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What, Me Worry? (Part 2) What, Me Worry? (Part 2)

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FISCAL POLICY

What, Me Worry? (Part 2)

Wall Street: Congress Can’t Be That Dumb

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Wall Street: The fix is in on the debt ceiling.(Spencer Platt/Getty Images)

A town hall of sorts was under way last week inside New York City’s Harvard Club, the prestigious university’s wood-paneled, velvet-draped Manhattan outpost. Treasury Secretary Timothy Geithner had just delivered a short speech outlining the Obama administration’s approach to deficit reduction and the need for Congress to raise the federal government’s debt ceiling before it risks a default on August 2. In the question-and-answer session, the microphone reached Christian Oberbeck, a merchant banker in a gray business suit and yellow tie.

“Just a quick question, but, assuming a deal is reached at midnight on August 1—”

 

Geithner looked pained and cut him off.

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“It has to be before that. Let me stop you there,” he said. “If you leave people in doubt, then they’ll start to act in a way that protects them if we don’t act. That itself has the same basic dynamics of default. More modest, initially, but we can’t wait for that. It would be irresponsible.”

 

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At an event later that night before a similar group, someone asked the Treasury secretary when the “real deadline” for raising the debt limit would arrive. Geithner answered that the punishment for inaction could come without warning, so “why would you want to experiment?”

Those kinds of exchanges underscore the difference in worldviews between Washington and Wall Street on the debt limit now driving the country’s broader fiscal-policy debate. Wall Streeters generally agree with Geithner that it would be a disaster if Congress failed to raise the debt ceiling and triggered an epic default. That, most agree, would freeze lending, torpedo the stock market, and very possibly usher in double-dip recession.

But few on Wall Street are losing sleep over that risk, because most are absolutely certain that Congress won’t let it happen. And some executives are actually urging Republicans to play brinkmanship, arguing that it’s the best way to force a real agreement on deficit reduction.

 
Treasury Secretary Timothy Geithner pleaded with Wall Streeters at the Harvard Club to take the debt ceiling seriously.

In effect, the financial community holds two contradictory beliefs about what Washington can do: One is that political leaders are either too inept or too partisan to make serious fiscal decisions; the other is that lawmakers are certain to do the right thing on the debt ceiling because they fully understand the consequences. It’s possible that the Wall Streeters are right on both counts, but it’s not a sure bet.

As a result of this outlook, financial lobbyists in Washington have been largely silent on the topic. Instead, they are focusing more on regulatory issues than on fiscal ones. Markets reveal almost no agitation among investors over short- or long-term Treasury securities, and borrowing costs remain at almost historic lows. The interest rate for one-year Treasury bills is barely one-quarter of 1 percent. That’s not what you might expect at a time when top administration officials use words like “Armageddon” and “catastrophic” to highlight the urgency of raising the debt limit. The complacency comes out in countless conversations.

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“I’ve got a lot of confidence in the [House] speaker,” one financial executive told National Journal, referring to Republican John Boehner of Ohio. “I think he’s done a masterful job, and I’m going to leave the deal particulars to him and the House leadership team.” That confidence seems to ignore the skepticism that many Republicans express about the need to even raise the debt ceiling. It also ignores the dissatisfaction among conservative freshman Republican members about their party’s leadership and their willingness to rebel when they think their leaders have gone soft.

At the same time, the scorn toward the Capitol is widespread. “I don’t think there is a credible solution in Washington,” said Oberbeck, a leveraged buyout specialist, shortly after the Geithner event. Despite that, he was confident that Congress would, in fact, raise the ceiling. “In the restructuring businesses, the best deals have a little distress. A little bit of distress is just what America needs.”

But what if distress becomes disaster?

Bad Memories

On September 29, 2008, Treasury Secretary Henry Paulson Jr. and Federal Reserve Board Chairman Ben Bernanke were stricken. They had warned Congress that failing to pass the Troubled Asset Relief Program would prevent them from saving the financial system and deal a coup de grace to already reeling markets. But the Republican leadership failed to deliver their caucus’s votes, and the bill failed in the House. At the time, most policymakers in Washington were speechless; on Wall Street, traders knew what to say: “Sell.” U.S. stock markets experienced their worst plunge since the Black Monday crash in 1987, wiping out $1.2 trillion in value. The bill passed on a second attempt days later.

This article appears in the May 28, 2011 edition of National Journal Magazine.

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