Curious Capitalist

The Widening Divide Between Wall Street and Washington

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There is much that divides Wall Street and Washington. The cleanliness of the streets. Sartorial daring. And the view on whether or not we’ll fall off the fiscal cliff by year’s end.

Wall Street, which bets on the future for a living, seems sure that Washington will come up with a solution. Markets rose as cliff negotiations between President Obama and congressional leaders commenced. While investors are worried about last minute brinksmanship, the consensus has been that the stock plunge that would surely result is “hardly the holiday gift legislators will want to deliver to their constituents,” as one major bank put it.

But Washington exists on a different planet than Wall Street and that planet has different laws of gravity. The first law is that while finance is global, politics is local. Wall Street looks at Europe and sees what three years of delays and half measures in dealing with the Eurozone budget crisis has wrought — another recession. Surely, the thinking goes, leaders in Washington won’t let that happen here. But a new set of possibly more conservative House Republicans isn’t looking across the Atlantic, but to their home districts, where they’ll be facing the next round of primary elections in two years. They may have taken some Wall Street campaign money, but they aren’t taking orders from the Street on a debt deal, no matter what the markets do. “Policy makers aren’t doing this with a sharp pencil. They are just worrying about slogans,” said hedge fund honcho Ray Dalio at a recent Council on Foreign Relations meeting.

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This underscores the second gulf between Washington and the Street—their time horizons. Sure, traders often bet on changes that happen within milliseconds. But the most successful ones have a worldview that spans centuries. Dalio, for example, is known for pouring over hundreds of years of financial history and decades of data, searching for patterns that mark the sea changes in economic cycles. At the CFR event, he spoke about how the world could very well be entering a new era in which just getting our investment dollars back will be a big accomplishment. Avoiding that fate will require a delicate mix of job-creating spending, deficit reduction, and smart monetary policy orchestrated over a decade. Politicians working on four-year election cycles have little impetus to make those changes fast enough or thoughtfully enough, as the last few years have shown.

Indeed, a new batch of arguably more conservative Republicans in the House has even less impetus than they did before the elections, which took the number of crossover districts down by half. “People who buy the argument that Republicans have been chastised [by Romney’s loss and exit polls blaming them for budgetary standoffs] aren’t following what’s happening at the House on a granular level,” says David Wasserman, the U.S. House analyst for the Cook Political Report. This new set of House members may have taken Wall Street money, but they aren’t taking orders from the Street on a debt deal, no matter what markets do.

(MORE: 8 Black Friday Mistakes You Can’t Afford to Make)

For more on how the fiscal cliff talks are likely to end, and what the market implications could be, pick up my Curious Capitalist column in the latest issue of TIME magazine.

7 comments
AngryRedHead86
AngryRedHead86

@TIME @TIMEBusiness Wall Street doesn't want what's best for the country, Washington is too scared to do what's right.

ScottWillowen
ScottWillowen

@WTHR_Producer #wallstreet. Throw them all in mainstream jail and make reality show of it. Fudge packing fun!

GaryRMcCray
GaryRMcCray like.author.displayName 1 Like

There is nothing I would like to see more than the Gap between Wall Street and our government widening (as much as possible).

And who knows, maybe the gap between Washington and the People of the United States narrowing!

It would be nice to think that they finally realized it was actually us they were supposed to be serving.

pianomanrsn01
pianomanrsn01

The "future" that Wall Street bets on has a very limited horizon.  Typically the bet is on what the company will earn that quarter.  At the other extreme are high frequency traders who place their bets every millisecond or so.  None of the players are capable of thinking long-term.  They are too busy planning their million dollar bonuses for pushing Greece and Spain into unsustainable debt and acquiring large tracks of rain forests, water rights, or mining claims which allow them to plunder the earth for short-term gains.  Maybe the fiscal cliff is necessary so that "business as usual" doesn't continue to reward this behavior and that of Congress members who cater to their special interests with sweet deals on crop subsidies, oil and gas tax breaks, energy credits for wind and solar, billions in aid to Israel, Egypt, and Pakistan, and tax provisions that permit the wealthy to avoid taxes while the middle class labors. 

antonmarq
antonmarq

If Wall St really want to see the gap widening, keep trying to dodge Washington. SOX may be a small example of what's to come if we still have these supposedly high rollers gambling public investments as if it were their own.  Fraud on Wall St. has been steadily rising, and people want actions now. 

Ohiolib
Ohiolib like.author.displayName like.author.displayName 2 Like

You missed something; The willingness of conservatives to destroy America as long as they can try to blame it on Obama.