Creating a Kinder, Gentler Fiscal Cliff
The fiscal cliff, if it materializes, would be a purely manmade disaster, with some very unpleasant results. Cynical as I am about humanity, we have rarely let such manmade disasters happen in our busy history. Not so abruptly, not with such perfectly predictable timing and widely known consequences.
Against my background of growing up in China, the supposedly sharp ideological divide between Democrats and Republicans strikes me as petty. Yes, it's real and can be important in the context of here and now. But are the politicians really so far apart and so dogmatic as to risk their careers by holding out or otherwise sabotaging the resolution?
Let's list out various realistic broad-stroke scenarios. I'll order them from disastrous to bad.
1. The lame duck Congress and the "new" president cannot reach an agreement, possibly due to some outgoing members of Congress throwing a tantrum or either side going overly confident or aggressive. They extend the status quo for a few months so that the next Congress and the White House have more time to do their political measurement and calculation and work it out.
This is the worst among all realistic scenarios because the cost of simply extending the status quo to buy more time is virtually zero. It's also likely if only because it's the easiest way out.
We would still face the uncertainty. But the significant and persistent risk-off until Monday, and especially the pop on "constructive" and "productive" meeting between Obama and Boehner last Friday, suggests that the market had mostly priced in this worst scenario.