Archive for category Debt ceiling

Mood Shift?

President Obama’s handling of the debt ceiling crisis may ultimately turn out to be seen as political mastery, a symbolic point where the country shifted from a dissatisfaction with the Democrats to frustration with the way the tea party prevents the Republicans from pursuing the rational policies voters thought they’d get.

Right now Obama isn’t getting a lot of credit for how he handled this.  Many Democrats compare Obama to past leaders and say he could have pushed the GOP harder.   I do not share that assessment.  Too much was on line, especially the nascent recovery that Obama will rely on to bolster his chances at re-election.   A default, a shut down of much of the government to avoid default would do tremendous damage to the economy.   Misuse of the 14th amendment would have started a constitutional crisis, severely damaging the economy and leading many to believe Obama was abusing power.  Any of those scenarios would have destroyed the Obama Presidency.

If Obama were to have played this differently, he would have had to have done it starting last year.   Perhaps even as late as May he could have framed the issue differently and forced an earlier decision.  Even that might not have worked.      Still, criticism of Obama has been rather muted compared to the anger at the tea party.   That is the narrative coming out of this drama, not one of a weak Obama.

When the public and especially independents shifted to the right to vote in a Republican House, they did it for one reason: to force the two sides to compromise and work out solutions together.   The country is moderate and pragmatic, even if the political activists are ideological and partisan.   They thought the 111th Congress pushed too hard to secure the Democratic agenda, over reaching their mandate.    But as the President said, people wanted divided government, not dysfunctional government.

President Obama comes out of this looking Presidential.   He called for a balanced compromise on national TV.  He then stayed aloof from the final negotiations once it was clear the “grand deal” of a $4 trillion mix of cuts and new revenues — a deal that would have been good for the economy — was rejected because the tea party cannot abide ANY tax increase.

He let Reid, Pelosi, McConnell and Boehner do most of the dirty work.   He was criticized for not leading when he spent four days outside the public view making phone calls and having private meetings.    Those saying he wasn’t leading have fallen victim to the idea that media presence = leadership.     It appeared at one point Reid and Boehner were close to a deal that would have been worse for the Democrats, and a private meeting with Obama stiffened Reid’s spine.   Boehner complained, but it was clear that Obama had set down markers that the Republicans could not pass.    As blame grew on the GOP for turning down an historic compromise, Boehner realized he’d gotten all he could get.

The result — a compromise that does nothing, and doesn’t even start making cuts until 2013 — simply pushes the debate down the road.   That is a victory for Obama.   Moreover, it does not harm the economy going into 2012.   The year the cuts could damage the recovery is 2013 — setting up a huge debate for the election.   Not agreeing to any cuts would have assured bond downgrades and loss of investor confidence in the dollar, doing considerably more harm to the economy than spending cuts or tax increases would.

Congress is getting approval ratings lower than any time in history.   Those on the right who were pointing to low approvals of the Pelosi House have gone silent; the GOP is no more popular.   GOP candidates walk gingerly among the tea party brigades.   Some like Mitt Romney and Jon Huntsman realize they’ll never win over the far right, they have to neutralize their strength.  I suspect this fight has improved their chances.   Moderate Republicans don’t oppose tax increases as part of the mix for debt reduction, and they certainly don’t approve of risking default over a principle.   Many have been horrified by this spectacle and worry about the direction their party has taken.

I’m not predicting certain re-election for Obama, but the chance that it will be either Obama or a moderate Republican like Romney or Huntsman is greater than before.    People like Bachmann will still rile up the party faithful.   The Democrats may not take back the House, but strident tea partiers in unsafe districts face a good chance of losing — even Michelle Bachmann could lose.

In short, public disgust at this whole spectacle — not so much the result but the way in which it played itself out — is going to have political ramifications.   The tea party has, as the saying goes, “jumped the shark.”   They’ve peaked and over reached.    In essence, Americans are becoming sick of the ‘politics of emotion.’    People are tired of angry rants, demonization, refusal to compromise, and mistaking rigidity for principle.    We’ve got real problems, they want people to solve them.   We’ve got real disagreements, they want people to compromise.

Whichever party can appear more adult, level with the American people, and show a capacity to compromise and reach out to the middle, will have the upper hand in 2012.   President Obama played that role in this last crisis, making him the only one of the principles who could truly condemn the ‘manufactured crisis’ with credibility.   John Boehner’s image was tarnished by both outbursts and bravado — bragging the Senate will “fold like cheap suit” while the country is heading to catastrophe doesn’t make him look very dignified.

