What Washington Can — and Won’t — Do About Market Fears

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The 6% stock-market sell-off on Monday elicited hopes from Wall Street that Washington would do something to reassure the world that it is serious about its mounting debt and determined to reinvigorate the stalled recovery. Sadly, there’s not much D.C. can do, and what it can, it likely won’t.

For starters, the standard Washington response — jawboning — isn’t going to do the trick. President Barack Obama stepped to the microphone on Monday at 1:52 p.m. to make remarks to the press. At that point, the S&P 500 was at 1,145.15, down from 1,198.48 at the market’s opening. By 2:26 p.m., the index was down to 1,124.87, on its way to 1,119.46 at the closing bell. So much for the bully pulpit.

What about Ben Bernanke? The Fed is holding a one-day policy meeting on Tuesday and will release a statement around 2:15 p.m. But there’s little expectation that monetary policy changes can reassure markets. The Fed has no sway on the issue of fiscal probity: Bernanke has already called for long-term debt diminishment without drastic short-term cuts in spending.

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Within the Fed’s dual mandate — keeping inflation in check and maximizing job creation — there’s not much room for maneuvering. Inflation is still not much of a worry, and Bernanke has already tried most of what he can when it comes to job creation. At most, Bloomberg reports:

Chairman Ben S. Bernanke and his colleagues may prolong a pledge to maintain record monetary stimulus, said economists at JPMorgan Chase & Co., BNP Paribas and Goldman Sachs Group Inc. The Fed could do so by making a commitment to hold its $2.87 trillion balance sheet steady for an “extended period.” The Fed also may replace shorter-term securities with longer maturities to reduce rates on longer-term debt.

“Those steps are all about bolstering confidence,” said Michael Feroli, chief U.S. economist at JPMorgan Chase in New York and a former Fed economist. “It wouldn’t do tons to alter economic and financial conditions, but the perception that the Fed will act and do something is reassuring.”

The one thing Washington could do that would make an immediate difference would be for the leaders of both parties in the House and Senate to speed up the appointment of members to the so-called supercommittee charged with conceiving a bigger deficit-reduction plan — and to choose serious deficit hawks who believe in compromise for the seats on it.

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The committee, created as part of the deal to raise the debt ceiling, is supposed to come up with a plan by Thanksgiving to reduce further trillions from the deficit in coming years. Given the debt-ceiling spectacle and the utter failure of previous commissions to get the country’s fiscal house in order, there is considerable doubt that the committee will produce a real plan by its deadline. Many in Washington expect it to come up with an elaborate way to punt the issue past the 2012 elections without triggering the politically costly cuts designed to kick in without a deal.

Were the Senate GOP leader, Mitch McConnell, to appoint hawkish Senator Tom Coburn of Oklahoma, for example, who has offered to embrace higher taxes in exchange for deep cuts to entitlements, that would rally the market. Likewise, if Democratic majority leader Harry Reid were to tap Kent Conrad of North Dakota, markets would respond positively.

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But don’t hold your breath. None of the leaders’ offices contacted for this post said they had plans to speed up the appointments. Nor would they discuss who might be chosen. If the markets are waiting for D.C. to ride to the rescue … they shouldn’t be.