Markets Aren’t as Stupid as Politicians

Paul Krugman discusses an interesting point today:

“Add me to the chorus of those puzzled by the lack of market alarm over the possibility of U.S. default, induced by failure to raise the debt ceiling.”

Yeah, why aren’t markets even remotely worried about a default?  Well, this is pretty simple in my view:

1)  Markets very rarely fall for the same trick twice.  We’ve seen this movie before and we all know how it ends.  Neither side can agree, the politicians get their time in front of the camera so they can give the appearance that they’re actually doing something useful, we get to the last minute, a deal is cobbled together and we all move on.

2)  Markets, as irrational as they can be, are not nearly as irrational as the politicians in Washington.  It’s remarkably stupid that we’re holding ourselves hostage over the debt ceiling.  The threat of defaulting is laughable and insanely irresponsible.  But I think the markets are calling Washington’s bluff.  This threat is so stupid that the markets don’t even come close to believing it.

In my mind, it’s that simple.  The debt ceiling is just politicians making noise and getting in front of cameras, which, these days, is about all they seem to be good for.  And the markets realized that long ago.