There are already signs of market volatility over the cliff stalemate. | REUTERS Markets' pain may be cliff deal gain

The stock market is getting increasingly skittish as the country approaches the fiscal cliff, but it may take a sharp plunge to snap lawmakers into striking a deal.

The Dow Jones Industrial Average fell 1.9 percent for the week to 12,938.


This steady decline is worrisome enough for market watchers, but Wall Street’s fears are unlikely to jolt lawmakers into action unless the Dow dives in a fiscal cliff panic, several senators said Friday.

“Sometimes a volatile market is what it takes to make them see the light,” said Sen. Tim Johnson (D-S.D.), chairman of the chamber's Banking,Housing and Urban Affairs Committee.

( Also on POLITICO: Why they want to go over the cliff)

A market shock would “absolutely” add impetus to strike a cliff deal, said Ohio Republican Rob Portman. “People here are very attuned to the market,” Portman said. “We’ll see what it does Monday.”

There are already signs of market volatility over the cliff stalemate.

Friday afternoon, the Dow dropped 66 points, building on earlier losses, after cable news stations flashed headlines around 3:30 p.m. that President Barack Obama was not offering a new proposal in his 3 p.m. meeting with congressional leaders.

Overall, the Dow closed down 158 points, or 1.2 percent, on the day.

Market plunges have moved Congress to compromise in the past, most notably during the 2008 financial crisis. At the height of the crisis, the Dow plunged 778 points on Sept. 29, when the House rejected the bank bailout bill.

( PHOTOS: 11 side effects of going over the cliff)

Five days later, a slightly amended version of the bill sailed through the House when almost 60 representatives — Democrats and Republicans alike — flipped their votes to back the bill.

A market plunge as large as in 2008 almost certainly won’t occur now because, unlike at the height of the financial crisis, there is no fear that the financial system is on the verge of collapse.

But senators fear a similar, if smaller, nosedive may be coming if Obama and congressional Republicans don’t reach a deal to avert the automatic tax increases and spending cuts set to take effect on Jan. 1.

( PHOTOS: Fiscal cliff's key players)

“The market has been very unsteady the last few days, and I think there’s no reason for it but what’s happening here,” said Connecticut independent Joe Lieberman. “My fear is that if we actually go over the cliff, you’re going to see a precipitous drop in all the markets, particularly the stock market.”

Going over the cliff would send the economy into “uncharted territory,” said Montana Democrat Max Baucus. “Who knows what the market is going to do if we don’t solve this. It is so unpredictable.”

While senators accept the possibility of a deal-inducing market crash, they are quick to express their disgust that that’s what it would take.

“It just seems so irrational and irresponsible to need to let that happen before we’ll come together and solve the problem,” Lieberman said. “It shouldn’t work that way. It really hurts a lot of people, their savings, their jobs.”

Some senators — including Idaho Republican Jim Risch — are skeptical that even a market crash could break the deadlock.

“Markets are going to do what markets are going to do,” Risch said. “Probably there are some [lawmakers] that are watching the market, probably there are some that aren’t. I would say it’s much more common that they’re not.”

Wall Street is begging lawmakers to pay attention, and some of its biggest names have been publicly lobbying lawmakers to cut a deal.

Goldman Sachs CEO Lloyd Blankfein went public after a late-November meeting with Obama, saying he would support tax increases if it allowed lawmakers to reach a deal and reduce the debt.

JPMorgan CEO Jamie Dimon has echoed similar thoughts in several interviews.

The market volatility over Washington’s cliff brinkmanship is likely to get worse if a new deal isn’t struck by soon after the new year, said Rob Nichols, president of the Financial Services Forum, which represents the CEOs of large banks and other financial firms.

Some analysts say Washington won’t listen to Wall Street’s chirping until market anxieties turn into a scream.

“The problem here is the more the markets don’t have a negative reaction, the more leeway these guys have,” said Edward Mills, financial policy analyst at FBR Capital Markets. “It’s a game of chicken. But by the time there is a negative market reaction, it could be too late.”

And while lawmakers could undo tax increases and spending cuts through a deal early next year, analysts say the damage to the market could not be so easily undone — even if lawmakers reach a deal in early January.

That’s because a trip over the cliff could convince investors that Washington is too dysfunctional to stay out of the economy’s way, said Jim Vogel, who manages market strategies for FTN Financial.

“The market reaction to a deal will depend more on the path Congress has taken than the details of the deal,” Vogel said.

Markets could rebound with a post-cliff compromise but only if investors are confident that lawmakers won’t immediately return to brinkmanship.

“If Washington can’t do that — across all the major questions for the next two years — then the economy remains stagnant,” Vogel said.

Kelsey Snell contributed to this report.

This article first appeared on POLITICO Pro at 7:31 p.m. on Dec. 28, 2012.