The Markets Yawn

Why isn’t Wall Street panicking about the default crisis yet?

Barack Obama. Click image to expand.
President Barack Obama and Speaker of the House John Boehner didn’t reach a deal over the weekend

Much to Washington’s surprise, the Debtpocalypse did not arrive this weekend. The markets had been sanguine since the United States hit its $14.3 trillion debt ceiling in May, with stock prices high and borrowing costs low. But on Friday evening, President Barack Obama announced that talks had stalled out. He sounded frankly peeved, chiding Speaker of the House John Boehner with a parting shot: “If you want to be a leader, then you got to lead.” Suddenly, the tenor changed. Wall Street analysts openly expressed worry. Congressional staffers seemed panicked. Negative news stories piled up. Boehner said he wanted a deal before the Asian exchanges opened on Sunday night to prevent an adverse market reaction. Republicans and Democrats failed to reach any sort of deal over the weekend.

Then, last night, at 8 p.m., the Tokyo Stock Exchange opened for Monday trading. Everyone held their breath. But … nothing happened. Indices like the Nikkei wandered around and closed slightly down on perfectly normal trading volumes. Major markets in Hong Kong, Shanghai, London, and Frankfurt posted similarly unremarkable changes. Finally, the New York Stock Exchange opened. Stocks are down, but not by much. There is no major sell-off. There is no panic. The bond market is doing just fine too, with yields barely moving. In short, the markets said, “whatever,” as they have been saying for the past 10 or so weeks.

Predicting where the market is heading is a daft exercise. But its nonchalance suggests that investors are no more worried about the possibility of a U.S. default today than they were on Friday. The consensus seems to be that the debt-ceiling crisis is an obnoxious piece of political theater that will end as close to the default deadline as possible, and that it is not an actual financial crisis that needs handling now.

Indeed, the current “crisis” is a manufactured one. Of course the United States needs to get its fiscal house in order. Of course the debt has ballooned to threatening levels. But the problem remains long-term and mostly about ensuring job growth and bending down the health care cost curve. Still, it is not clear what the scale of the catastrophe could be should Congress fail to raise the debt ceiling. Some investment banks speculate that the market reaction might not be as bad as people think, with government going into a very short-lived shutdown, voter anger forcing Congress to get its act together, and the market rolling its eyes even if it dumps some bonds.

But others believe consequences will be horrible. Today, the International Monetary Fund warned that it fears “universally large and negative effects.” The Bipartisan Policy Center notes that the Treasury will have to halt about 40 percent of its monthly payments—meaning Treasury Secretary Timothy Geithner will need to decide between hospitals, troops, seniors, prison guards, bondholders, and a thousand other constituencies. As Simon Johnson explains in Slate, Americans can expect everything from long lines at the ATM to mass unemployment to higher mortgage costs if the country goes into default. Forecasters like Macroeconomic Advisers predict an instant recession.

The prospect of that happening has not spooked the market—yet. But the knock-on effects are building. Consumer confidence is down. Layoffs are increasing. At least some companies are hoarding cash and citing Congress as the reason. Moreover, it now seems like a downgrade from the major ratings agencies is in the cards, whether or not Congress reaches a deal in time. Standard & Poors, for instance, has issued an ultimatum. Unless Congress reaches a big deal—something like a $4 trillion deal, whereas Senate Majority Leader Harry Reid and Boehner are currently negotiating plans in the $1 trillion to $3 trillion range—it might re-rate Treasury debt at AA+, rather than AAA. That might not raise the United States’ borrowing costs. Then again, it might. Anyone who says they know for sure what will happen, doesn’t.