Political Hay

Close Call

For congressional Republicans, it's a good thing the Wall Street slide didn't happen a week earlier.

By 8.8.11

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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.

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About the Author

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.