Wednesday, July 27, 2011

Tea Party Resolute, but Wall Street Finally Freaks Over Debt Debacle

Wall Street and global financiers finally ended a schizophrenic stand on the debt shenanigans in Washington, soundly signaling with a nearly 200-point drop in the Dow Jones industrials today that a default will likely rip apart a weary American economy.

"Right now I'm pretty worried," said Howard Ward, a chief investment officer at asset manager GAMCO, quoted by the Associated Press.

Wall Street, like much of Washington, has been slow to catch up with the will of Americans, who for weeks have indicated in poll after poll that they want a debt compromise. They even would be willing to see revenues increase along with the slash and gut budget savings to get it done, surveys repeatedly show.

Others, like the Tea Party ideologues refuse to give an inch, and that is creating the unfathomable possibility that the U.S. might just default.

"As hours pass and the uncertainty builds, I think the market is starting to price in the potential that we might not have a solution by August 2," Channing Smith, managing director of Capital Advisors Inc., told Forbes. "Confidence in our political system is beginning to fade."

While investors worldwide finally awoke to the dangerous reality that stubborn political gamesmanship and entrenched ideological warfare truly has brought the U.S. to the brink of default, the non-partisan Congressional Budget Office piled on with more bad news.

CBO ruled debt-reduction plans by GOP House Speaker John Boehner and Senate Democratic leader Harry Reid both fall short of their projected savings.

Boehner's debt ceiling plan would cut the deficit by about $850 billion in 10 years, less than the $1.2 trillion claimed, while Reid’s plan would slash $2.2 trillion over 10 years, short of its promised $2.7 trillion in savings, CBO said.

It forced Boehner to retool his legislation, while Reid said his Senate measure could be repaired with a tweak (Reid and the Senate Democrats are unified in the defeat of the incremental Boehner plan, and Obama has promised to veto it. They do not want to revisit this again at Christmas time, as the plan calls for).

The pitiful partisan parlay seems to trigger a battle-a-moment, especially for Boehner, whose shadowboxing with President Obama has exposed a much more unwieldy circular firing squad -- one that pits the Speaker against the House Tea Party faction, at times including his deputy, House GOP leader Eric Cantor, and the mainstream Senate Republicans.

Perhaps fighting for more than just his debt legislation, Boehner decided go to the stick and take on the stonewall Tea Party faction.

"Get your ass in line," he told House Republicans today at a closed-door meeting, where he demanded his caucus vote tomorrow in favor of a retooled two-step debt reduction plan.

"I can't do this job unless you're behind me," Boehner pleaded.

(There are side fights, too: Tea Party scrapper Joe Walsh has decided to take on GOP Sen. John McCain, who has blasted the Tea Party for stonewalling and touting a minority position on lifting the debt ceiling. Walsh blamed McCain for the debt crisis).

As the impasse took a turn for the dramatic away from the public eye, it played out loud and clear on Wall Street. The escapades and impotence of America's elected officials may already have cost the nation its AAA credit rating, even if the problem is rectified, ratings experts have warned.

All the markets appeared to be jolted by the desperate debt dealings:

-Standard & Poor’s 500 fell 27.05 points, 2.03%, to 1,304.89. 
-Dow Jones average declined 198.75 points, 1.595%, to 12,302.55.
-Nasdaq composite dropped 75.17 points, or 2.65%, to 2,764.79.
-10-year Treasury note fell 7/32, to 101 7/32; yield up 2.98% from 2.96%

The standoff in Washington also was a contributing factor to the European markets, though the state of the local economies was big blame for a third straight day of losses.

The pan-European Stoxx 600 index sank 1.1% to end at 267.05. Markets from the FTSE to the Dax -- and everything else in-between -- took a hit.

Asian markets tonight (Washington time) are bracing for more of the same, expected to follow where the U.S. financial markets left off -- in the hopper.

Congress is tasked with raising the country's $14.3 trillion borrowing limit by Aug. 2 to avoid a debt default.

"Given that it is so clearly within the capacity of Congress to find the compromise that could clear both houses and be signed into law to solve this problem, I still believe that because the stakes are so high and because the American public so clearly wants this done in the right way, that in the end, it will get done," said White House spokesman Jay Carney.

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