Wall Street Has the Right Attitude Toward the Fiscal Cliff

Chris Matthews spent an entire segment yesterday on Hardball going ballistic over the notion that financial markets will implode if we don’t reach an agreement on the fiscal cliff by December 31. Is that true? Neil Irwin says Wall Street is taking the whole thing in stride:

The markets’ sense of confidence — or, arguably, complacency — is rooted in two strains of thought.

One is that all the tough talk from the negotiators is mere posturing, nothing more than a signal to their allies that they are taking a stand in advance of real dealmaking closer to the deadline. Investors and executives have repeatedly seen brinkmanship out of Washington — including over raising the cap on government borrowing in the summer of 2011 — conclude with an agreement at the last possible moment.

….Another argument for why there is no need for huge concern is that a short-term voyage off the cliff would do no lasting damage to the economy. Even if there is no deal on Dec. 31, Treasury Secretary Timothy F. Geithner could order that income tax withholding tables not be adjusted to reflect higher tax rates on Jan. 1, which would mean that Americans would not immediately see smaller paychecks. The government could adjust the timing of payments to defense contractors and others to take the sting out of automatic budget cuts in the initial days of 2013

These aren’t competing theories. They’re complementary, and they’re both true. Negotiations like these really do usually go down to the wire, so lots of huffing and puffing at this stage is hardly something to get too worried about. At the same time, January 1 isn’t some magical date carved on an ancient Mayan stone. Going over the cliff for a few days or weeks won’t do much harm, and politically it might be better to do a deal in January, after tax rates have reverted to their pre-Bush levels, than before. If we’re still nowhere near a deal by the end of January, I’ll start getting worried. Until then, I’m with Wall Street: there’s no need for panic yet.