According to Fortune, Bank of America CEO Brian Moynihan is warning that the government shutdown risks creating economic “malaise” as regulatory approvals stall and federal workers pull back on spending. Moynihan revealed that Bank of America banks between 250,000 to 300,000 government employees who are now receiving loan forbearance and fee forgiveness services due to pay disruptions. The economic impact extends beyond consumer spending to include stalled SEC approvals for IPOs, government contracting, and regulatory approvals that have “ground to a halt.” Moody’s chief economist Mark Zandi added that if the shutdown extends into the Christmas buying season, financial markets may begin discounting the economic damage, with a recession “more likely than not” if the standoff continues through year-end.
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The Cascading Nature of Government Shutdown Damage
What makes government shutdowns particularly damaging is their cascading effect through multiple economic channels. The initial impact on federal workers’ spending is just the first domino. As Moynihan correctly identifies, the real economic damage occurs when business activity that requires government oversight stalls completely. This includes everything from small business loans requiring SBA approval to mergers needing antitrust clearance and pharmaceutical companies awaiting FDA decisions. Each day of delay represents not just postponed economic activity but potentially lost opportunities as companies reconsider expansion plans or investors seek more stable markets.
The Hidden Cost of Regulatory Bottlenecks
The shutdown creates regulatory bottlenecks that will persist long after politicians reach an agreement. When government agencies reopen, they’ll face backlogs of approval requests that accumulated during the closure period. This means the economic impact extends well beyond the shutdown’s duration as companies wait in queue for regulatory attention. For capital markets specifically, the inability to secure SEC approvals for public offerings creates a financing gap that can derail growth plans and force companies to seek more expensive private funding alternatives. The CEO of any company dependent on government approvals understands this creates uncertainty that makes strategic planning nearly impossible.
The Psychology of Economic Malaise
Moynihan’s use of the term “malaise” is particularly telling, echoing the economic pessimism of the late 1970s. When consumers and businesses begin anticipating economic trouble, they behave differently—postponing major purchases, delaying hiring decisions, and becoming more conservative with investments. This psychological shift can become self-fulfilling as reduced spending leads to reduced economic activity. For Bank of America and other financial institutions, the concern isn’t just about the immediate impact on their government employee customers but about broader consumer confidence deteriorating across their entire customer base.
When Markets Begin to Discount the Damage
The most concerning scenario, as Moody’s Zandi notes, occurs when financial markets begin pricing in the economic damage. Thus far, markets have largely treated the shutdown as a political spectacle rather than an economic threat. However, if the impasse continues through the critical holiday shopping season, investors may begin discounting retail stocks and broader market indices to account for reduced consumer spending. The transition from political theater to market-moving event represents a dangerous threshold where economic damage becomes amplified through asset price declines and reduced business investment.
Long-Term Damage to Economic Governance
Beyond the immediate economic consequences, prolonged shutdowns damage the credibility of U.S. economic governance. International investors watching the spectacle may question the stability of American economic policy, potentially affecting foreign direct investment and Treasury bond demand. The inability to conduct basic governance functions creates uncertainty that extends well beyond the current political standoff. When businesses cannot rely on consistent government operation, they factor this uncertainty into their long-term planning, potentially reducing U.S. competitiveness relative to markets with more predictable governance.
