democrat-led Senate. The last shutdown occurred in 1996. The current shutdown has 800,000 federal workers on furlough, and Credit Suisse economist Andrew Garthwaite in a client note on Wednesday estimated that "even a 22 day shutdown (as under Clinton) would take only around 0.2% off GDP." The timing of the shutdown at the beginning of the fourth quarter could also work out well, assuming Congress comes to an agreement fairly quickly, since there's still plenty of time for federal agencies to make up for delayed spending before the end of the year, which would limit the effect of the shutdown on economic growth.

The president may have taken some grim satisfaction that the market began to decline on Wednesday and declined further Thursday morning, following his failed meeting late Wednesday with congressional leaders.

The potential for a default on interest payments by the U.S. Treasury is of far greater concern to investors.

Last Wednesday, as lawmakers were trying to strike a deal to keep the entire federal government operating, Treasury Secretary Jack Lew in a letter to Speaker of the House John Boehner (R., Ohio) said the "extraordinary measures" the Treasury was taking to maintain its borrowing power would "be exhausted no later than Oct. 17," unless the $16.7 trillion federal debt limit is raised.

Over the past few years, the recurring "debt ceiling" debate has revolved around the major ideological differences between the major parties, and within the Republican Party, as some legislators refuse to budge from their desire to defund the Affordable Care Act, and their desire to tie each increase of the federal debt limit to specific cuts in spending.

Each period of recent debt-limit brinksmanship has ended with a compromise before any threat of government default, which has muted the market's reaction. With the current debate also involving a government shutdown, things may be different this time.