Democrats may hope that this continues, and that the tea party divides and exerts undue control over the GOP.   That would help the Democrats in 2012.   But that would not be good for the country.   Best for the country would be if the majority of Republicans who do not agree with the tea party stand up and reassert their power.    I’d much rather the face of the GOP be Senator Olympia Snowe than Representative Michelle Bachmann!   This country needs real debate and engagement of diverse ideas, not partisan war.  With the public no longer as entertained by or fooled by the emotion-laden spectacle of Glenn Beck’s rants and tea party calls for revolution, it’s time to settle down and take a pragmatic approach to the problems facing the country.

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The Age of Austerity

It wouldn’t make for a good song by the 5th Dimension, but the “Age of Aquarius” is giving way to the “Age of austerity.”  This is a dramatic shift.   The last time we faced such a dilemma was when the great recession of 1980 hit, and President Carter gave a much maligned, but now prophetic speech on the dangers facing the US at that time due to consumerism, oil dependence and an emphasis on material self interest rather than community values.   Carter was ignored.   The solar panels he installed on the White House were taken down.   Ronald Reagan defeated President Carter in the 1980 election with the promise that we can ‘have it all.’   There is no need to cut back, we only need to cut taxes!

Reagan succeeded, thanks to declining oil prices and a massive increase in debt.   Private debt, credit card debt and government debt all took off in the 80s, while the current account went into deficit.   Reagan’s “morning in America” was the start of a country  living beyond its means.

Private and public debt increase dramatically after 1980 - it is now about 400% of GDP

The first question, and one many liberals are asking, is why can’t we do what Reagan did?   Why can’t we just stimulate the economy with more debt until it starts producing jobs and economic growth.? (Conservatives refuse to acknowledge that this is what Reagan did — they want to hold on to the myth that he was fiscally conservative, not the reality.)

There are economists who think that a new stimulus could work.   They recognize we can’t use the kind of hyper-stimulus Reagan employed, but believe that another jolt of spending could get the economy moving, with the debt to GDP declining due to a higher GDP.    This argument relies on speculative and technical economic models which ignore political reality.   Due to almost certain credit downgrades and a devaluation of the dollar should such a route be taken, the risks to the economy are enormous — and could create long term stagnation.   Russian President Putin called the US a “parasite,” noting that we get away with high debt while pushing costs on to other states due to the reserve currency status of the dollar.   Countries aren’t going to let us get away with that; if we add yet more debt we’ll see countries dump dollars and treasury notes.  Again, this would damage the economy severely — and aren’t considered as variables when economists try to make the “more stimulus” argument.

Thats why most analysts who take into account both politics and economics say a decline in growth due to less government spending and higher taxes is preferable to running up a higher debt.   And if we do it right, it doesn’t mean that a recovery will be stymied.

First, though, a bit of cold water.   Remember the heady consumer utopia of the mid-00’s?  You know, low interest rates, home values rising (cheap home equity loans!), easy credit, buy buy buy!?   Those days are gone.   If by recovery you want to go back to the world of 2006, it’s not going to happen.   Recovery now simply means more people getting back to work producing goods and services people value.   The current account has to go into balance, and personal as well as public debt needs to decline.  We also have to come to grips with the fact that the number of people retiring will go up dramatically in coming years — needing social security and medicare, and the sad fact is over half of the people retiring have debt.

That’s why this will feel like the “age of austerity.”   The military will be forced to cut back its global role as the US will realize we cannot afford to try to dominate world affairs.    The dollar’s value will decline, and as foreign goods ultimately get more expensive, American products will rebound.   If government programs can effectively target spending into areas that create production and jobs, recovery can build even without increased government spending.  It will take time, and instead of flipping houses even well to do households will start to pay down debt and build savings.   The uncertainty factor is high, no one wants to be caught out of work and out of money.

As long as the re-balancing takes place with safety nets in place and government action to help facilitate growth (what Obama calls ‘investments in America,’) it won’t feel like the Great Depression.   The government and the federal reserve board have enough policy options to prevent massive unemployment and reliance on soup kitchens.    The tax rates on the wealthy are so low that raising them will not harm investment or stifle growth.  Yet it won’t be the booming bustling economy we’ve been used to.   Prices will likely go up faster than wages.  People will stay in their homes longer, keep cars until they start to wear out (and buy used ones rather than new ones), and live a bit more like we used to before the consumerist binge took off with the ‘something for nothing – borrow and spend’ mentality.

