The childish circus in Congress this summer during the debt-ceiling debate crystallized and deepened many investors belief that the political system in the U.S. is broken and needs a makeover if lawmakers are going to fix Americas underlying problems.

That political debacle nearly led to an unthinkable default, was the driving force behind the first downgrade of the countrys debt and helped erase hundreds of points from the Dow. Moreover, lingering political uncertainty is threatening to send the U.S. to a painful double-dip recession.

The toxic political atmosphere has also breathed new life into a push by some to install term limits in Congress that would be aimed at transforming self-serving career politicians into honorable statesmen.

The system is broken. And if anybody tells you its not, theyve got a horse in this race, said Peter Kenny, managing director at Knight Capital. If this republic is to survive as a republic, we need thinking that reflects fresh ideas, the ability to adapt and the ability to alter the way we do business. This is not working.

Like most things in Congress, reaching the two-thirds majority needed for a Constitutional amendment installing term limits would be extremely difficult to achieve. Its also an idea that has been explored before and has yet to win over some.

Chilling Effect on Economy

Still, its clear that the political climate in Washington these days is worrying many people in the financial markets.

In fact, Standard & Poors, which is owned by McGraw-Hill (MHP), cited it as the key reason behind its controversial decision to remove Americas coveted AAA credit rating.

The economy was paralyzed by the debt ceiling debate, the threat of default, and subsequent downgrade, David Joy, chief market strategist at Ameriprise Financial (AMF), wrote in an email.

The belief that Washington is unwilling or unable to take tough stands is scary because it comes as Congress must make painful decisions.

Those choices are highlighted by the need to get Americas fiscal house in order by weaning the country off of its addiction to debt and fixing troubled entitlement programs like Social Security.

There is no question that the current dysfunction in Washington is having an impact on investor and consumer psychology, said Joy, who has endorsed term limits. The ongoing uncertainty over the elements of deficit reduction efforts is also having a chilling effect on economic activity.

Given the high stakes, many investors and observers believe the U.S. political apparatus needs a radical change before it does any more damage to the country.

The entrenched elected officials have an inordinate amount of control over their own destiny at the U.S. taxpayers expense, said Kenny. Its a corrupt system of lobbyists and self-serving bureaucrats working together to make sure they sustain their interests.

Kenny said he believes term limits would force this stagnant, established bureaucratic ruling class up and out of there and pave the way for fresh, creative, forward looking ideas in their place.

Ideological or Systemic?

Of course, not everyone believes the political system is even broken.

Douglas Holtz-Eakin, former director of the nonpartisan Congressional Budget Office, said he thinks these concerns about the system are overblown.

We hear this all the time and it always turns out to be an overstatement and fear in the moment, said Holtz-Eakin, who was an economic adviser to then-presidential candidate John McCain in 2008.

Instead of a broken system, some think the political paralysis is simply a reflection of an enormous gulf in ideology between Republicans and Democrats over how to fix the countrys problems.

I don't necessarily think the system is broken, although that is a possibility, said Joy. This same system has served us well from the beginning of the republic.

While S&P cited politics when it downgraded the U.S, Egan-Jones, an independent ratings company, does not share that opinion.

Our view is the political debate is a sign of health, said Sean Egan, a founding principal of Egan-Jones.

Still, according to NYU financial historian Richard Sylla, the U.S. is in the midst of its largest political divide since the Great Depression struck in the 1930s.

It may be that this stuff comes up a lot when the economic sledding gets tough, said Sylla. When things are going well, change is at the margin.

How Would Term Limits Work?

The current system allows for an atmosphere where enormous divides in ideology can halt progress in Congress. It may even contribute to the polarization as career politicians refuse to reach across the aisle to find common ground out of fear for their own jobs.

The term limitation would eliminate the seniority system that forces members to tow the strict party line to get ahead, said Joy.

Last April Republican Senator Jim DeMint sponsored a bill in Congress that would limit U.S. House members to three two-year terms and U.S. Senators to two six-year stints.

It appears such a bill would receive support from the people who send lawmakers to Congress: the voters. According to a September 2010 FOX News/Public Opinion Dynamics poll, 78% of all Americans support congressional term limits, including 84% of Republicans and 74% of Democrats.

Still, it seems highly unlikely, even to proponents, that both the required two-thirds of Congress and 35 states would sign off on this amendment. Thats because the lawmakers considering the matter would essentially be voting themselves out of a job, at least at some point.

The chances of this happening are remote at best, said Joy.

Alternative Fixes

There are many people who have not been sold on the idea of term limits for a range of reasons. One problem is that it could make lawmakers in their final stint less accountable.

Even if our system has serious problems, I dont think term limits are the solution, said Holtz-Eakin. I believe it is important to have elected officials who are more sensitive to the electorate than less.

Instead, Holtz-Eakin said it would be helpful if there was a crackdown on gerrymandering, a redistricting process that unfairly protects incumbents House members on both sides of the aisle.

Egan warned there is more than meets the eye on term limits. He suggested the underlying problem of unresponsive elected officials could be addressed by monitoring direct and indirect campaign contributions and stricter rules on the revolving door between Congress and lobbying firms.

However, as the Supreme Court recently affirmed, it would be very difficult to take money out of politics.

No matter the fix, most people seem to agree the current environment isnt working. For now, the best hope is that leaders step up and break the current stalemate despite the electoral consequences, before its too late.

We need statesmen, not career politicians, said Joy.

Follow Matt Egan on Twitter @MattMEgan5