Financial Markets Show Limits of Obama's Power

Simple but often overlooked truth: When a nation's equities, debt and currency are bought and sold globally in very large amounts, it places limits on that nation's fiscal and monetary policies. But global financial markets are more than just a veto, they can also nudge policy in certain directions. Evidence of that was on display this week here in Washington  where a) factions within Congress are pushing hard for a modification in mark-to-market accounting rules; b) Treasury Secretary Geithner seemed to hedge on the idea of raising taxes, and c) President Obama tried to adopt a more upbeat tone, even hinting at cutting corporate taxes.

Politicians here, I would argue, seems to be waking up to the reality that markets may not sign off on massive increases in our national debt. As the Chinese Premier Wen said earlier today:  "Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried ... I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."  Indeed,  financial insurance contracts that reflect the odds of a U.S. debt default have gone through the roof  since September. Perhaps Washington is finally listening to the message Wall Street is sending.