Ultimately, we will not be in good shape until the debt to GDP ratio is back under 60%, and even at that point we’ll still need to continue reducing debt.  I’ll be comfortable only when we hit about 30%.  To reach just 60% will require growth, cuts and tax hikes.  There is no other way.   And if wild cards like global warming or peak oil enter the fray, they’ll create more risk, but also provide opportunities.

The bubble growth that defined so much of the last 30 years was unsustainable.   The wealthiest benefited most, people were deluded into thinking they had more wealth than they did through bubble investments, and the apparent “growth” was built on the finance industry and services that offered little in real value.   It was a kind of “fake economy” which addicted us to the illusion that we could have something for nothing.

Although Americans think we’re immune to the kind of collapse states of Europe experienced in the early 20th Century, the massive gap between rich and poor plus the growing partisan divide and hyperbolic rhetoric, do show risk.  If the wealthy try to pay as little as possible and ignore social responsibility, the poor and middle class may turn on them in class warfare.  The right will then demonize minorities and foreigners, creating a  kind of neo-fascist rhetoric to keep the support of the working poor against intellectuals and “liberal elites.”  (One sees signs of this already in some of the more extreme tea party rhetoric).     If both left and right think that the need for austerity is false, foisted upon them by the ill will and misdeeds of the other side, the country’s bickering will prevent real solutions to fix our broken economic and political systems.

I hope it doesn’t come to that.   Re-balancing our economy will take years, but not decades.   We may not have the hyper consumerism of the 00’s, but we can have the comfortable middle class life styles that had been eroding even as the bubble economy grew.   Things seemed grand, but the reality was life was getting more difficult for the middle class and poor.    We can do it.   But the first step is to recognize the crisis is real, we’re entering a new era whether we like it or not, and we can’t just blame the other side for the problems.     There is no quick fix.

But given the consequences of hyper-consumerism on the environment, community, peoples’ psychological states and the political system, these changes could turn out to ultimately lead to a better place than where we’ve been.

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Political Pragmatism

You want to make me dictator?  OK, here’s what I’ll do:

1) Slash US military spending, start an orderly but fast withdrawal from Iraq and Afghanistan, leave the NATO alliance, and instead focus on enough military to defend the homeland, and a long range plan of intelligence sharing and operations to counter terrorism and other threats;

2) Abolish the current tax code and create a progressive fair tax that had marginal rates lower than the current ones, but wipes out almost all tax breaks and loopholes.   The new system would be a revenue generator, but would not place a greater burden on families earning less than $125,000 a year;

3) Restructure the health care system to guarantee care to every citizen through state run programs with federal benchmarks and requirements.   States will have considerable leeway how they do this, and we can learn from their different experiences.   Medicare as we know it will be subsumed in this new system.   Costly duplications and pharmaceuticals will not be covered unless absolutely necessary (and generics will be the only drugs covered where they’re available);

4) Social welfare programs would be restructured to be results-driven — not simply transfers of income but actual opportunity creators focused on jobs, education/apprenticeship, and community action.  This would be done with a focus of community organization rather than federal bureaucracy with the idea of building community solidarity;

5) A blue ribbon panel of economists will focus on economic investments that are designed to return the country to sustainable economic production to replace the hyper consumerism of the past thirty years (especially the 00’s).

Of course, I’m not about to be made dictator, and even if President Obama privately agreed with all that, he couldn’t do much to turn it into reality.

The US was founded on the core governing value of political pragmatism.   The founders knew that competing interests and ideals meant that conflict and disagreement would be at the core of the American political soul.   Moreover, they felt that such conflict and disagreement could be good — it could force people to have their beliefs critically challenged, and have to find common ground with people of different interests.   The only way the US can undertake major political initiatives is through compromise.

The right wing of the Republican party and the so called “tea partiers” (at least the radical ones) are the most virulent and dangerous wing of the current anti-pragmatists.  Using that old canard of “standing on principle” (which all too often means ‘calling my subjective beliefs principle and refusing to look at any evidence that might call them into question’) they enthusiastically and with the demeanor of a self-righteous crusader out to slay Satan’s hordes hoped to force the country into a crisis.   They lied to themselves that the US “wouldn’t really default” and that they could somehow bring back fiscal sanity.   They wanted to get their way completely.   If they couldn’t then they’d cause so much damage that the whole system would collapse.   One person equated it to an alcoholic whose life has to hit rock bottom before he changes.   The country needs default and a currency collapse before it will change its habits.

