Thursday, July 28, 2011

A Glimmer of Hope for a Debt Ceiling Deal

As the House of Representatives struggles tonight to hold a futile, symbolic vote on Speaker John Boehner's debt ceiling proposal--which the Senate will reject, so the vote achieves nothing except to throw more mud at the other side--there is a glimmer of hope for a resolution. It comes not from a smoke filled room on Capitol Hill, but the stock market.

For five days in a row, the Dow Jones Industrial Average has fallen, dropping a total of almost 4%. The S&P 500 has dropped four days in a row, for a total loss of over 3%. The Nasdaq went slightly off message today, rising 0.05%. However, in the preceding three trading sessions, it dropped a total of over 3%. Although these numbers don't come close to a correction, let alone a bear market, they are large enough to make many registered voters get nervous about their 401(k) accounts. If voters were wondering why the debt ceiling mattered, well, now they know.

The politics of the debt ceiling issue have become more convoluted than the serpents that served as Medusa's tresses. The impasse over the debt ceiling comes, to a large degree, from Tea Partiers and other conservatives seeing the ceiling as a matter of ideology. Just about everyone else understands it's a matter of financial management. But ideologues tend not to compromise on matters of ideology. So the trains no longer run on time in the processes of the federal government.

However, on Wall Street, Main Street and even Pennsylvania Avenue, money talks and bullswaggle walks. When the House got all wound up over TARP and voted it down on September 29, 2008, the market dropped about 8%. Constituents from sea to shining sea communicated with their representatives promptly, frankly and not positively. This captured the full attention of the House, and an amended TARP bill was promptly passed on a second try.

The principal activity of members of Congress is to tell their constituents what they want to hear; that's how they get elected. The debt ceiling squabble has devolved into a lot of posturing for the choir, which not surprisingly admires the Representative's new clothes. Representatives aren't getting enough objective feedback from the political process.

The stock market is just about the only means for imposing legislative discipline. There's no chance of a compromise before this weekend. Another down day in the market tomorrow might work wonders in opening hearts and minds on Capitol Hill to the joys of productive dialogue. Even though more market drops mean investment losses, there is no way to reach a resolution on the debt ceiling problem without pain. If there is no resolution, the pain from the financial markets will be much more acute that what we've experienced so far. If the markets fall again tomorrow, view it as filling the glass halfway.

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