Brexit: Why markets may not bail out the PM's deal

Ben Bernanke, George W. Bush, Hank Paulson and Christopher Cox address the US in the week after the collapse of Lehman Brothers Image copyright Getty Images

Financial markets have had a rather bad Brexit. They have taken solace in the wrong things and freaked out at ephemera. But there is a lot of talk at the moment that their conniptions might help make sure Parliament passes Theresa May's withdrawal agreement.

This is known as the 'Tarp' scenario - a reference to the US government's so-called Troubled Asset Relief Programme.

In September 2008, the week that Lehman Brothers collapsed, Hank Paulson, the US Treasury Secretary, requested a $700bn fund from Congress to fight the banking crisis - a fund to deal with "the illiquid assets that are weighing down our financial system and threatening our economy".

In short: he wanted $700bn to help clean out the financial system and prevent the US economy going into a uncontrolled credit contraction that could cause an economic catastrophe.

When he presented the initial draft, it was more or less a request for blank cheque.

Perhaps unsurprisingly, the US House of Representatives turned him down - 228 votes to 205. Two-thirds of Republican members of congress voted against this proposal from a Republican treasury secretary.

The Dow Jones stock index fell 7%, its largest-ever one-day fall.

Faced with that market disruption, 33 Republicans and 24 Democrats switched sides and the measure passed shortly afterwards.

The Tarp scenario in Westminster

The Tarp scenario for Brexit that is circulating in Westminster is that MPs may vote down the legislation first time around. Certainly, at the moment, it is hard to see a path for it. But, the scenario goes, if there's a vicious financial market reaction, MPs will be cowed into voting the withdrawal agreement through.

There are, however, a number of issues here:

  • First, the US is more politically sensitive to stock indices than we are. And, even then, the case for voting the law through was bolstered by a terrible set of labour force statistics that emerged between the first and second votes - the worst rise in unemployment in five years.
  • Second, it is unclear what market reaction would shock MPs enough to change their minds. A lot of MPs get muddled about what to make of the changing price of government debt. And I am unclear whether our MPs would understand what a big move - even a 15 per cent drop in the price of sterling, say - would mean or how they'd react. It is simply not in our political discourse.
  • Third, from the start to the end of the process, the Tarp legislation ballooned from three pages to 450. There were tax breaks folded into the bill to buy off individual legislators. Our Parliament's rules on amending legislation make it harder to add 'pork' to bills - but that also makes it much harder to buy off individual MPs.
  • Fourth, there was also a presidential election happening and the two candidates - Barack Obama and John McCain - both supported the deal. The powers of patronage all went one way. The parties' current and future leaders all supported the plan. But it is unclear that anyone leading any party in the next few years will support this plan except Theresa May.
  • Fifth, if markets expect a loss on a first vote, and anticipate it passing on a second vote, these market reactions might not happen when they're helpful for parliamentary arithmetic. Counting on Tarp makes it unlikely to happen.

This outcome is still possible and plausible - especially if one understands the Tarp scenario less literally.

If you redefine it to a broader notion about how MPs might get freaked out by some news at some point and vote to accept whatever deal is offered to them, then it becomes much more likely.

But maybe it will be some news from Nissan or Airbus rather than the markets. Maybe it won't be economic news at all. And maybe it will come when the deal had looked dead in a few weeks time, not between the first and second votes.

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