Tuesday, October 8, 2013

Shutdown optics?

 This chart has been making its rounds on the Internet - I added the S&P500 to the VIX volatility index. The claim is that the shutdown is a non-story and is all optics and theater since the government could never credibly threaten to default no matter who is in charge:
“As political theater,” he said, “the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default.”
Mr. Reinhart’s view has become conventional wisdom on Wall Street when it comes to whether the country will hit the debt ceiling limit on Oct. 17. Warren Buffett put it this way: “We’ll go right up to the point of extreme idiocy, but we won’t cross it.”
This assumes that Congress or rather the Tea Party 30 are rational. What about the Lehman failure? Was the market expecting that?

Update (10/9/2013) from NYT:

Many in G.O.P. Offer Theory: Default Wouldn’t Be That Bad

On Wall Street, among business leaders and in a vast majority of university economics departments, the threat of significant instability resulting from a debt default is not in question. But a lot of Republicans simply do not believe it.
A surprisingly broad section of the Republican Party is convinced that a threat once taken as economic fact may not exist — or at least may not be so serious. Some question the Treasury’s drop-dead deadline of Oct. 17. Some government services might have to be curtailed, they concede. “But I think the real date, candidly, the date that’s highly problematic for our nation, is Nov. 1,” said Senator Bob Corker, Republican of Tennessee. 

Others say there is no deadline at all — that daily tax receipts would be more than enough to pay off Treasury bonds as they come due. 

“It really is irresponsible of the president to try to scare the markets,” said Senator Rand Paul, Republican of Kentucky. “If you don’t raise your debt ceiling, all you’re saying is, ‘We’re going to be balancing our budget.’ So if you put it in those terms, all these scary terms of, ‘Oh my goodness, the world’s going to end’ — if we balance the budget, the world’s going to end? Why don’t we spend what comes in?” 

“If you propose it that way,” he said of not raising the debt limit, “the American public will say that sounds like a pretty reasonable idea.” 

Is it time to be afraid?

Update 10/11/2013: Even Marty Feldstein (and by extension Greg Mankiw) doesn't believe that default is a risk if the debt limit is not raised.

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