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Posted by on Jul 29, 2011 in Economy, Politics | 10 comments

When Will Wall Street Weigh In?

A Dow drop of almost 200 points Wednesday could be the first tremor of panicky bears preparing to escape an economic conflagration that Congress seems intent on setting off. Will the markets be full of investors with their hair on fire today or Monday as the debt-ceiling deadline looms?

While the House and Senate continue to play chicken, Wall Street (Heaven help us all) looks like the last hope for sanity, as it was in September 2008 when the biggest single-day market crash ever spurred approval of the Paulson bank bailout for unfreezing credit after the House failed to pass it. A loss of $1.2 trillion in market value got their attention.

Now, as the Washington game goes on to avoid default, with the stakes even higher, will the “Greed is good” gang react any differently?

“Investors,” says a New York Times report cautiously, “are seeking alternatives to United States Treasury bonds as worries escalate that lawmakers will fail to reach an agreement…Some have shifted funds into corporate bonds, others are forgetting about yields entirely and parking their money in cash, and more are looking to those classic safe havens of yore, gold and the Swiss franc.

“Investors are getting leery of stocks…”


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  • Wall Street is also worried about total debt, but that doesn’t seem to come up very often.

  • merkin

    Debt is a long term problem. Wall Street is only concerned with the short term. The debt problem to them is only a problem of interest rates.

    Wall Street is only willing to settle the debt only if it doesn’t involve tax increases or decreases in domestic spending. That is, Wall Street maybe interested in the debt problem, but it is not that crazy about the solutions to it.

    This shouldn’t be too surprising, since that was the attitude of the two major parties up to about six months ago. Wall Street’s campaign contributions have been a wise investment on their part. I wish I could say the same for the nation as a whole.

    But you can easily read too much in to Wall Street’s concerns. From the investor tout emails I receive everyday, Wall Street is the only group I can see who worried about the end of QE 2 in June and its impact on the economy. From what I have seen on this site and in the popular press virtually no one else understands and appreciates what QE 2 is and what it has done.

    Wall Street, like most people, didn’t believe the Republicans would push this extortion right to the brink like they have. Quite frankly I didn’t think they would either. It is amazing the lack of influence the saner mandarins of the party have anymore. And this includes Wall Street.

    Especially since no one thought Obama would cave so completely and the Republicans would be so reluctant to grab victory when it was handed to them. And push the economy down for another dip of recession.

  • merkin

    Reading my post I realize it is a bit obtuse.

    To be clear, Wall Street doesn’t want to see any solutions to the debt problem agreed to and implemented now. It will drive the economy further into another recession. Qr prolong the recovery from the last one. They were counting on the gridlock in Congress to prevent any agreement other than an eleventh hour straight raising of the debt limit. In other words, sanity.

  • You know Merkin, we may have slightly different definitions of “sanity”, but I have to agree that, like most people, they want the goodies without the costs.

  • DLS

    [chuckle] What about the possibly-coming (i.e., threatened) QE3, and if the Krugmans had their way, QE4 after that, much larger?

    * * *

    Panicky bears? More like decisive, opportunistic bears, but other, ordinary investors maybe panicking. No doubt some (the thinking ones, the real bears) could sell now, and just buy-back afterward.

  • merkin

    The Fed is charged with controlling inflation and minimizing unemployment. If no one else will try to reduce unemployment, and certainly all seem to be working hard to increase unemployment, then the Fed must act.

  • merkin

    Yes, Professor E – greed has no natural limits and is not self-regulating.

    I know you are a deficit hawk generally, but I am curious if you agree with me that the debt limit hostage taking is not a very good way to accomplish it. And what you think about the debt problem in general. I am truly curious, I am not laying in wait, setting you up for something. You seem to think through your positions and not just take them from a web site or pundits’s mouth and repeat them verbatim like so many here seem to. Here is my position, which I admit has changed over time.

    The ever increasing debt is a problem. But it is sufficient to slowly bring the current accounts budget deficit down, to lessen immediate impact on the economy of the change. This is the budget minus interest payments on the outstanding debt. The way the country was headed in 2000. You will not believe the amount of activity the freed capital will generate. Or the damage too much capital will wreak on the economy if it is done too fast.

