The Real Reason The Debt Ceiling Fight Was Horrible News For Markets

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The debt ceiling fight didn’t end in default (thank god) and in all truth it didn’t even result in severe austerity in the near term.The cuts next year aren’t actually all that dramatic, although they’re certainly very unhelpful at a time when the private sector is weak and deleveraging.

But the fight did reveal some bad news.

See, people talk about the Bernanke Put (will the Fed chair step in to ease conditions if things get bad enough?) but throughout history you’ve always had a Washington Put.

When things get bad, governments do stuff. That’s not just limited to America. There isn’t a government in the world that doesn’t try to ameliorate hard times, whether they be economic, natural disaster-related or something else.

The recent action in Washington really does call into question whether the Washington Put exists at all. One party was completely unyielding in its demands, and seemingly willing to seriously damage the economy to pursue its agenda. And it’s not just the debt ceiling where you see this. This FAA nonsense shows again a total inability to do basic, obvious stuff.

The Republicans have even shown an unwillingness to deal with actual natural disasters. Remember when Eric Cantor said there would be no relief for Joplin Missouri unless there were budget offsets found?

Even if you agree with the GOP’s hardcore stance, you must admit that when disaster relief comes with conditions, the usual buffers for the economy are eroding.

After Congress gets back from recess, there are a number of things which, theoretically, should be possible and palatable, including a continuation of the payroll tax holiday, and other jobs-type bills that would normally be agreeable. But the situation in Washington does not look as though it will be conducive to any of that until at least January 2013.

And if things get really bad — you know, if the banking system starts creaking again — you can forget about getting any more help there.

The Washington Put is no more. The market is realising that, and has been since that Friday when talks first collapsed between Obama and Boehner.

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