This is a very good post by Megan McArdle on the way Wall Street and Washington misunderstand each other:
I dialed into a sell-side conference call last week to hear what sort of high-level analysis the bond vigilantes were doing, and the answer seemed to be that they knew less than I did. I didn’t hear anything about the process that I couldn’t have read in the pages of the New York Times or the Wall Street Journal — or my own blog. Listening, I thought of the frustration I’ve often had with people in New York who blithely lay out political strategies for their favored party that couldn’t possibly actually work, either because said New Yorkers don’t understand the institutional barriers, or because they don’t understand what is actually popular outside of Manhattan and Brooklyn. Even a misunderstanding of small technical questions — like the need for a CBO score, the vulnerability of bills to amendment, or the time it takes to whip votes — lead people outside of Washington to frequently underestimate the difficulties of doing the “obvious” thing.
On the flip side, it’s also clear to me that many people in Washington are living in a bubble where procedure and politics often shut out common sense. I know I’m losing valuable intelligence about what’s happening in the financial sector, because I’m simply not marinating in it every day. On that same call, I heard an analyst make a point about proposed 14th Amendment bypass of the debt limit, which was so obvious that I couldn’t believe I hadn’t thought of it: To wit, even if the Treasury simply went ahead and issued more debt, who was going to buy these instruments of dubious legality? And at what price? Yet all the DC people I’d seen writing about the “14th Amendment Solution” had focused on the legality of the move, or the political fallout; no one had thought about, like, finding customers for the debt ...
There are people in Washington who get Wall Street, and people on Wall Street who get Washington. But they are a small minority in both places. I submit that this disconnect is dangerous. Wall Street is giving us too much rope to hang ourselves because they don’t really understand the barriers to achieving fiscal sanity — and Washington is taking it, because they don’t really understand how Wall Street thinks, and what the bond traders will do when they finally decide that we’re likely to default.
Read the whole thing. The only thing I’d add is that I’m often struck by how many people there are in Washington who don’t understand the legislative process, have only very vague ideas about how polarization has changed in recent decades, have no idea of the role that baselines play in the budget process, etc. These people often have other areas where they’re extremely knowledgeable — campaigns, for instance — but in off-years, they’re called to comment on the legislative process and they get quite a lot wrong.
I’d liken it to the fact that Wall Street had a lot of people who were trading bonds based on mortgages but didn’t have a lot of technical expertise in the housing market. They missed the subprime crisis, and I worry that there are a lot of folks in Washington who are missing, for lack of a better word, the gridlock crisis, and are thus leading people — on Wall Street and elsewhere — to be overly sanguine about the political system’s ability to continuously get the job done. The people I know who have a deeper understanding of how Congress has changed in recent decades tend to be much more worried about a catastrophic breakdown in the coming years.
One place where you see some of that disconnect is in the yields on Treasury bonds, where you see that the market’s confidence in us is very high, even though Washington’s confidence in itself is, increasingly, quite low. Part of that is a flight-to-safety spurred by the financial crisis and the European debt crisis and other sources of global financial uncertainty, but I’ve had very senior government officials tell me they think Treasury debt is probably underpriced, that the market is probably too confident in our ability to solve our problems, and I broadly agree.