BofA’s Harris: Washington Playing Dangerous Game of Going Over Cliff

Tuesday, 04 Dec 2012 02:40 PM

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Letting the country careen over the fiscal cliff as part of a bargaining strategy to push through fiscal reforms would serve as a dangerous game politicians would be playing with the economy, said Bank of America Merrill Lynch economist Ethan Harris.

At the end of this year, tax hikes are scheduled to kick in at the same time government spending cuts take effect, a combination known as a fiscal cliff that could tip the economy into a recession next year if left unchecked by Congress and the White House.

Taxes have served as a sticking point, with Democrats arguing that tax breaks must expire for the wealthy, something Republicans oppose, proposing instead to raise government revenue via capping deductions.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

Some lawmakers have suggested Jan. 1 can come and go without a deal and address the issue by putting one another’s feet to the fire or punting on deadlines as tax hikes and spending cuts take root.

Even talk of such strategy can damage the economy.

“One of the most dangerous ideas circulating in Washington is that it is okay to go over the cliff temporarily,” Harris said a note to clients, according to CNBC.

“Threatening or actually going over the cliff will likely do serious damage to economic and market confidence. What some people are calling a ‘bungee jump’ could cause an economic heart attack.”

Both sides of the U.S. political aisle have crafted proposals to steer the economy away from the cliff, with neither side appearing to compromise on tax hikes for the wealthy.

Markets may be set to roil as they did during the 2008 debate over whether or not to bail out the banking sector via President George W. Bush’s Troubled Asset Relief Program (TARP), which lawmakers passed at the last minute, other economists say.

“It will be exactly like what happened when TARP went before Congress in late 2008,” said James Lebenthal of Lebenthal Asset Management, CNBC added.

“The politicians puffed themselves up, voted it down and the markets went straight down. Four days later they reconsidered and passed it.”

President Barack Obama insists there will be no deal without hiking taxes on the top 2 percent of U.S. earners.

“We’re going to have to see the rates on the top 2 percent go up, and we’re not going to be able to get a deal without it,” the president told Bloomberg.

Investors, meanwhile, are growing increasingly nervous.

“The clock is ticking,” said Quincy Krosby, market strategist for Prudential Financial, Bloomberg added.

“The focus is on what goes on in Washington. The market will be volatile. You’ve got to be very well-hedged given that the market is so much headline-driven.”

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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