On Again, Off Again

Do Republican leaders in Congress answer to Tea Party activists or to Wall Street? That question will be answered in the next few weeks as the debt-ceiling fight comes to a head. The choice that GOP leaders make will influence more than fiscal policy or the financial markets; it will also shape the 2012 election and reveal the true identity of today's Republican Party.

Wall Street has been urging Republicans to approve more government borrowing for months, arguing that it is too risky to use the debt-ceiling cap as a hostage in the budget battle. That message was delivered during a series of meetings in April between GOP leaders and top Wall Street executives and has been repeated often by the finance sector's ubiquitous lobbyists on Capitol Hill. As Rep. Michael Grimm, a Republican from Staten Island told The Wall Street Journal: "Wall Street understands that if we default on our obligations, our markets are going to crash. ... They're doing their job and talking to a lot of members."

So far, these pleas for prudence haven't gotten much traction. This isn't surprising. Wall Street and the Republican Party have long been drifting apart, and the GOP has been leaning more and more toward the Tea Party, which demands that the debt ceiling not be raised without drastic reductions to government spending.

Tea Party supporters have turned this issue into a fealty test, threatening to mount primary challenges against Speaker John Boehner and other top House Republicans if they vote to raise the debt ceiling without huge budget cuts. William Temple, chair of the Tea Party Founding Fathers, has said that his group will grade Republican members of Congress on only one issue this year: their position on the debt ceiling.

Disagreement over the debt ceiling is yet more evidence that Wall Street and the Republican Party increasingly inhabit separate worlds. Over the past 15 years, the Republican Party has become ever more dependent on downscale voters from rural and small-town America, as well as more beholden to the religious right. In contrast, the financial industry - which is largely based in the most cosmopolitan parts of blue America - has become a more complex and global business that is increasingly dominated by highly educated leaders with postgraduate degrees from elite universities.

While John Boehner grew up working in his father's bar and got a B.A. at Xavier University in Cincinnati, Jamie Dimon of JPMorgan grew up as a broker's son on Park Avenue before earning degrees from Tufts and Harvard Business School. The two top Republicans on the House Financial Services Committee - Spencer Bachus and Randy Neugebauer - were small-business men in the South before going into politics. Wall Street's top hedge-fund managers, meanwhile, include a number of PhDs such as former math professor James Simons and the computer scientist David Shaw.

To be sure, there are plenty of hardcore conservatives on Wall Street. But most in the finance world are more pragmatic than ideological. Many Wall Street leaders saw tax increases as inevitable as the Bush presidency came to a close, and didn't have a problem with Obama's proposal to raise rates on the wealthy. Bankers also believe that government has an important role to play in managing the economy and making investments in education, science, infrastructure, and other areas.

Once upon a time, the Republican Party took a pragmatic view of taxes - Reagan rolled back 40 percent of his tax cuts - and saw a role for government. But those days are long gone. And the ideological rigidity of today's GOP is unnerving to Wall Streeters who view the world as inherently complex.

In turn, with anti-elite populism surging in conservative states, Republicans see major risks in getting too close to Wall Street - even as the party quietly does the Street's bidding on a host of regulatory issues. Many of the Republicans who backed the Troubled Asset Relief Program have now spent three years abjectly apologizing for their vote or were ousted by primary challenges from the right.

The first two years of the Obama administration did help bring Wall Street and the Republicans closer together again. But according to campaign records, there has not actually been a seismic shift of Wall Street money to the GOP. Democrats only narrowly raised less money than Republicans from the securities and investment sector in the 2010 election cycle.

If Republicans go to the brink or beyond on the debt ceiling, they will likely lose whatever ground they have regained with Wall Street amid an anti-Obama backlash. This could have big implications for fundraising in the 2012 election. After the legal profession, no industry gives more in political donations than financial services. The GOP's disadvantage here hurt the party not just in 2008 but also in 2006 when the Democrats regained the Congress.

By taking an absolutist stance on the debt ceiling, the GOP is handing the advantage back to Democratic Party fundraisers. Wall Street may not be a haven of liberalism. But it is more likely to back a Democratic Party that wants to raise taxes on the rich and impose new regulations than to support Republicans who are crazy enough up to blow up the economy on principle.

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