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 — 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. John Maynard Keynes famously explained that the stock market is not just a beauty contest but a beauty contest in which every judge is trying to figure out the candidate whom the other judges deem the most beautiful. Investors may be strategizing that even if they personally don’t believe the country will actually breach the ceiling, other fools may. Therefore, they might sell now, planning to buy back after the market goes down. (It would be impossible to separate this kind of thinking from actual fear that we are headed toward a breach.)
Any plunge now would be a good thing. Plunges in markets now could help prevent greater turmoil later.
In the meantime, the Wall Street consensus eases pressure on the House Republicans. Ted Yoho, a Tea Party House member from Florida, terrifyingly proclaimed that a default “would bring stability to the world markets,” because the United States had moved to curb its debt. Cutting off your foot curbs bunions, but it doesn’t bring stability.
O.K., that’s a backbencher speaking. But many other Republicans have expressed similar nonchalance.
Wall Street, meanwhile, keeps expecting some deus ex machina. On CNBC on Sunday, no less a figure than the chief executive of Moody’s, Raymond W. McDaniel Jr., endorsed one popular bit of Wall Street magical thinking: that the Treasury Department could simply prioritize its payments of Treasuries, paying off creditors before any other bills. It’s highly doubtful this option exists. One might hope that the chief executive whose company’s entire business is predicated on its ability to analyze the definition and likelihood of default might grasp that.
I’m not immune to the complacency. Indeed, I still think that it is unlikely we will breach the debt ceiling. It’s too difficult to picture Republican leadership allowing the nation to do something so stupid and avoidable.
But investor calm is making me nervous.