Some fear stock mar­ket re­ac­tion to ‘cliff’ events

Lack of deal to ward off spend­ing cuts, tax hikes may spark Wall Street sell-off.

Austin American-Statesman - - THE SECOND FRONT - By Charles Babington DE­VEL­OP­MENTS

WASHINGTON — Congress and the White House can sig­nif­i­cantly soften the ini­tial im­pact of the “fis­cal cliff” even if they fail to reach a com­pro­mise by Dec. 31. One thing they can­not con­trol, how­ever, is the fi­nan­cial mar­kets’ re­ac­tion, which pos­si­bly could be a pan­icky sell­off that trig­gers eco­nomic re­ver­sals world­wide.

The stock mar­ket’s un­pre­dictabil­ity is per­haps the big­gest wild card in the po­lit­i­cal show­down over the fis­cal cliff.

Pres­i­dent Barack Obama’s re-elec­tion gives him a strong ne­go­ti­at­ing hand, as Repub­li­cans are in­creas­ingly ac­knowl­edg­ing. And some Democrats are will­ing to let the Dec. 31 dead­line pass, be­cause a rash of broad­based tax hikes would pres­sure Repub­li­cans to give more ground in re­newed deficit-re­duc­tion ne­go­ti­a­tions.

A chief fear for Obama’s sup­port­ers, how­ever, is that Wall Street would be so dis­gusted or dis­mayed that stocks would plum­met be­fore law­mak­ers could prove their new­found will­ing­ness to mit­i­gate the fis­cal cliff’s harsh­est mea­sures, in­clud­ing deep, across­the-board spend­ing cuts that De­fense Sec­re­tary At a cam­paign-style event in Michi­gan, Pres­i­dent Barack Obama warned his lis­ten­ers their taxes will rise Jan. 1 with­out ac­tion by the congress. White House Press Sec­re­tary Jay car­ney told re­porters that‘the pres­i­dent be­lieves that a deal is pos­si­ble. It re­quires ac­cep­tance and ac­knowl­edge­ment in a con­crete way by Repub­li­cans that the top 2 per­cent will see an in­crease in their rates.’ House Speak­erJohn Boehner’s of­fice ex­pressed frus­tra­tion with the talks to date, a day af­ter the Ohio Repub­li­can met with the pres­i­dent at the White House. ‘We con­tinue to wait for the pres­i­dent to iden­tify the spend­ing cuts he’s will­ing to make as part of the “balanced”ap­proach he promised the Amer­i­can peo­ple,’ a writ­ten state­ment said. Leon Panetta says could sig­nif­i­cantly dam­age the na­tion’s mil­i­tary pos­ture.

Fi­nan­cial mar­kets re­spond to emo­tion as well as to rea­son. If New Year’s head­lines scream “Ne­go­ti­a­tions col­lapse,” an emo­tional sell-off could threaten the pres­i­dent’s hopes for con­tin­ued eco­nomic re­cov­ery in his sec­ond term, even if Repub­li­cans re­ceive most of the blame for the im­passe.

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