YESTERDAY, a colleague at Democracy in America warned that a debt-ceiling fight could potentially raise America's borrowing costs, needlessly increasing the country's fiscal burden. I'm somewhat sceptical; as my colleague acknowledges, previous debt ceiling fights have not generated much of a move in bond markets. But Matt Yglesias finds evidence that Wall Street is prepared to punish Washington this time around:
House Speaker John Boehner has been reaching out to top Wall Street players asking how close Congress can get to the May 16th deadline (or July 8th drop-dead date) for raising the debt limit without seriously unnerving financial markets. The questioning is not going over well. “They don’t seem to understand that you can’t put everything back in the box. Once that fear of default is in the markets, it doesn’t just go away. We’ll be paying the price for years in higher rates,” said one executive. Boehner’s office last night would not confirm the conversations.
Of course, just two posts later Mr Yglesias writes:
Shannon Bond reports that JP Morgan Chase is winning the future and “reported a 67 per cent jump in first-quarter profit, as better performance of its credit card division offset losses from its troubled mortgage business.”
Recall that as recently as March 31, JP Morgan Chase CEO Jamie Dimon was warning us that the new Dodd-Frank bill would be “the nail in the coffin” for giant American banks.
Those lying dogs! So the question is: when can one trust what Wall Street folks are saying? And the answer is: sometimes. For my part, I look at current bond yields, which are very low, and think that if Wall Street were at all concerned it would be bidding in some risk premium.
Now, Mr Yglesias' broader point is that the fact that John Boehner cares whether a debt-ceiling battle impacts borrowing rates signals that his threat to not raise the ceiling isn't credible, and the Democrats should therefore refuse to negotiate. That seems clearly right to me. But that also suggests that debt-ceiling demagoguery, while annoying, is basically harmless.
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