Where's The Panic Button?

Hard to believe this story in CNBC is for real. According to John Carney, the adults in the room are expressing frustration with the absence of a stampede for the exits in the markets. As they learned during the TARP voting, there's nothing like a historic drop in the Dow to change a few votes.

I just got off the phone with a source on Capitol Hill who has spent the past few days trying to convince Republicans to vote for a debt ceiling hike.

He told me that the biggest obstacle he faces has been "market complacency."

"Frankly, a bit of panic would be very helpful right now," he said.

As he explained it, lots of people in Washington, D.C. expected that this would be a week marked by panic in the markets. Stocks would tank. Bonds would get clobbered. The dollar would do something dramatic. And all of this would help convince reluctant lawmakers that they had to reach a compromise on the debt ceiling.

Hard to imagine you can improve on the boundless cynicism of the bolded part. But, wait, there's more:

"We were following the script from 2008. When the market collapsed after TARP failed, that spooked everyone enough to get them to fall in line. We thought the same thing would happen this week," he said.

That's the problem. Everyone knows that the TARP vote was indeed induced by a DC-NY axis that threatened Armageddon if a trillion dollars wasn't transferred to every major financial institution in the world by the close of business on Thursday. Ever since then, the Congress simply hasn't been legislating in a normal manner: no budgets for 800 days, endless continuing resolutions, health care reform passed via bribes and procedural tricks, etc., all the while accompanied by apocalyptic pronouncements about a broken "system" and Republican intransigence. At this point, the market has probably priced the cost of liberal governance into its buy-sell decisions, hence the failure to panic.

The markets have been down a little this week, but that is as much due to the increasing rate of bad economic news as it does the parliamentary machinations in DC. And despite the best efforts of the adults in the room, the markets simply don't believe a default is coming because such an event would be due to a willful act of the executive branch, not because of Tea Party extremists in the Legislature.

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