President Obama and House Speaker John Boehner learned that if a large enough contingent of such radicals make it into Congress and refuse to play by the tradition of American pragmatism, they can make the entire government dysfunctional.   On the left, a lot of liberals want to reject the agreement for only slightly less insane reasons.   They’re mad that a radical cadre of Republicans could force this down their throat, and believe that they only way to respond is in kind.    The President should do what’s necessary to fight them — risk default, risk a constitutional crisis by invoking a 14th amendment not meant for this kind of case, and go the mattresses in partisan war!

In some ways this is typical for the House.  It’s always more partisan and rowdy than the stoic Senate.   The President, by comparison, is meant to be a unifying symbol and has to look out for the long term good of the country.   If the US didn’t raise the debt ceiling, and more importantly if the US didn’t show signs of making progress cutting the debt, our credit rating would have sunk.   That sounds bland, but the consequences would have been severe, perhaps catastrophic.   Pushed by their own core constituencies into a difficult situation, they realized they had to compromise.

The compromise is the essence of pragmatism.   No major decisions were set in stone — the cuts they agreed to were agreed upon early on in the process and were probably a minimum to avoid a downgrade.   A no-cut scenario was out of question, without progress on the debt a downgrade was virtually certain.  The bi-partisan commission who will report recommendations includes all the top players, assuring no one can get steamrolled by something like the “Gang of Six” Senate moderates who had true independence.   They rigged the deck further by making consequences for not acting on that bi-partisan committee report painful to both parties.     They had enough votes to allow the more partisan in both parties to complain loudly.  But they did what they had to do.

The left simply cannot get its way in this political environment.   Not only is there no chance for tax increases or a new stimulus, but not cutting deficits will lead to a downgrade with a further drag on the economy.   The right is simply out of touch with reality — they’ll never get entitlement reform and deeper cuts without tax increases and the closing of loopholes.  It cannot happen.

Little was decided with the debt ceiling compromise.  This was an opening skirmish in a political battle that will continue.   The 2012 election will be a war, followed by diplomacy to determine how the relative balance of power decides what kind of policy will prevail.  It’ll be slow, agonizing, and the advantage will shift from left to right quite often over coming years.  There will be emotion, anger, and new compromises and deals that will satisfy no one.

Leaders will be blamed for the political reality they inherit.   Populists will make it sound like an easy solution exists if only the politicians would grasp it.   I don’t know how the future will turn out, who will win in 2012, or where the economy is going.  I do know that if political pragmatism ever loses out partisan warfare of the kind we saw flashes of here, we may shift to a very destructive phase of America’s democratic experience.

The tradition of pragmatism is strong; it is the American way and has been for generations.   Tradition and political culture are resilient, especially in a country this stable and old (yes, in terms of functioning democracies we’re older than European states).   The spectacle was exciting, the anger on the left and right over a compromise neither like is palpable.   But pragmatism won the day, and assures that the battle over the future simply moves to another venue down the line.   That’s what the founders intended.

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Did the Democrats Cave?

If look at the left side of the blogosphere, word of an agreement between the White House and Republican leaders was met with despair and anger.   Rather than stand up to the Republicans the President gave in again, sacrificing Democratic principles of protecting the elderly and poor, while getting no tax increase at all.   It was a ‘cuts only’ approach, the same thing that he spoke out against just last week.    If this were a game of chicken, they say, the President swerved first — and before he had to.

However, a few things stand out in listening to the President announce the deal.  First, he said leaders of both parties in both chambers of Congress have approved the deal.  I assume this means that Nancy Pelosi, who has been the most adamant in not wanting the President to give in too much, must have signed on.   Moreover, the $1 trillion of cuts agreed upon over the next 10 years is something both parties agreed to early on in the process.    Everything else is uncertain.

Apparently a bipartisan commission will meet to recommend how to cut the deficit further, and report to Congress in November.   Congress will vote up or down on their proposals or have to face automatic cuts that would be very painful for both liberals and conservatives.   Speaker Boehner can’t demand revenue increases be removed, Senator McConnell can’t threaten a filibuster, and the only person who could stymie this would be President Obama, should he choose to veto the legislation.

I certainly can understand objections to this.  From the right, of course, this makes the possibility of tax increases extremely likely, something they’ve vowed to oppose.  It also suggests that spending cuts will not simply be on programs they hate, but might include favorites of the right, particularly the Pentagon.

