Brinkmanship

09.30.13

Government Shutdown? Wall Street Refuses to Panic

It’s a down day, but as the government shutdown looms, Wall Street isn’t freaking out yet. Daniel Gross on why the markets may be waiting for Boehner and the fractious Republicans to blink.

It began Sunday afternoon East Coast time. As prospects of a government shutdown grew more likely, stock markets in Asia began to fall. As daylight moved from east to west, so too did the red arrows on stock markets. This is the way the global financial system processes dysfunction in America.

Japan fell out of bed, postings “its biggest drop in six weeks,” according to Reuters, based in part on “growing concerns over a possible U.S. government shutdown.” The main Nikkei index was off 2.1 percent, which is a pretty sharp drop. The Hang Seng Index, the main Hong Kong one, fell 1.5 percent on the day.

A gap for several hours until, in the middle of the night, the markets in Europe opened and began trading. They were down, too, though not as bad as in Asia. The worst performing Western market on the day was Italy, falling 1.9 percent through midday. But the news had nothing to do with American political dysfunction and everything to do with Italian political dysfunction. Former prime minister Silvio Berlusconi withdrew several of his party’s ministers from the government over the weekend, fomenting yet another crisis. Markets in Germany and France were off about 1 percent, while British markets were off about 0.8 percent.

As U.S. futures began to trade, stocks were down, too. For casual observers, a glance at the Yahoo! Finance homepage will tell you what you need to know. In premarket trading, futures on major U.S. stock indices were off about 0.8 percent. That’s nothing.

There are a few things worth noting. Over the course of Monday’s trading day, the initial reaction became less severe as time went on and as the trading action grew closer to the source of the problem. And it wasn’t because a late-night negotiation session produced a breakthrough. Markets have simply become either complacent, or more apt, in dealing with Republican-imposed crises in Washington.

Indeed, while Wall Street last week started to get nervous about Washington, it isn’t freaking out. Take a look at the VIX index, a measure of volatility that is a sort of barometer of the market’s need for Dramamine. A look at a five-year chart shows that it is at levels far below those of the financial panic of 2008 or the debt-ceiling debacle of August 2011 or the fiscal-cliff hostage situation of December 2012. In fact, it is below where it was a month ago.

Yes, markets are concerned, and maybe even a little worried. But they’re not freaking out by any measure.

To a degree, that’s bad news for those wishing for a breakthrough. While Congress may not respond to public opinion polls or the pressure of historical norms, it does respond to intense stock market pressure. Dial back to the fall of 2008. Investors generally presumed that the GOP-controlled House would go along with a Republican president’s request for a bailout. But when House Speaker John Boehner failed to corral the votes, the markets fell sharply. The dizzying declines forced action, as Treasury Secretary Henry Paulson begged House Minority Leader Nancy Pelosi for help and Boehner quickly agreed to a bipartisan bailout deal.

But today, with markets relatively calm, the CEOs of investment banks and big hedge-fund managers aren’t dialing up the offices of Boehner, House Majority Leader Eric Cantor, and other senior House GOPers and exhorting them to act quickly. What’s more, there’s been a significant shift in the relationship between Wall Street and the GOP in recent years. There are no Wall Street Republicans left in Washington—there’s no Henry Paulson, there are no Rockefeller Republicans and virtually no members on the House GOP side from financial services–friendly turf like New Jersey, Connecticut, and New York. The Tea Party crowd doesn’t particularly want to hear what Goldman Sachs CEO Lloyd Blankfein thinks they should do.

There are other dynamics at work here. The markets and investors have become dulled to the brinksmanship now on display. They’ve seen it all before, and it always gets resolved in some fashion, usually in ways that are favorable to the wealthy and companies. And so there’s no need to freak.

They’ve seen it all before, and it always gets resolved in some fashion, usually in ways that are favorable to the wealthy and companies.

But I’d suggest something else. It’s quite possible that the markets are already factoring in the idea that Boehner and the fractious Republicans will ultimately blink. For once, it’s the Democrats in the Senate and President Obama who are being steadfast and hard core in their refusal to negotiate and it is the Republicans who are at war and uncertain. Perhaps investors, in their collective wisdom, perceive, correctly, that the House GOP (and its friends in the Senate) have gone so far, have become so disconnected from reality, and are so lacking in any workable strategy, that their hostage taking will end up in failure.

So, yes, it’s a down day. But nothing traumatic—so far. And the damage has been for worse overseas than at home. If the markets want to force action on the debt ceiling, if they want to move Republicans off their obstinacy, or push Democrats in Congress and President Obama to move closer to Republicans’ position, they’re going to have to do a lot worse than this.