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 sell-off 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 broad-based 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, across-the-board spending cuts that Defense Secretary Leon Panetta says could significantly damage the nation’s military posture. Some Republicans believe that fear will temper the president’s insistence on a hard bargain this month. Obama and GOP House Speaker John Boehner on Sunday held their first meeting between just the two of them since the election, and spokesmen for both emphasized afterward their lines of communication remain open.