The left has more serious objections.   First, many believe this will stifle the already limp recovery, not only dooming President Obama’s re-election, but harming the economy.   Some evn want a “stimulus II,” believing budget cuts are the wrong thing at this time.  Others point out (as I have) that the wealthiest Americans have been virtually the only ones who have benefited from the boom times of the last 30 years.   Cutting domestic spending to the “lowest level since Eisenhower was President” while taxes rates tax the rich at much lower levels than during Eisenhower’s tenure could be termed the worst of both worlds.   More money should be spent to help the poor and middle class, provide college education to students, help out states in trouble, and assure our elderly have quality lives, paid for by relatively large increases in marginal tax rates.   Finally, others note that due to the loss of productive capacity over the last thirty years of economic mismanagement, real investments in infrastructure and productivity need to be made.   You have to spend money to make money, and the only real cure to our debt is a growing economy, not just cuts.

I am sympathetic to all these arguments.  However, reality bites.   Our government debt to GDP ratio is nearing 100%.   Our total debt as a country (public and private) is about $60 trillion (about 400% of GDP), with almost $15 trillion foreign held.    Because of the hyper-consumerism of the last thirty years, particularly the last decade, we’ve created an unsustainable economy that ultimately went from bubble to bubble deluded by the ‘wealth illusion’ before things collapsed in 2008.  These are real problems requiring rapid and even radical solutions.

If President Obama had refused to make a deal, maybe the GOP would have surrendered.   Given the radicalism of especially many in the House, that’s unlikely.   More likely is that either the US would have defaulted, catapulting us to a global depression, or the President would have invoked the 14th amendment, leading to political turmoil.   That would have included impeachment, mutual anger, and no common ground at a time of immense danger to our prosperity and way of life.   Perhaps the President could have come out on top; but mutual fighting would have insured a long term partisan divide.   Either way, it was a gamble.

With this deal, the President has claimed the middle ground.   It’s clear that he gave a lot to get a deal.  The left may hate it, but I suspect independents, scared by recent tea party hyperbole, may respect it.   The US has proven that its political system is not collapsing and it’s likely we’ll keep our AAA rating.   Moreover, a big debate is set up to begin the next election campaign.   When the recommendations come out in November, members of both parties will have to take a stand, choosing between two options which neither will like.  Demagoguery will be difficult to maintain.

Here is where I simply differ with many of my friends on the left.  I do not think our debt to GDP ratio can be raised, and in fact am convinced that for the long term health of the country we need to work to start lowering it immediately.   Given the partisanship and sometimes radicalism in our political discourse, a bipartisan body of respected experts seems to me the best path towards making tough choices.    The sooner we can make those choices, the sooner we’ll re-create economic stability and shift towards a sustainable path forward.

I also think that the experience of getting here has lessons for us.   The right was wrong to embrace deregulation and radical tax cuts (let alone the Iraq war!).   Without the Bush tax cuts we’d be in much better shape.   However, government programs embraced by the left have often been dysfunctional.  Class mobility remains low in the US.   We haven’t spent wisely to create real opportunity.  Finally, with the information revolution, there are ways to envision cheaper ways of making money go farther by allowing localities more power in determining what is needed and how to implement it, rather than centralized bureaucracies in Washington creating standard operating procedures which can add red tape and cost.

This might also spur the left to engage in grass roots campaigns to reinvigorate the labor movement; relying on the government isn’t enough.   Both parties betrayed workers over the last 30 years, labor unions have to become grass roots movements again.

In short, this forces the country to start a path of renewal and revitalization.   It makes clear that while neither party has truly won, the future needs to be shaped with a different vision than the past.   Tax cuts and de-regulation were a too good to be true solution.   But government programs and regulation also didn’t solve our problems.

I do not think the Democrats caved.  I believe President Obama has put the Democrats in a fine position for the 2012 national debate on these issues.   The wildly fluctuating results of the last two elections have created a break from business as usual.   We’re starting to address the severe problems facing this country created by 30 years of bi-partisan economic mismanagement and a culture driven by consumerism and superficiality.  Transitions are never easy and usually require a break in old ways of thinking.   The optimist in me believes that’s starting to happen.

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Understanding the Economic Crisis

I posted much of this back in 2009, but given the circumstances I’d like to again note what the nature of this economic crisis is — and thus how the circus in Washington totally misses the boat and in fact is risks real economic collapse.

