Senate’s "Nuclear Option" Could Cause a Market Meltdown

Nuclear explosion
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With the Senate thinking the unthinkable—a "nuclear option" on filibusters—you may have to factor in politics before making your next investment.

Senate Majority Leader Harry Reid (D-Nev.) has threatened to change Senate rules and weaken the filibuster, which is the principal way that the minority party preserves power. It has been used with increasing frequency in recent years, with Republicans using it to prevent the confirmation of agency heads. In response, Reid argued on NBC's "Meet the Press" that a rule change that would make it impossible to filibuster executive branch is warranted.

Abolishing the filibuster is referred to as the purposely scary-sounding "nuclear option," and it could have a dramatic impact on the market. In fact, Lawrence McDonald, Newedge Group's senior director of credit sales and trading, calls the nuclear option the "top risk [to the market] this week."

In response to Reid invoking the nuclear option, "Republicans would counter, refusing to play ball with any Democratic wishes, turning gridlock into grid meltdown, and possibly a government shutdown," McDonald wrote. "Negotiations around the grand bargain, tax reform, and the debt ceiling could fall apart."

(Read More: Senate leaders in deal to (sort of) muzzle filibusters)

But Wendy Schiller, associate professor of political science and public policy at Brown University, says main street businesses, not Wall Street, should be worried.

"Wall Street doesn't want to see a government shutdown, and Wall Street doesn't want to see a government default," Schiller said. And because Wall Street is such a massive supporter of the GOP, "the Republican party simply won't allow the economy to go over the cliff," even if that means compromising with Democrats.

Besides, Schiller notes, it's hard to imagine Congress becoming even less productive, even if the nuclear option is invoked. "This is the least-performing Congress in history," Schiller said. "There's so little productivity that the idea that one or two actions now will trigger no cooperation in the future. ... There's no cooperation now!"

But Schiller maintains that "every business in the country should care about this." Since the appointees that Republicans are trying to block include the heads of regulatory agencies such as the Consumer Financial Protection Bureau, the end of filibusters for executive branch nominees "will mean a huge increase in future regulations."

So will the nuclear option actually be detonated?

"The Democrats actually have the votes to go through with it," said Gregory Koger, an associate professor of political science at the University of Miami and the author of Filibustering: A Political History of Obstruction in the House and Senate.

In an extremely rare occurrence, all senators will meet behind closed doors on Monday, when they could craft a deal to avoid the rule change. Republicans might agree to allow votes on certain nominees, and the Democrats could, in turn, maintain the status quo.

But Koger believes that the Democrats could invoke the nuclear option even if the Republicans wish to strike a deal. "They're done," Koger said. "They're tired of putting up with this. They have the votes, and they're frustrated enough to do it."

On the Republican side, Senate Minority Leader Mitch McConnell (R-Ky.) has not minced words when it comes to the nuclear option. "If we don't pull back from the brink here, our friend the majority leader is going to be remembered as the worst leader of the Senate ever," McConnell said on the Senate floor on Thursday.

McConnell's Kentucky Republican colleague, Sen. Rand Paul, pulled off one of the Senate's recent high-profile filibusters. For 13 hours in March, Paul filibustered John Brennan's nomination to be CIA director to protest President Barack Obama's drone policy. Under Reid's filibuster plan, such a delay tactic to block an executive branch nominee would not be possible.

But would the Democrats be shortsighted in enacting the rule change, considering that they could soon become the minority party?

"Even if you're shortsighted, the nominations that are being held up are particularly important to the Democratic base," Koger said. "If I was a Senate Democrat and I only cared about elections, I would still follow through with this."

Schiller brings up another factor. "The age of people who are running the Senate matters," she said. "The heavyweight, influential senators are old—old enough that they don't know how much longer they'll be around. They're not looking at a 20-year time horizon. They're thinking: Do it now."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

Follow the show on Twitter: @CNBCOptions

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