Brinkmanship and the markets

For financial markets, the news the government won’t shutdown this weekend over extending the payroll tax cut seems a bit like someone promising not to poke you in the eye after all.

As part of the deal, the Obama administration backed off its push for a surtax on millionaires to pay for more of the payroll tax discount. Options for paying for it include new fees for banks that deal with mortgage intermediaries Fannie Mae and Freddie Mac. And there’s still talk of cutting a tax break for corporate jets.

Karen Shaw Petrou is a managing partner of Federal Financial Analytics in Washington. She says it’s not so much the political issues that scare the markets as the brinkmanship that wears them down.

Petrou says the payroll tax cut is useful now, as the U.S. economy shows some signs of strength. It puts money in people’s pockets and gets them spending. She says the economy’s facing strong headwinds from Europe now, and ending the payroll tax cut could take the air out of the economy’s tires. Now’s not a good time to be banging along on the treads.