In 1980 the US economy entered its worst post-war recession, one that would last until 1983.  The pain was real — high unemployment, high interest rates to fight inflation, and major manufacturing sectors going out of business, most notably the steel industry.   Nonetheless, the economic fundamentals were not all that bad.  The US government had gone from total debt of 120% of GDP at the end of World War II to only 30% of GDP, budget deficits were small, and the US ran a current accounts surplus, meaning that we were a net investor in the world.   The US could have responded to that recession by saving the manufacturing sector and investing in national infrastructure.   Instead, the Reagan Administration made a series of bad decisions, starting a process that would yield increasingly unsustainable economic imbalances for the next thirty years.

First, the recession was ending in 1983 due to a dramatic drop in oil prices, which stimulated the economy.  The oil price drop also eased inflationary pressures, allowing interest rates to go back down.   All other things being equal, we were going into a clear recovery.  Yet the Reagan administration increased budget deficits radically.   Total debt went from 30% of GDP in 1980 to 60% of GDP by 1990.   This hyper-stimulated the economy, creating an illusion of economic prosperity — you can think of the country as the equivalent of a family whose costs are declining but yet spending beyond their income through increased credit card debt.

Starting in 1981 US debt climbed rapidly as the Reagan Administration decided deficits and debt were OK; the trend has continued except for the mid/late 90s

Second, believing in the free market, the Reagan Administration allowed industries like the steel industry and manufacturing jobs to die out, to be replaced by jobs supposedly fitting our comparative advantage.   It was thought these would be high tech jobs that would benefit our advanced economy, but it turned out to be mostly service sector jobs, often in the financial industry, which did not produce any goods.   We started consuming more than we produced, as our current account went into deficit.

A current account deficit (not to be confused with a budget deficit or debt) means that we take in more from the rest of the world than we put back.  For us, this was mostly a trade deficit.  You can’t do that unless this is financed by foreigners buying US assets — property, bonds, stocks, currency, etc.    In this case China, Japan, and the Arab world were willing to buy US bonds and currency.  They trusted the dollar and thought these were good investments.   More importantly we were purchasing goods from them, and they knew the money would cycle right back to their economy, bolstering their industrial sector.  For China especially this was a win-win situation — they get a stake in the US economy, and we use that money to buy their goods, further stimulating their economy.   At this point China has about $2 trillion of US assets, and the US relies on China to help finance the deficit.  If China wanted to, it could launch a crippling blow to the US economy.   That would hurt China too, but if you ever wonder why the US doesn’t ever really pressure China, this is the reason.

 

The current account deficit becomes a problem at 3% of GDP.  The US hit that by 1990 and it kept growing.   We kept consuming more than we produced.   Moreover, the country as a whole went into debtor mode.   Saving rates dropped, personal debt (credit card and otherwise) increased, to the point that now the country is about $60 trillion in debt if you take all sectors into account (with nearly $15 trillion of that held by foreigners).  Credit card debt alone is $1 trillion.  Savings rates hit zero in 2006.   Some economists sounded alarms over this, but the wealth illusion made it seem like savings were unnecessary.  Instead of having money in savings, we had it in stock portfolios (in the 90s) and real estate (in the 00′s).   That theoretically meant that we could dip into our wealth if we needed funds, and thus low interest savings accounts were irrational.

Yet the wealth illusion was built on bubbles.   First was the stock bubble, where people literally believed all they had to do to get rich was buy some stock and watch it grow.   We got addicted to the notion of something for nothing.   People were borrowing to buy stocks, knowing they’d earn enough to pay back the loan and make money.  It was quite literally too easy.   And in 2000 (over a year before 9-11-01) the inevitable occurred:  it crashed.   The tech-heavy Nasdaq collapsed, and stocks started reeling.   The current account deficit was up to 5% of GDP, and the only good news is that we briefly had small budget surpluses rather than deficits.

At this point in time a painful recession like that of 1980-83 might have been enough to correct the imbalances and force us to increase production to bring it in line with consumption (and balance our current account).   Yet after 9-11, the US decided that we could not let terrorism bring down the economy.  President Bush said the patriotic thing to do was to go shopping, interest rates were kept very low, and thus a new bubble formed, the housing bubble.

