Astute analysts have been predicting for months that the debt ceiling deal wouldn't happen until markets experienced a "TARP vote" moment, whereby investors really panicked and forced politicians to cut a deal.
So far, obviously, the market hasn't shown any real panic over the debt ceiling (certainly not in stocks or Treasuries, though the relentless fall in the dollar against safe-haven currencies has been notable).
It looked like politicians were trying to induce a panic last weekend, when the Sunday night Japan open was set up as a goal (which failed), but there's been nothing doing.
But eventually markets will panic and spur politicians to act, right?
We're skeptical for two reasons.
First, it's possible the market will never panic, or at least not before August 2, convinced that there's always some kind of backup contingency, whether it's the Fed somehow stepping in to ensure no default or the 14th Amendment, or some other loophole.
But second, even if the markets did go into panic mode, that might not be enough to make a deal happen.
Nate Silver has a really good argument that the markets don't understand Washington right now, and don't realize how seriously conservative the Republicans are.
And on this TARP vote:
Moreover, a precedent the markets may see as comforting — the passage of the Troubled Assets Relief Programthrough Congress in late 2008 after the Dow Jones lost 777 points — could reverberate upon the endgame in a negative way. There is evidence that voting for the bailout program may have been directly responsible for costing some members of Congress their seats. Although voting for a debt limit increase is not likely to be nearly so unpopular as bailing out the banks — in fact, it’s not clear where public opinion stands about it at this point — that’s something that many members of Congress, especially in swing districts, will have in the back of their minds.
As a thought experiment, try to figure out if TARP would have any chance of passing in today's Congress.
What we're seeing right now in this fight is the real schism between the money folks who are connected to the GOP elite, and the Tea Party, who despise bailouts, and have no love for Wall Street. Larry Kudlow's grilling of Eric Cantor was a good example of this divide starting to get raw.
So really, there should be no comfort that a market reaction will force anyone into a deal, and there should be no comfort that the lack of a deal will force a market reaction.
Hello Twilight Zone.
This story originally appeared on Business Insider
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