Wall Street's Bet on the Fiscal Cliff

The smart money says a deal has to get done. But Washington isn't good at smart

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Illustration by Harry Campbell for TIME

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That's not to say it never happens. Just look at Germany, which survived and thrived postcrisis (before being dragged down by the troubles of its euro-zone neighbors) because the public sector and corporations worked together with unions to come up with reduced-time work deals and public subsidies that kept factories running and made them better able to capitalize on the upswing once it happened. Companies that played along, as well as those that poured money into job-creating R&D, got tax breaks. Germans, like many Wall Streeters, would seem to be students of game theory, which stresses that incentivizing collaboration is often the way to overcome difficult problems and get a better outcome for everyone.

Not so in Washington. Indeed, there's a short-termist, conventional wisdom building that it wouldn't be so bad to go over the fiscal cliff in order for each side to cut a better deal. (Maybe Republicans will play ball, the thinking goes, if they can talk about middle-class cuts rather than hiking rates on the rich.) While a week or two over the cliff wouldn't tank the economy, we'd almost certainly be looking at multiple stock-market drops of 5% or more in lieu of serious negotiations. Several months over the cliff would kill the economy. It's yet another measure of just how far Wall Street and Washington are from each other that markets haven't priced in a deeper fiscal dive. I'm hoping, though still skeptical, that the Street will be right.

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