Again, a something for nothing mentality took over.   Making money on real estate became easy, people could borrow from the equity on their home to buy more property, knowing it would go up in value.   Or at times people would borrow against their home just to have a better lifestyle, invest in a company, or pay for college.   Again, a wealth illusion spurred greater consumption, and by 2006 the current account deficit reached a whooping 7% of GDP.   Budget deficits started to rise again as well, as a mix of tax cuts and war (I still cannot comprehend cutting taxes in a time of war) led to rising debt and deficits.

With the financial markets deregulated, bizarre financial products were put on the market.   Mortgages were bundled and sold, and then those bundles were rebundled and resold.   These ‘derivatives’ were wholly unregulated, and produced huge gains as people saw them as both safe (rated triple AAA), and rising in value by 10% or more a year.  The perfect investment!   To keep creating these derivatives for which there was so much demand, mortgage brokers stopped caring if their clients could pay, leading to fraud and a massive decline in lending standards.  This wasn’t because of the government, this was deregulated capitalism!

The housing bubble was so dramatically out of line with historical housing prices people should have expected a collapse!

When the housing bubble burst, this started a chain reaction.   Note: the bad mortgages or subprime sector could not alone bring down the economy.   If it wasn’t for how these got bundled up and turned into complex financial products, the housing bubble could have burst with containable damage; easy mortgages alone were not the problem.   Rather, these complex and little understood financial products came crashing down, bringing the entire financial industry with them.  Bear Stearns felt it first in March 2008, then the biggie came when Lehman brothers had to declare bankruptcy in September 2008.

By September 18, 2008 credit markets had seized completely, the financial system stood at an abyss.   That’s why free marketeers like Treasury Secretary Hank Paulson were forced to go for a massive government bailout, and why Alan Greenspan admitted he was wrong in trusting the market to “get it right.”

However, that is only the tip of the iceberg.   The imbalances in the US economy not only are unsustainable, but it’s clear that China and the rest of the world are no longer willing to continue to finance a completely out of balance US economy.   We need to start producing more, or we will be forced to consume much less.    Even as we try to stimulate the economy, we do so by increasing debt, now at about 90% of GDP, and likely to rise to over 120% of GDP by 2015.

This is why the US cannot afford this fiasco about the debt ceiling.  The imbalances are real, and with the US no longer seen as a safe investment, interest rates could skyrocket causing a downturn that makes the last few years look minor.   This could be as bad or worse than the Great Depression.     The cause has been debt (especially in the 80s and 00s) and de-regulation.   I won’t go into taxes here (click here for more on that), but tax cuts to the wealthy have led to a dramatic increase in the gap between rich and poor, while adding to the debt.   That needs to be fixed.

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Obama’s Big Mistake

In May President Obama should have made a forceful, definitive statement:

“There is some talk about making an increase in the debt ceiling a partisan fight.    That is unacceptable.   The debt ceiling is not about authorizing new spending, but about paying for what Congress already authorized.   If Congress doesn’t want the money spent, they should not put it in their budget — they cannot have their cake and eat it too.     The debt ceiling has been routinely raised whenever we need to borrow more to pay the bills run up by Congress.   President George W. Bush raised it seven times; President Reagan raised it 17 times.

So let me be clear.   I will only accept a clean increase in the debt ceiling.  I will not negotiate on this point, and I will veto any bill that attempts to connect the debt ceiling to other issues.   That would be playing Russian roulette with the American economy, allowing partisan bickering to put at risk our low interest rates, good credit rating and economic recovery.   However, this summer I call on Republicans to join me for a serious discussion on the future of the budget, with the goal of serious deficit reduction as soon as possible.   However, I will not tie that to the debt ceiling, or accept any legislation which does.”

Such a statement, clear and forthright early on in the process could have altered the way in which this discussion has played itself out.   First, real talk on budget cuts could be proceeding without an arbitrary deadline that does not leave time to really think about the implications of perhaps trillions of dollars of cuts in coming years.  Second, America’s economy would be safe from the severe consequences of default.   Finally, the US would not be in a position where the party in the majority in one of the chambers of Congress could use the potential for economic crisis as a way to ram its narrow agenda through.    The Republicans in the House are literally holding the US economy hostage.  It should never have come to this.

President Obama, by deciding he could negotiate and perhaps use this issue to pressure Democrats into accepting cuts, walked into a trap.   It is a trap that goes beyond him personally.   This sets the precedent for a party that does not have the votes to get something done through the usual process to find a way to use threat of real disaster to dictate their agenda to the rest of government.   Rather than trying to win in 2012 (both the Presidency and the Senate will be in play), they want to put a gun to the nation’s head and dare the Senate and President not to give in to their demands.

