Don’t look to a market panic to save us.
We are in upside-down world, where a freak-out now would help stave off financial devastation later. By staying cool, the markets are making a crisis more likely.
Sure, the stock market has ebbed lower, but it hasn’t plunged. Short-term bond markets have hiccupped. Spreads on United States credit default swaps have widened, indicating a slighter greater fear of default, but nothing drastic. The financial media keep grasping at any movement to demonstrate investors are worried. But market participants simply don’t think that the government will end up doing something so obviously reckless and harmful as refusing to pay its debts.
Wall Street’s lack of worry reflects cynicism about Washington (who doesn’t feel that?) but also a deep misreading of how significant the ideological fissures are in the capital. Wall Street is misunderstanding the extremism of the House Tea Party Republicans who precipitated the government shutdown and debt ceiling crisis.
There are debt-limit deniers among the G.O.P. and deniers on Wall Street of the faction’s power. This time, Wall Street and the big business lobbies still expect clearheaded grown-ups to prevail. They haven’t reckoned with their loss of influence. Last week, Wall Street leaders went to Washington, a town over which they normally have serious sway, and came away having their warnings fallen on deaf ears. Business lobbyists, according to a Wall Street Journal article, are finding themselves stymied in the capital, with less influence than they are normally accorded. That’s no surprise. Last time, the establishment egged the crisis on, helping to create a monster it can no longer control.
The problem, of course, is fundamentally political, in a way that investors don’t grasp. Republicans’ success in rolling the Obama administration and wringing concessions in 2011, by holding the debt ceiling negotiations hostage, led them to do it again.
This time, the Obama administration sees such extortion tactics as a constitutional crisis from which it can’t budge. Or so the administration officials say. But Wall Street thinks: Well, what else would they say?
This is the Obama administration’s terrible bind: Scare tactics don’t work, but acting responsibly staves off a panic that would be salutary.
Last week, the Obama administration tried fear mongering. Administration officials made the rounds to scream bloody murder about how serious breaching the debt ceiling would be. But, although true, it isn’t credible to Wall Street because of recent history.
This week, the administration moved toward trying to buy time and soften the message. President Obama and administration officials signaled their support for a temporary extension of the debt ceiling extension to give more room for negotiations. The chairman of the Council of Economic Advisers, Jason Furman, explained that the country would have some time after the technical default on Oct. 17.
“It’s irresponsible to get to the 17th â€" but no, you don’t fall off a cliff instantly,†he said.
Unfortunately, investors are complacent. They feel they have seen this before. In 2011, the last time we came close to a debt-ceiling crisis, Wall Street didn’t think the worst would happen, as the economics commentator Megan McArdle and the budget expert Stan Collender noted then. Mr. Collender wrote , “Financial markets aren’t yet reacting because they think a deal is in the offing and the G.O.P. isn’t cutting a deal because it doesn’t think Wall Street cares.†And investors were right, more or less.
That summer, Standard & Poor’s downgraded United States debt, stripping it of its gold-plated credit rating. There were dire predictions. No crisis there, either.
Markets may panic yet, of course, and that could happen even if the markets continue to not believe that Washington will go into default.
