Stock market is a wild card in fiscal cliff talks

Published on NewsOK Modified: December 10, 2012 at 9:13 am •  Published: December 10, 2012
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Some financial bloggers agree. "Although it would be bad to let the spending cuts and tax hikes fully go into effect, if this thing is addressed in early January, things will be okay," wrote Business Insider's Joe Weisenthal.

So far, the stock markets have stayed calm. The S&P 500 index is up 12 percent for the year.

That might be because investors agree that a temporary trip over the cliff wouldn't be too harmful. Chastened lawmakers, the thinking goes, would quickly minimize the economic damage with a deficit-reduction compromise that eluded them in December.

Or, it's possible that investors view the most pessimistic tones surrounding the fiscal cliff talks as posturing that will give way to a last-minute deal. If that is the thinking — and if the Dec. 31 deadline instead is breached — Obama's fear might come to pass: The expectation of a deal might produce a significant decline in stock prices if it doesn't occur.

As bad as that sounds, some liberals think it will be necessary to force many Republicans to drop their opposition to higher tax rates on the wealthy that Obama says are crucial to trimming the deficit.

Rep. Peter Welch, a Vermont Democrat who says temporarily going over the cliff wouldn't be so bad, noted what happened on Sept. 29, 2008. The House surprised investors by rejecting a proposed bailout of the crisis-stricken financial sector. Republicans strongly opposed the plan despite then-President George W. Bush's support. The Dow plunged 777 points, its largest one-day point drop ever.

Four days later the House, shaken by the market reaction, passed a slightly modified bailout bill.

Welch said a similar market meltdown next month, in the event of a fiscal cliff impasse, "is what will force members of Congress eventually to act."

Few lawmakers in either party are eager to predict how the stocks and bonds markets would react to a failure to reach a fiscal cliff accord by year's end.

"Let's not pretend the markets fully understand the politicians, or the politicians fully understand the markets," said Rep. George Miller, D-Calif., who has served in Congress for 37 years.

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Follow Charles Babington on Twitter: http://twitter.com/cbabington