Wall Street could force Washington to address a pending fiscal nightmare, says Roger Altman, chairman at Evercore Partners and former Deputy Treasury Secretary.
At the end of the year, tax breaks are set to expire while automatic spending cuts are set to kick in, a combination dubbed by Wall Street as a "fiscal cliff" that could siphon hundreds of billions of dollars out of the economy and possibly throw the U.S. back into recession next year.
Congress and the White House would have to agree on extending tax breaks and reschedule spending cuts, which could fuel election-year bickering and brinkmanship.
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However, plunging stock prices and market alarm could drive politicians to act out of fear that allowing the country to plunge off the fiscal cliff could cost many their political careers.
"On the question of how the markets will act as the fiscal cliff gets closer, I think that's the giant imponderable because if there is market instability well before the Dec. 31 expiration date, that could, of course, put so much pressure on Washington that there would be an extension just to relieve the market instability," Altman tells CNBC.
"I happen to think the odds on severe market instability are relatively low, but I know that some very smart people — a lot smarter than I am on markets — would disagree with that. Right now it's too far off to judge."
The Congressional Budget Office (CBO) warns that failure to steer the U.S. away from the fiscal cliff today could throw the country into a recession next year, with gross domestic product shrinking 1.3 percent in the first half.
"Given the pattern of past recessions ... such a contraction in output in the first half of 2013 would probably be judged to be a recession," the CBO says in a report, according to Reuters.
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