Everyone wants in on this act. Particularly the bond rating agencies. Having been caught asleep at the switch in the run-up to crises past, Moody's and Standard & Poor's are loath to let it happen again. Going back to the Drexel Burham/Michael Milken affair, they affirmed the strong ratings on Executive Life just before the junk bond world collapsed. Same with Orange County, California, before losses in its investment pool drove it into bankruptcy. They threatened the bond insurance companies with downgrades if they did not bulk up their balance sheets with housing bonds, and we are all know how that ended up...
Now, Moody's and S&P want to play in the Treasury bond/debt ceiling game of high stakes poker in Washington. This week, both rating agencies piled on, threatening the United States with downgrades on its bonds if the debt ceiling matter is not promptly resolved. These pronouncements tend to have consequences, as the leadership of united Europe has found out. Greece has become yesterday's news, as over the past two weeks Portugal and Italy have seen their bond prices tumble and interest rates skyrocket as the markets responded to rating agency comments on their fiscal fortunes. Outraged European central bankers, struggling to find an effective solution to the crumbling of the Eurozone, attacked the bond rating firms for hidden political motivations and threatened to take action to "break the oligopoly."
And what of the Treasury market? How did U.S. Treasury bond market respond to the threatened downgrades?
Not even a whimper. Actually, a rally of sorts. Yields on the benchmark 10-year Treasury declined by four basis points this week. As buyers bid up the prices, yields fell from 2.95% to 2.91% today, down from just over 3% a week ago. Europe's pain -- much to their undying chagrin -- continues to be our gain. From the bond market perspective, the debt ceiling debate seems almost to be a sideshow against the backdrop of the disintegration of Europe, even with only two weeks to go until Armageddon.
It's the new reality TV. Everyone is watching, everyone is talking about it, but if the markets are a measure of the real world, this most important and urgent of matters seems to have become part of the entertainment-cable-Internet-popular culture other-world that consumes our lives, but isn't really part of our lives.
Perhaps it is because we tend to believe that an actual default on U.S. Treasury obligations is simply beyond of the realm of possibility. We see all the actors yelling and screaming in Washington, playing their assigned roles, but we know deep inside that they cannot actually let the world unravel around them. Just because they are scared of Grover Norquist?
There is another point of view, which is that this is not about our debt at all, but a tug of war for which the debt ceiling is just a dramatic point of leverage. It is not about debt, because some would argue -- though few appear to be listening -- that constitutionally there is no crisis. The 14th Amendment would seem to be quite clear -- to a lay-person -- that the full faith and credit of the United States obligations cannot be questioned -- and therefore cannot be undermined even by Congress. The counter-argument that has been offered is that the Constitution gives only to Congress the power to borrow. But the simple fact is that all of the bonds on which people suggest that we might default were borrowed with the full authority of Congress. And once authorized and issued, the obligation to repay cannot be questioned -- or so it would seem.
Perhaps the bondholders who are lining up at the Fed window in D.C. -- even as they are running from the same in capitals across Europe -- know what seems to have eluded the bond rating agencies, which is that the debt will be paid, that the market -- as is its wont -- has already priced in the risk of default on our bonds, and it is a small price indeed. It is all the other "obligations" that are at risk. All of those obligations -- the ones that impact the lives and livelihoods of all but the holders of our bonds -- that are only valid if each Congress chooses to make good on the commitments of some prior Congress. And those obligations are indeed at risk, for the simple reason that as a nation we have consistently determined that we are not willing to tax ourselves for the goods and services that we seem to want, and with no action on the debt ceiling we will have neither the tax revenues nor the bond proceeds to pay for all of them.
The issue is not default. The issue is spending. In the view of House Republicans and Tea Party activists, spending should come down dramatically. Sacred cows should be slaughtered. Entitlements should be reconceived. The New Deal and the Great Society have run their course. But for the Senate Republicans the motivations are more complex. The plan put forward by Senator Mitch McConnell skillfully serves a larger set of interests and would allow the status quo ante so dear to Senators to survive. His plan would essentially would take Congress out of the debt ceiling game, and give his colleagues the best of all outcomes: The spending would continue while someone else -- the President -- would take the blame.
Right now, both the President and Senate leaders believe that the fear of default should provide enough motivation to get something done -- along with the cover each side needs to take steps that might otherwise be unthinkable: Cutting entitlements, raising taxes, trimming the military. But so far, the House leadership is not biting. For the Democrats, the McConnell proposal may well emerge as a middle ground of sorts. But for the House Republicans and the Tea Party -- those who truly want to reduce the size of government -- McConnell's success would constitute a stinging defeat, an historic moment lost, and a movement scorned.
The ultimate question is what the President plans to do on August 2nd if there is no agreement. One must presume that there is a plan in place: The 14th Amendment will be upheld, the bonds will be paid, the full faith and credit of the nation will be reaffirmed -- and massive cuts and sequesters will be put into effect.
As great as the fear of default might be, both the President and Mitch McConnell must fear even more what would happen next. If the markets are right, and no default ensues, the motivation to reach a middle ground or face-saving solution will dissipate, and each side will once again be captive to their base. Caught in a lie -- that he knew there would be no default -- the President would lose the high ground. Vindicated for their obstinance, the House leadership will have even less reason to negotiate.
