Would a market dive bring Congress around?

It's dawning on investors that the US might crash through the debt ceiling. Their reaction might scare leaders into action.

By RPrichard Jul 29, 2011 11:00AM

By Rex Nutting, MarketWatch

 

With the failure of House Speaker John Boehner (so far) to round up enough Republican votes for his bill to raise the debt ceiling in exchange for about $1 trillion in spending cuts, the markets are beginning to get the idea that Washington might not solve this problem before the bus goes off the cliff.

 

The market -- in general -- has been assuming that the politicians will eventually raise the debt ceiling (probably at the very last second), but that the accompanying deficit reduction won’t be enough to prevent a downgrade in the government’s prized Triple-A sovereign rating.

 

Now market strategists are trying to figure out what the damage would be if the debt ceiling is breached. And some of them are trying to figure out how to get out of the bus before it goes over the edge.

 

Stocks opened down Friday morning. But the big investors will be watching Washington ever more nervously as the clock ticks closer to market close and a long weekend of sitting around waiting for Washington to act.

 

It could get ugly fast if it really does look like there won’t be a deal. It could be a replay of the TARP vote in the fall of 2008, when the House (led by back-bench Republicans) failed to pass the bill proposed by President George W. Bush, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke.

 

After that rejection, the Dow Jones Industrial Average plunged 775 points. The next day, after loading up the TARP bill with a few more goodies, the TARP’s $700 billion bank bailout was approved.

 

Analysts at Bank of America Merrill Lynch said early Friday that “significant market pressure may be needed to prompt action” on raising the debt ceiling, just as with TARP.

 

But will tea party listen?

Unfortunately for those who think history could repeat itself, a tantrum by Wall Street this time would only further embolden the tea-party caucus in the Republican Party to stand firm. The tea party was born out of disgust with TARP and other bailouts. The tea party views TARP as Exhibit 1 in their beef against socialist government spending, and in the folly of listening to the “experts” in their own party.

 

A market tantrum would get the attention of everyone else in Washington, however. A big sell-off would likely prompt Barack Obama, John Boehner, Mitch McConnell, Nancy Pelosi, and Harry Reid to find a solution they can live with, even it does leave the tea party out in the cold.

 

That’s a path Boehner in particular has been trying to avoid. He’s insisted that no legislation can move unless a majority of Republicans support it, which in effect gives the tea party a veto over everything. The alternate strategy would be to marginalize the tea party by going across the aisle to the Democrats for the votes needed to pass legislation.

 

The choice for Boehner and for all the other leaders in Washington is now laid bare: Will they represent only their own party, their own constituents, or will they do what’s best for the country, regardless of what happens to them personally?

 

Yes, the 2012 election is important. But some things are more important.

 

The economy —already beaten down — hangs on the brink. The last thing it needs now is for the government to shut down, or for the political wrangling to drag on.

 

Related articles at MarketWatch:

 

Bush tax cuts factor into impasse

 

Fights over debt limit have long history

 

Debt-ceiling wheeling and dealing