New York (CNN) Wall Street is taking a nonchalant attitude about the ticking time bomb in Washington that threatens to blow up the world economy. This can be a problem.
Credit limit induced selling has been almost non-existent. The Nasdaq is still up a staggering 22% on the year. And CNN’s Fear and Greed Index market sentiment is nearing “excessive greed” mode.
Perhaps this indifference is because investors have seen this drama before. They know how this ends: waiting until the last minute before giving in to politicians and finally raising the debt ceiling before disaster strikes.
No one wants to see panic in the markets unnecessarily shrinking millions of Americans’ 401(k) plans, nest eggs and college savings plans. Unfortunately, there is a growing sense that a little market mayhem may be necessary.
“A selloff in the stock and bond markets may require donors and voters to knock on the doors of lawmakers to stop the drama and raise the limit,” Mark Zandi, chief economist at Moody’s Analytics, told CNN on Monday.
On Friday, it looked as though the White House and Republicans were getting closer to a deal on the debt ceiling before talks unexpectedly broke down.
But even news of that setback was greeted with a collective shudder on Wall Street. Stocks retreated from their highs but the Dow ended the day with a loss of only 109 points, or 0.3%. It’s not really going to get people to call their MPs.
In some ways, the calm mood in the markets is acting like a feedback loop. Investors are betting it will all take care. Lawmakers are in no hurry because the markets are not panicking. rinse and repeat.
“Both political parties may need to see incremental market volatility before an agreement is reached,” said Nicholas Colas, co-founder of Datatrack Research.
The market selloff forced a rework on the TARP in 2008.
History shows that market turbulence can act as a coercion mechanism, forcing lawmakers to make difficult and unpopular votes.
For example, on September 29, 2008, the Dow fell 778 points – or nearly 7% – after the House of Representatives voted to initially veto the Troubled Asset Relief Program, better known as TARP.
The message was delivered loud and clear. The House came back a few days later and approved the controversial bailout program.
In 2011, markets experienced volatility in the days and weeks before Washington reached a last-minute deal to raise the debt ceiling, the most severe near-default in US history. Much selling followed as investors worried about drastic spending cuts and an unprecedented credit rating downgrade from S&P.
None of this is to say that the markets today are completely ignoring the drama of the debt ceiling.
There are signs of concern beneath the surface. The cost of insuring US debt has skyrocketed since the beginning of the year. And interest rates on Treasury bonds maturing this summer have risen as investors worry they won’t get paid on time.
‘Not concerned enough’
Still, at a higher level, the stock market isn’t really down, at least not yet. And that means nobody under the authorities in Washington is lighting a fire.
“What concerns me is that there is not enough concern today,” said Ed Mills, a Washington policy analyst at Raymond James. “I’ve long held the belief that DC responds when there’s a crisis or a deadline. We haven’t necessarily agreed on a deadline. We understand there could be a crisis but we’re not in a crisis yet. “
Mill said the problem isn’t just reaching a high-level deal between President Joe Biden and House Speaker Kevin McCarthy. It’s getting rank-and-file members of Biden and McCarthy’s respective parties to sign on to whatever deal emerges.
“The final settlement is really difficult. And it really needs to be bipartisan, one or both sides to give more than they want,” Mills said.
This is where market downturns that create a sense of urgency can be helpful.
Of course, this is not going to reduce the popularity of the Congress.
The debt ceiling is a manufactured crisis that officials could have dealt with months ago. However, they decided to wait until the last minute to sort it out – but probably not until it reduced the nest egg of real people first.