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Update: Stocks Slide as Political “Arms Race” Threatens Fiscal Cliff Deal

Aaron Task
Daily Ticker

Updated from 11:50 a.m. EST

Update: A modest sell-off in stocks picked up steam Tuesday afternoon after Sen. Majority Leader Harry Reid (D-NEV.) said he was "disappointed" with the "little progress" being made in negotiations to avoid the fiscal cliff.

"We only have a couple weeks to get something done so we have to get away from the "happy talk" and do "specific things," Reid said, according to wire service reports.

The Dow fell about 60 points in immediate reaction and was recently down 0.6% to 12,891, closed down 0.7% to 12,878, just off its lows of the session; meanwhile, the S&P 500 shed 0.5% to close below the psychologically important 1400 level.

Earlier: Stocks were modestly lower Tuesday despite potential positive catalysts such as the latest Greek bailout, a better-than-expected durable goods report, a spike in consumer confidence and another gain in the Case-Shiller Home Price Index, which hit its highest level since October 2010.

One reason for the lack of enthusiasm: Rising skepticism about prospects for a deal to resolve the so-called fiscal cliff.

On Monday, White House Press Secretary Jay Carney said Social Security reform should be on a "separate track" from the fiscal cliff discussion, suggesting Democratic opposition to entitlement reform.

"We should address the drivers of the deficit and Social Security currently is not a driver of the deficit," Carney told reporters.

In addition, President Obama has threatened to veto any deal that does not raise taxes on the top 2% of income earners, which puts him squarely at odds with House Republicans.

"We were not re-elected to raise taxes or increase marginal rates," House Majority Leader Eric Cantor (R-VA) said on MSNBC Monday.

Meanwhile, President Obama is resuming his public campaign on the issue this week, planning to meet with small business owners on Tuesday and another group of CEOs on Wednesday before traveling to a manufacturing facility of toy-maker The Rodon Group on Friday.

"The president will travel to Montgomery County, Pennsylvania, to continue making the public case for action by visiting a business that depends on middle class consumers during the holiday season, and could be impacted if taxes go up on 98 percent of Americans at the end of the year," a White House official tells Reuters.

With some 35 days to go before year-end, there's still time to get a deal done and this may just be political posturing. But it's fair to say that the most recent movement on the fiscal cliff issue has seen the two sides moving farther apart. And given the recent history of votes on TARP in 2008 and the debt ceiling in 2011, I'm hard-pressed to see why people think there's going to be a sudden outbreak of rationality and harmony in Washington D.C.

"I definitely don't think they'll get a deal done before the last week of this year the way it seems to be going," says Justin Fox, editorial director of Harvard Business Review and author of The Myth of the Rational Market.

Fox, who notes that the fiscal cliff is another example of America's unique tendency to create self-inflicted crises, likens the current political situation to an arms race.

"It feels like the arms race was started by Republicans with their 'no tax' pledge which creates this situation where we can't have real compromise," he says. "Increasingly, that's being echoed by Democrats, [who say] 'If you're saying no tax increases, we'll say no entitlement reform.'"

On a related note, there's been a bevy of stories lately declaring the man behind the 'no tax' pledge -- Grover Norquist -- has (depending on the outlet) passed his peak, jumped the shark and is at risk of becoming irrelevant.

My bet here: Reports of Norquist's demise have been greatly exaggerated and the more the "mainstream media" declares the pledge is dead, the higher the odds the GOP closes ranks and we go over the cliff.

As Fox and I discuss in the accompanying clip, that might actually be the Obama administration's preferred outcome. The good news is the "cliff" is really more like a slope — the spending cuts won't hit all at once and the tax hikes could be reversed, at least for some Americans.

But if Dec. 31 comes and goes without a deal — or at least tangible progress toward one — it's hard to imagine the financial markets won't have at least one more fiscal cliff "freak out."

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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