The debt ceiling debacle that is unfolding in Washington is not about ideology and it’s not even about putting the nation’s fiscal house in order. It’s not even really about the American people. This is about appeasing just one group of people: the people on Wall Street. And before this is over, watch out for a Wall Street panic, which ultimately breaks the deadlock.
So far, the Street, frankly, has been largely asleep at the switch. Even as the economy has continued to falter it’s been more than happy to keep the gears of commerce greased with plenty of government money. After TARP there came quantitative easing. After quantitative easing came QE2. That money has bolstered not just the bond markets, and lined the pockets of Goldman Sachs, but bolstered the equity markets.
And so the Street has thought: Hey, those guys down in Washington will make a deal, eventually. And a deal means predictability; and that’s what investors, correctly, want. They want to know which corporate loopholes are opened or closed. And yes, they want to know if those Bush era tax cuts are going to be there when that big year-end bonus comes in. And like any bunch of bankers, the Street’s got nothing against a bigger national debt ― as long as there’s a nice fat schedule to pay it down.
And both parties have been vying for the Street’s favor. The Republicans on the tax side and the Democrats, now, on the spending side. And here’s why: If President Obama can force a deal on his terms that Wall Street is OK with, the stock market could go through the roof, people could get jobs ― and he’s going to get a second term. If the congressional Republicans can get the Street what it wants then they can curry favor with people who have been traditionally Democratic donors, and capture Congress. And nobody in this equation could care less about the Republicans running for president.
But the Republicans have got one big problem: the tea party. The tea party’s freshmen Republicans have held the line and insisted on cutting spending, even if that means not raising the debt ceiling above the current $14.3 trillion, even if it means defaulting on the debt. They’ve aligned themselves, too, with keeping the Bush-era tax cuts. And there’s the rub, the contradiction.
So, Wall Street is going to have to choose between those great big bonuses and default. And that’s why Mitch McConnell lost his nerve and John Boehner scheduled utterly symbolic, meaningless votes on things like a constitutional amendment ― that are going absolutely nowhere. So the freshmen can cover their behinds at home and then they can get on with voting to raising the debt anyway. It’s why Boehner breaks off talks and then rushes back into them, so Wall Street doesn’t go into cardiac arrest for a lack of both predictability and liquidity. But it’s likely going to get ugly before that happens. The tea party isn’t getting the message: Washington works for Wall Street.
“Wall Street always wins, but they’ve been up against something more powerful: the tea party,” says Jeff Connaughton, a former Senate chief of staff and now an ardent critic of Wall Street. “Why Wall Street hasn’t yet understood that there’s going to be a wreck is beyond me. The House is a stormy ocean. And we have no idea if the ship’s going to make it to port or not.”
As the deadline approaches, the bankers have showed the politicians how to paint by the numbers in opinion pages of The Washington Post. One weekend, none other than Pete Peterson, former chairman of Lehman Brothers, co-founder of Blackstone Group and fiscal conservative, pronounces the need to raise the national debt. The next weekend, Mark Zandi, top analyst at Moody’s, explains patiently the precise details of the deal.
But the bankers are not going to be happy and they’re starting to figure that out: It’s no accident, I think, that Moody’s threatens to downgrade Treasury bills after Ben Bernanke announces there’s no QE3 coming to inject fresh liquidity. And of course, after weeks of humming along, the S&P Dow Jones and NASDAQ all drop.
They’re really going to drop, is my guess, and put the pressure on till Mitch McConnell feels like his eyeballs are going to pop out of his head. So, unless Obama folds, Wall Street is going to have to choose between those sweet bonus checks and a certain amount of liquidity and predictability ― and, oh yeah, having their clients start to hire some people. Right now, outside the Beltway and Manhattan, there are just two kinds of Americans: those that can’t find jobs and those that think they’re next.
But make no mistake: Unless Obama crumples up, that queasy feeling you’re about to get as the market slides and real people’s savings and jobs are put on the line again is real. It has, after all, happened before. In 2008, when the financial system ran out of liquidity, the stock market slid out of control for days when the House first shot down TARP. Ultimately $10 trillion in wealth was destroyed. It’s happening in Europe because of Greece. And that’s what happens when the masters of the universe and their minions in Washington play God.
So, buckle up, folks, because here we go again.
By Richard Parker
Richard Parker is a journalist and publisher, a regular contributor to McClatchy-Tribune Information Services. ― Ed.