That may well be the endgame that true believers among the new breed of House Republicans have in mind. And it does not make them crazy, just strategic. If they believe that default will not be allowed to occur -- as a matter of Constitutional obligation and proven bi-partisan deference to the bond markets -- then reaching August 3rd with no agreement might reasonably be their goal. In three weeks, they can achieve their objective of an America forced to live within her means. And ironically, from that perspective the only thing the President could do to stop them would be to allow a default to occur even when it is within his power and authority to prevent it.
Robert Reich: The Biggest Driver in the Deficit Battle: Standard & Poor's
Joseph J. Thorndike: Not Grover: Who's the Progressive Counterpart to Norquist?
Republicans edge US nearer debt crisis
Voters weighing in with lawmakers over debt issue
Stocks stymied without a debt deal
unreseasonable in assuming you only make cuts and not increase taxes in order to balance the budget. As long as there is this acrimonious atmosphere there will never be any real solutions to the problems facing the US.
As far as the debt goes I don't understand the mentality of thinking that you can spend and spend and when there is a deficit just borrow more to cover it. Sooner or later the ppl lending you money will say enough is enough, and you will not be able TP pay your bills. It's inevitable this will happen, if not on Aug 2, but sometime in the future.
Three lines in, and you already lost me. They weren't caught asleep at the switch. They were actively colluding with the other criminals in that biggest scam in history. That none of them, nor their co-conspirators, are in jail says much more about us than about them.
So raising taxes on the top 2% is just not an option, not even to be mentioned in a article about the debt ceiling? Why? Because somebody decreed that the rich are now always to be referred to as "job-creators"? If these "job-creators" had been creating jobs, the unemployment rate wouldn't be around 9%, now would it. This is a phony, manufactured crisis. The debt ceiling has been raised many times in past years, but now, all of a sudden, it can't be raised this time? Nonsense.
First, not raising the Debt Ceiling doesn't result in automatic default. The Treasury Department can fall back (as they have in the past) on revenues from the Federal employee payroll deductions in the G Fund and the Civil Service Retirement and Disability trust fund. Meaning: Bonds would continue to be retired and the interest on the National Debt would be serviced.
Second, though not raising the Debt Ceiling won't result in automatic default it would completely crater spending. All spending. Not just on the part of the Federal Government but on the part of consumers and businesses. Particularly consumer spending which makes up 70-percent of the American economy. When consumers quit spending businesses have lower (or no) revenues. Which results in layoffs, failure to expand, failure to purchase capital equipment, etc. Meaning: It all cascades negatively almost instantly and puts the country right back into a recession (or worse, a depression).
Thirdly, the Republicans have absolutely no leverage. They married the issue of raising the Debt Ceiling to the issue of the Federal budget and spending (twice) and then in turn married both issues to the issue of a Balanced Budget Amendment. It's backpedaling. It gets worse when one considers that within Republican ranks there's disagreement and even within the House, which they control, they can't get enough votes lined up to pass anything. Meaning: If the Debt Ceiling is not raised and then the economy implodes the Republicans will take the blame.
People can state what operational procedures are in various situations without stating a preference for a desired outcome. If I state that "the Sun will most likely rise tomorrow" it doesn't mean I "approve" or "disapprove" of the Sun rising, just that the Sun will most likely rise tomorrow. And has done. In the past.
Note that a statement such as "the Sun will most likely rise tomorrow" contains no hidden meanings or hidden agendas. The presentation of a likely outcome, in this case, stating that the Sun will rise, does not mean a person hates Jesus, feels that aliens run the government or finds puppies and kittens delicious. It's just a statement concerning a likely possible outcome.
"If the debt ceiling talks fail, independent voters will see that Democrats were willing to compromise but Republicans were not. If responsible Republicans don’t take control, independents will conclude that Republican fanaticism caused this default. They will conclude that Republicans are not fit to govern."http://www.nytimes.com/2011/07/05/opinion/05brooks.html
I'm not a fan of Brooks but he is right on this one. Democrats had "agreed to a roughly 3-to-1 rate of spending cuts to revenue increases" yet the Republicans gave the deal a thumb's down!! No new taxes for for billionaires!! Yet, a default will wipe out Wall Street & overall it will be bad for business. But it is clear now that Boehner has no control over the T-Baggers even with Big Business clamoring for a deal ("If the markets are right, and no default ensues" - where are you getting your info Mr. Paul?):
62 leading U.S. business groups, including the American Gas Association, the Telecommunications Industry Association, and the National Association of Manufacturers, all pleaded with Congress this week to get this done quickly. http://www.washingtonmonthly.com/political-animal/2011_05/the_kind_of_people_who_get_eat029555.php
The country defaults, the Republicans will lose BIG time.
The President next move should be to go before the cameras one more time and deliver a speech (that only he can deliver) and explain to the American people that he has tried every thing he knew to be bipartisan, but has been rebuffed at every turn. He should say this is my last and final proposal, a clean debt ceiling increase bill period, and explain this is what McConnell plan actually does ,the only difference being McConnell provides a stage for them to perform their BS in order to win elections, with no regard for the masses, but only protection for the wealthy.