WASHINGTON (AP) — Congress and the White House can significantly soften the initial impact of the “fiscal cliff” even if they fail to reach a compromise by Dec. 31. One thing they cannot control, however, is the financial markets’ reaction, which possibly could be a panicky sell-off that triggers economic reversals worldwide.
The stock market’s unpredictability is perhaps the biggest wild card in the political showdown over the fiscal cliff.
Some Democrats are willing to let the Dec. 31 deadline pass, because a rash of broad-based tax hikes would pressure Republicans to give more ground in renewed deficit-reduction negotiations.
A chief fear for President Barack Obama’s supporters, however, is that Wall Street would be so disgusted or dismayed that stocks would plummet before lawmakers could prove their newfound willingness to mitigate the fiscal cliff’s harshest measures, including deep, across-the-board spending cuts that Defense Secretary Leon Panetta says could significantly damage the nation’s military posture.
Some Republicans believe that fear will temper the president’s insistence on a hard bargain this month.
Obama and GOP House Speaker John Boehner on Sunday held their first meeting between just the two of them since the election, and spokesmen for both emphasized afterward their lines of communication remain open.
The so-called cliff’s recipe of major tax hikes and spending cuts can actually be a gentle slope, because the policy changes would be phased in over time. Washington insiders say Congress and the White House would move quickly in January or February to undo many, but not all, of the tax hikes and spending cuts.
Financial markets, however, respond to emotion as well as to research, reason and promises. If New Year’s headlines scream “negotiations collapse,” an emotional sell-off could threaten the president’s hopes for continued economic recovery in his second term, even if Republicans receive most of the blame for the impasse.
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 an impasse, “is what will force members of Congress eventually to act.”