What a difference a week could have made on the debt limit. Had
last week’s market slide happened the week prior to a debt
limit deal — instead of the week following — leverage for
the Republican proposal could easily have evaporated. Instead, the
market’s performance has undercut the argument that Wall Street was
really so focused on the debt limit stalemate.
Last week proved that markets have plenty of fear to spare, and
disproved the Administration’s contention that a debt deal was
necessary to calm market fears. On the Monday
following Sunday’s announcement of the debt limit deal between
the Congress and Administration, and on the day the House passed it
by 100 votes, the markets fell slightly. On Tuesday, as the Senate
was passing the deal by 3 to 1, the markets fell even more — the
DJIA dropping 265 points. The markets’ real spanking came on
Thursday, when the DJIA fell by over 500 points.
Even Friday’s brief rally, on what passes for good
economic news today —117,000 new jobs created and the unemployment
rate dropping 0.1% to 9.1% — quickly reversed itself.
Apparently the financial markets were paying far more attention
to economics than politics. While the negative tone of the former
would seemingly have a long way to go to drown out the negative
tone of the latter, it did. Negative economic news — encapsulated
most clearly by the earlier downward revision of America’s
overall economic growth to just 1.3% in the second quarter — took
its toll. It also delivered its message: the contention that debt
limit uncertainty was negatively affecting financial market
performance, much less fundamental economics, was hokum. Markets
matter. Apparently Washington does not.
The financial markets seemed to be ignoring Washington all
along. It has been stated that the opposite of love is not hate,
but indifference. That certainly seems to be the markets’ response
to their political suitor.
While Washington does not appear to make much of an impact on
the financial markets’ performance, this doesn’t mean that the
markets don’t have an impact on Washington. As is the case with all
one-way love affairs, the object of unacknowledged adoration has an
inordinate impact on its admirer.
If you don’t believe it, just look at Washington’s TARP
experience almost three years ago. That experience indicates what
the markets could have done with a well-timed come-hither look the
week prior to the debt limit vote.
Back in 2008, Congress and the Administration were again
embroiled over legislation to buy troubled assets (hence the
acronym: Troubled Asset Relief Program) to soothe the markets.
However, the markets were far from indifferent then.
Although the Administration supported it and the Senate passed
it, the House rejected it. The next day, the markets suffered a
DJIA-777-point-drop. That was enough to set political hearts
aflutter. Congress changed course and promptly passed a revised
version of TARP.
Based on its own track record, imagine what would have happened
if last week’s market meltdown had occurred a week earlier — while
Washington was still mired in a debt deal impasse? The calls for a
conservative cave-in on its debt-limit demands would have been
enormous. All the claims that the markets were really watching
Washington — rather than economic fundamentals — would have
seemed to be verified.
The press would have had no hesitation to report it as such.
Calls for a quick — and likely “clean” — debt limit increase
would have been deafening from liberals. There would have been an
economic echo chamber, with the markets seeming to shout
through it. Suddenly the leverage that conservatives held would
have been turned against them.
While it is valid to ask whether the same event could have been
used to bolster conservatives’ case — that a debt limit increase
combined with deficit reduction was really the right prescription
— we all know it would not have been played that way in the
media.
The question is: Could conservatives have held out under the
enormous pressure that would have been brought to bear?
Fortunately for all concerned, we will never know.
Liberals have a right to think that the financial markets have
left them at the altar all too often. The economy has not shown up
for them for almost three years. Their best-laid plans have been
undone, time and again, by economic woes. While liberals fervently
yearn to say “I do” to the markets and the economy, the markets and
the economy continue to say “I don’t” to the liberals.
Here was another opportunity for the markets to come through for
them. Once again they didn’t. It leaves us, and liberals, to
think about what might have been.
