Wall Street in denial about Debt Ceiling Armageddon

Rick Moran

Megan McCardle at The Atlantic:

I've been having some disturbing conversations with both finance people and Washington people over the last few days, that have only confirmed the disconnect I wrote about a few weeks ago. Each side is sending signals that the other side is not reading correctly. And this is getting more dangerous by the hour.

The core fact is that markets haven't sold off nearly as much as you'd expect if Wall Street were really freaking out. This is not because Washington pols have told their Wall Street paymasters about a secret deal that just hasn't reached the ears of those of us reporting from down here. Nor are they calm because they think that a failure to raise the debt ceiling will be no big deal. They certainly don't believe that a forced spending cut of 40% will somehow make us extra-super-more-likely to make us pay off our debt.

No, they're relatively calm because they simply cannot bring themselves to believe that we're not, in the end, going to raise the ceiling. It's too outlandish that we would, through the collective action of our congressmen, suddenly and for no apparent reason shoot ourselves in the head.

This is sound reasoning, as far as it goes. But it doesn't get you very far. They're deriving a theory of the debt ceiling like Aristotle, from first principles rather than data. In general, my non-representative sample of people working on or near Wall Street is that they are now noticeably more sanguine about the prospects for a deal than people working in the city where the deal is going to get made.

I don't know about you but my reading is that August 2 will come and go without a deal. House won't pass Reid's plan and senate won't pass Boehner's plan. There is no fallback plan as I write this. Wall Street has far too much confidence in Washington at this point.

What is going on is that if either side yields - taxes for the GOP and Medicare spending for the Dems - it will set off bitter, party splitting recriminations. In short, neither side can afford to yield on their core issue. This is a recipe for stalemate and since Obama is offering zero leadership - as usual - both sides will play chicken and end up in a head on collision.

How about a clean vote, up or down, on debt ceiling? It may come to that if both sides realize how bad it will look if the US goes into technical default. But if Wall Street continues to show that they are unconcerned about the deadline, once August 2 comes and goes, the chances of a real panic on the street increase greatly.