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A Very Consequential Couple of Weeks

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Forget the Wisconsin recall. We are into the last two weeks of June with a calendar loaded with answers to questions that will determine the course of the rest of this year, economically and politically.

Will the Greeks form a government capable of preserving their membership in the Euro and avoiding Europe's "Lehman moment" -- or will that torch pass to Spain if it cannot borrow money in the bond market anymore? Will the U.S. Federal Reserve (again) risk discontinuing its existing quantitative easing program supporting the financial markets, double down and add more easing now, or keep its powder dry in case of a Euro implosion?

Will the G-20 Group of Nations and Europe's weak confederation of political leaders and hamstrung Central Bank take decisive steps to backstop European banks and sovereigns that have run out of purely local options to preserve their solvency? And will the U.S. Supreme Court strike down Obamacare's insurance mandate as unconstitutional, and if so, then go on to invalidate the entire statute?

While all four questions could wind up with muddled answers rather than clear bright line resolutions, at least we can predict that we will know more in two weeks about each of the underlying issues than we know now, and that whatever answers we get will shape developments in the financial markets and in the forthcoming U.S. political campaigns and "fiscal cliff" negotiations for the balance of the year. Subsidiary questions like what will rating agencies do about European banks and sovereigns, U.S. financial institutions and ultimately even the U.S. double "A" rating will also turn on these events.

So, despite the serious developments in Syria and Egypt leading to questions of whether these two nations will even have governments at year's end -- not to mention the Jerry Sandusky trial and the Arizona immigration law -- we need to keep focus on the Greeks, the Euro-Geeks, the Central Bankers, Chancellor Merkel and the interplay of opinions at the Supreme Court so that we can make our own personal decisions about the future or 2012, whether political or economic or both.

What are keys we have to read to see which way each of these decisions could come out? What will we know, and when will we know it and where does it lead?

Let's start with the Greeks: their decision to reject (by the narrowest of margins) the leadership of the Syria Party, which promised to repudiate the country's bailout commitments, has set the scene for two of the other big questions: what will the Fed do, and what will the Europeans do, with respect to the financial market crisis that continues despite the formation of a coalition government in Athens that will basically stick with the program. We have been spared a period of brinksmanship over whether Greece will leave or be kicked out of the Euro - for the time being - no country has ever left or been forced out. But the focus of financial market vultures quickly shifted to Spain Monday morning and it's difficulty in paying borrowing costs up to the 7% rate being forced on it by bond traders.

That 7% level was previously seen as the "tipping point" that forced Ireland and Greece and Portugal to seek bailouts of their debt obligations from the Eurozone. Why are hedge funds holding Spanish bonds trying to force their yields up and their prices down - why are they engaged in trashing their own holding?

At bottom, the bondholders are trying to force a bailout of Spain because they would vastly prefer to be holding what would, in effect, be German obligations rather than Spanish. We'll see if they can shake some supportive bond buying out of the European Central Bank to keep the interest rates down on Spain's bond auctions this week, to buy time (the Eurozone is developing a skill base in this regard, at least) for the G-20 to make supportive noises in Cabo San Lucas and for the new key "group of 4" in the Eurozone - Merkel, Hollande, Monti and Rajoy - to come up with a way forward that they all can agree on this coming Friday. Maybe they should simply agree that whichever country wins the current European Soccer Cup playoff gets a bailout.

Meanwhile, the U.S. Federal Reserve will survey the mess in Europe and the recent softening of almost all data points in the American economy (in part as a result of uncertainties about Europe) and decide whether to do anything this week in the way of more "quantitative easing" -- i.e., buying U.S. debt obligations to keep rates down and thus encourage risk taking in the economy. They will conclude their meeting on Wednesday with a statement and the quarterly press conference of Chairman Bernanke.

Hopefully, they will at least let us know whether they will take some easing action -- probably in the form of extending their current "QEII" practice of converting their short-term Treasury holdings to longer term debt, maybe even mortgage bonds -- to push longer term interest rates down to even lower levels than the markets are now providing as a kind of "insurance" against further deterioration in the economy, or opt instead to (very ostentatiously) signal that they are "keeping their powder dry" in case of a real calamity hitting the markets suddenly, like a Spanish default as a result of being unable to roll over its debt (Spain being generally regarded as both "too big to fail" and "too big to bail").

The Fed will be keeping one eye on the U.S. electoral calendar as well: Fed decisions on interest rates were generally thought to have cost George H. W. Bush re-election, and Republicans have made it quite clear they favor no more easing action by the Fed to help the economy and this helps Obama get re-elected (although of course this view is purportedly based on their long-standing principled opposition to low interest rates and Fed bond-buying as harbingers of inflation). The notion that we should wait to help fix the U.S. economy until after the first Tuesday in November every four years may be the working assumption in Congress, but it is not how the Federal Reserve Chairman understands his legal mandate.

Expect something tangible from the Fed on Wednesday, but if they persist in their current fantasy line that the economy looks to be achieving "moderate growth," the markets will treat that just like the media treated Obama's recent miss-statement that the "private sector is doing fine."

Speaking of politics, a quick thought or two about the Supreme Court decision on the famous "mandate" coming by the end of next week. Consider what happens if five justices agree to invalidate the mandate -- what then happens to the rest of the statutes? Justices on both sides of the "mandate divide" expressed views that could be taken to mean they would favor striking down the whole statute because the mandate is so central to its purposes; but others, again from both sides, seemed to favor a very limited ruling and left the resulting situation to Congress to address. (There are some interesting ideological complications at work on this issue.)

As a result, we could see a 5:4 decision striking down the mandate, and a different 5:4 or even 6:3 or 7:2 combination of justices ruling as to whether the entirety of the statute has to go as a result. That would be a lot of fun for the law review crowd, but quite complicated in terms of understanding just what parts of the Affordable Care act remain in effect.

Here is one scenario that could well emerge if the Court does strike the mandate on all Americans to buy some kind of health insurance. In this scenario, three Justices opine that the entirety of the Act must fall with that mandate; but three rule just the opposite -- that the rest of the Act remains in effect; and three conclude that only certain other parts of the Act -- i.e., the mandate on insurance companies to cover pre-existing conditions or children up to 26 -- are also null and void. What then is left of the law?

In this situation, the determination of the three Justices "in the middle" would seem to prevail: only the provisions they ruled have to fall with the mandate would be invalidated, because three other justices had separately agreed that the whole stature should fall -- of course, including those specific provisions dinged by the 'middle three' -- so you would have technically a "majority" against those specific provisions. Pretty convoluted territory for the Justices to have left us in -- but why should the Supreme Court be any less convoluted on health care policy than the rest of us?

Of course, if the Court rules by any majority that the mandate meets the Constitutional treat, we never get to the second question of what's left of the Affordable Care Act at all. Indeed, could the decision on the mandate itself turn on whether any majority of the Court can agree on what to do with the rest of the law?

As noted, this is going to be a very consequential two weeks.