Tags: jared bernstein | wall street | stock market | shutdown deal

Jared Bernstein: 777-Point Stock Plunge Will Hasten DC Deal-Making

By Michael Kling   |   Tuesday, 15 Oct 2013 02:09 PM

Wall Street can help close a government debt ceiling deal — with a 777-point drop in the Dow Jones Industrial Average, argues Jared Bernstein, a former Obama administration economist.

A huge drop in the stock market may be the only way to motivate political leaders in Washington to approve an agreement to reopen the government and avoid defaulting, Bernstein writes in his On The Economy blog.

Bernstein, a senior fellow at the Center on Budget and Policy Priorities, recalls when the House of Representatives rejected the Troubled Asset Relief Program, or TARP, in 2008.

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The Dow promptly plunged 777 points. Congressmen abruptly did an about face and approved the program.

"That may be what it takes to end this charade," Bernstein comments.

The Senate is reportedly close to reaching an agreement that calls for raising the debt limit through February and approver a budget to keep the government open through January.

A huge stock market drop, he says, may be the only way to wake up Republican moderates and prompt them to demand the House Republican leadership to allow a vote on the accord.

"I vividly recall how a huge drop of almost 800 points in the Dow Jones industrial average in late September 2008 changed the minds of House Republicans on the TARP legislation," Bernstein writes in a recent article for The New York Times.

"Perhaps that’s what it would take to wake the moderates, but one just can’t be sure. The unwillingness to put country ahead of ideology and self-preservation (as in keeping your job) is at a level unfamiliar, if not downright scary, to me."

The percentage change of a 777-point drop was much larger then, he says, noting the Dow was about 10,000 then compared to 15,000 now.

The government shutdown does not pose to the same economic impact as the credit shutdown of the 2008 financial crisis. But a government default does.

Instead of plunging, the stock market has been sliding only slightly as the government approaches its debt limit, expected to be reached Oct. 17, and a default that could spark a potentially catastrophic financial crisis.

It's unclear how the Senate's agreement will fare in the House. Conservative House members are already voicing opposition to the deal, reports The New York Times.

"We’ve got a name for it in the House. It’s called the Senate surrender caucus," said Representative Tim Huelskamp, Republican of Kansas. "Anybody who would vote for that in the House as Republican would virtually guarantee a primary challenger."

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