    There is no need to pay down the outstanding debt, that could increase the money supply too fast and increase inflation. We need a certain amount of controlled inflation to insulate the economy from what we faced in 2007/2008, deflation. This inflation will slowly erode the outstanding debt until it is trivial.

    The total accumulated national debt was 900 billion dollars in 1980 when we first started our radical economic experiment, supply side economics. Worry over that size of a debt would seem laughable today because of the inflation that has occurred since 1980. At the time Reagan called it immoral (and proceeded to double it.)

    This doesn’t make a very good campaign slogan or bumper sticker. It wouldn’t get people elected to public office. When Chaney said that deficits don’t matter he wasn’t being caviler about the nation’s finances. He was saying that no one votes based on the deficit. I think that is still the case.

  • merkin

    The really frighting thing is that we are told that all we have to do is pass a balanced budget amendment and everything will be OK. But the things that caused the deficit, unfunded Medicare part D, two unfunded, unnecessary wars, the doubling and tripling of earmarks, increases in the defense budget to fight the ghosts of threats from thirty years ago, irresponsible regulatory policies that caused the Great Recession, and tax cuts on top of more tax cuts, all of these things they promise to continue or even to do more of. And they struggle to come up with even a small percentage of the spending cuts they would have to make to fulfill the requirements of the BBA. And these anger so many people they are forced to withdraw many of them.

    Then they tell us that the solution we came up with to solve the demographics problem the baby boomers would cause with funding Social Security, thirty years of increased payroll taxes, has been retroactively declared to have actually been a regressive general revenue tax increase to allow the middle class and small businesses to fund tax cuts primarily for the wealthy. Meaning we must now suffer benefit cuts to what has been the most fiscally responsible program in the federal government because the wealthy want more tax cuts, not increases to pay back the money they took out over thirty years.

    And Medicare. We are being told that since the only hope to contain the costs of Medicare is to reign in the run away medical costs and there is no way we can do that if it involves reducing or eliminating the profits of private enterprise and since it is threatening to bankrupt the nation the best thing to is to cap the government’s costs each year and let the run away medical costs bankrupt the sick old people.

    Greed knows no limits.

  • DLS

    I can’t believe the lefty misconceptions.

    The Fed is charged with controlling inflation and minimizing unemployment.

    There is no Phillips Curve, as was demonstrated in the 1970s.

    “Humphrey-Hawkins” has always been bullshit.

    They aren’t doing the best they can for stability when engaging in Quantitative Easing (QE or QEs), flooding the market with more money, either.

    As for other misconceptions (balanced budget amendment, long-overdue entitlement reform that will be forced if not sought earlier), [shrug] I suppose some won’t learn until reform is forced.

  • @Merkin

    The debt ceiling battle seems to be a pay-me-now/pay-me-later thing. If I thought that there was a chance that congress (and our financial institutions) could turn things around in an intelligent way before complete collapse, I would care more. But the fact that both sides still have sacred cows tells me that they’re either helpless to change it, or clueless. I’m guessing helpless, but the result is the same.

    The fact is, the entire banking system has become way to complex and interrelated, generating unbelievable instability. We should not, for instance, be greatly affected by the Greek economy, because it’s too small. But because it was able to borrow too much, and because all that debt has been stacked and spread around, and because the derivatives market could amplify the effects throughout a number of already weak financial institutions, we’re looking at another possible disaster.

    There’s a point where a building, a bridge, or an organization gets too weak and dysfunctional, that it’s cheaper and easier to tear it down and start back from scratch. The fact that a few trillion could only paper over their problems in 2009, says our financial institutions passed that point long ago. I just don’t see how we could possibly fix something that’s so broken and counter-productive, and I don’t see anyone trying.

    In short, I agree that doing it wrong is going to be a major disaster the likes of which we haven’t seen since the great depression. But I also think that our current financial and governmental leaders are like blind drunks trying to navigate a damaged, overloaded ship through the rocks during a hurricane. Their tools and theories simply aren’t up to the enormity of the task.

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