Why did Obama try to scare the markets?

Yesterday Obama played a new strategy:

Obama dismissed talk on Wall Street that Washington will solve its problems, warning that the fight this time is putting not only government operations at risk, but the debt ceiling as well.

“I think this time it’s different,” Obama said in the interview. “I think they should be concerned.”

Usually political leaders don’t like to spook markets.  Presumably Obama hoped to spook markets, which in turn would put pressure on Republicans sooner rather than later.  The problem with waiting for “the spook” to come later is that there may not be enough time to put a deal together at the last minute, or trembling hands may make a last minute deal too risky.

But can Obama spook markets in this fashion?  Obviously markets know that Obama has an incentive to talk up the fear for this reason.  The market might thus remain unruffled, or at least it won’t be Obama’s words that are making things worse (the risk of short-term default is going up in the markets).  Furthermore, let’s say that Obama’s strategy, if it could strike fear into the hearts of market traders, would work in pressuring the Republicans.  Markets know that too, and so again the fear doesn’t get off the ground.

It is interesting to compare this to the standard game where a politician tries to talk the value of the domestic currency up or down on world markets.  A president or central banker might, by saying a weaker currency will be tolerated, signal the future stance of fiscal or monetary policy.  Since a leader who wants a stronger currency won’t try to talk down his nation’s money, this strategy (sometimes) succeeds, albeit with multiple equilibria.  But here Obama’s cheap talk isn’t signaling his inner preferences about bond prices, but rather it is an attempt to manipulate trading strategies.  If Obama sees his own talk as ultimately bullish (which is presumably the case if he is saying it), perhaps markets will too.

Would Obama’s strategy work if he blurted out the worries while evidently drunk?  Studied Captain Queeg?  Stated them “mistakenly” into an open microphone, of which he was supposedly unaware?  What if he just begged everyone to believe that things were really, really bad?


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