The country is 10 days from a debt ceiling breach that experts all but unanimously warn will cause a Lehman-sized financial meltdown. The White House says it won’t accept anything less than a clean increase and Republicans say they won’t pass anything of the sort. If you make a living off investments–or anything else, really–it seems like a decent enough time to freak out.
But despite some recent bumps in the Dow, the markets are mostly hanging tough. They didn’t move much after Obama explicitly warned Wall Street leaders on CNBC last week that “this time’s different” when it comes to the debt ceiling. And the Dow Jones dropped 136 points after Speaker John Boehner told ABC’s George Stephanopoulos on Sunday that he really wasn’t bluffing when it came to the debt ceiling, which isn’t exactly a panic. On Monday, the Washington Post’s Wonkblog debuted a new menu of economic indicators designed to gauge investors’ collective level of debt ceiling panic only to find most of them actually mellowing out since Friday.
To make sense of the apparent disconnect between Washington politicos and New York traders, MSNBC turned to someone with a foot in both camps. Mark Dow served in the Treasury and IMF under the Bush I and Clinton administrations but has since entered the private sector as a policy economist and investor.
“Most investors don’t have any Washington experience,” he said. ”Wall Street investors look in rearview mirror and ask ‘What’s the most similar thing that looks like this?’ And in the case of the debt ceiling, it’s obvious: the pattern has been they always get it resolved at the last minute.”
As a result, there’s a high threshold for debt ceiling panic now. Investors who sold off stocks in the ugly days leading up to the 2011 debt limit are still kicking themselves for the money they lost once Obama and Boehner reached a deal and the markets rallied again. To convince investors they’re not making the same mistake again, Congress will have to take things even closer to the edge of default this time.
Steve Rattner, former auto czar under Obama, offered a similar take on Morning Joe.
“Right now people perceive there could some type of last minute save, and that is why the markets aren’t going as crazy,” he said Monday.
Dow warns that imagining the market’s reaction to the debt ceiling as a gradual creeping fear is the wrong way to go about it. It’s more like a reflex that’s either activated or not, with little in between. Once investors finally do get spooked, the reaction is likely to be swift and contagious.
“They underreact until a certain moment comes and they overreact,” he said. “I call it belated overreaction. So rather than ratchet up the possibility of something bad happening as you get closer, it’s more like 0, 0, 0 then 100 on the scale.”
Part of this might be the advice they’re getting from the major firms. Goldman Sachs analyst Alec Phillips, for example, suggested to investors ahead last month that a shutdown would likely reduce the odds of default by making Republicans reluctant to fight two difficult battles in a row. Morgan Stanley’s Adam Parker gives the Congress a “zero percent” chance of defaulting. In general, the big names have trouble conceptualizing the greatest country on earth voluntarily destroying its economy.
You might take their words as a comfort. But it also means the market hasn’t done much to price in the chance of things going wrong. If the conventional wisdom starts looking wrong, you’ll notice the difference pretty quickly.