I’d expect that in a third world state or an emerging democracy in the former Soviet Union, but not in the US.  If politics sinks to this level, then the US is truly in severe decline.    Former Presidential standard barrier for the GOP John McCain lashed out at the House “tea party” Republicans, claiming they were irresponsible and in his words “bizarro.”  Other Republicans have also expressed horror at the events unfolding.   As Senate Majority Leader Harry Reid said, the GOP needs to go back to being the party of Ronald Reagan.   Reagan was an optimist who worked with people to convince them to go along with him.   The current gang in the House are bitter and angry, and want to use threats to get their way.

Speaker Boehner is an enigma.    The most friendly read on his tactics is he simply wants to strengthen his hand and show the tea party brigade that he’s fighting to get the most he can get.   Then when a compromise comes, enough Republicans will join with Democrats to pass it, even if the tea party folk demur.    But to do so in this manner and with this level of incompetence (you don’t announce a plan on national TV when you aren’t sure you have the votes) not only damages the country but hurts his own party — and his chance at keeping his majority.    He may really think he can ram this through, in which case he’s putting the dreams of the American people on the line.

It would be irresponsible for President Obama to give in on this, even if it means default.   The President simply cannot allow the House to dictate policy under threat of disaster.   If he gives in, then the political game sinks to a new low and could get much uglier down the line.   He should have never let it get to this point.

It’s probably too late to demand a “clean” debt ceiling vote.   He’s publicly urged compromise and it would seem erratic to shift now.   But it’s not too late to draw a new line in the sand and mean it.   Compromise that is bi-partisan means something that gets significant support from both parties.   That can happen, and I suspect will — though one gets the sense that process is getting a bit out of control and the principles aren’t really sure where its going.

When a compromise is finally reached, on signing President Obama must harshly condemn the whole spectacle as being an embarrassment to the American people.    He must take his share of the blame, and state that never again will he be party to some negotiation tied to an issue like the debt ceiling.   He must say in late July or early August what he should have said in May.    The US economy cannot be held hostage so that one group can get its way.    That is a threat to the very foundation of our democracy.   They should go through the normal legislative process, including making it an issue in the next election.

President Obama made a mistake opening the door to allow the issue to be used this way.  He must slam it shut, and refuse to open it again, not even a crack.

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14th Amendment a Serious Option?

President Barack Obama claims to have ruled out using the 14th amendment, and if you read the statements of his Press Secretary and the President’s own words, you’d be forgiven for believing that it’s not an option.

However, in politics you never look at just what the principles are saying, you look at what they are doing, and the potential impact of what they say.   For instance, President Obama clearly doesn’t want to invoke the 14th amendment.   But if he threatened to do so, the left wing of the Democratic party would mount a concerted effort to stop any negotiated settlement that includes significant debt reduction in the Senate.  Obama had to convince his own party that they did not have the 14th amendment as a fall back should negotiations fail.  That would be necessary to get them to vote for a last minute compromise.

This also suggests that Obama wanted to reach a “grand compromise” with significant budget cuts, and may still through back channels and secret talks be headed in that direction.   His public schedule has been empty, but full of private and unpublicized meetings.    Things are brewing, but we don’t know what.

The 14th amendment reads in part:  The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.   The President could say that the constitution by stating that the validity of the public debt should not questioned, requires that it be paid.   The only way to do that, and continue spending money the Congress voted to spend, is to raise the debt ceiling.   The interpretation is plausible enough to not be “over the top,” even if weak.

I do not think it is a winning argument.  Article 1, Section 8 gives Congress the power to pay debts and borrow money.  One could argue that Amendment 14 altered this by adding to the President’s power by saying the validity of the debt should not be questioned.  An historical read of this amendment, however, clearly weakens that claim — it is focused on the Civil period and its aftermath.   Nonetheless a literal interpretation (e.g., just the text, not historical context) at least creates an opening for that argument.

Some people claim that President Truman invoked the 14th amendment to raise the debt ceiling.  That isn’t true.  He used the amendment to integrate the military, but during his Presidency there was no increase in the debt ceiling.   In fact, since the debt ceiling was created in 1939 Truman is the only President not to have raised it.    Most have raised it five to seven times, though Ronald Reagan’s years brought 17 debt ceiling increases – not surprising since the Reagan years saw the biggest relative growth in debt in US history.

But for politics the issue becomes murky.    First, President Obama knows the constitution well, having taught it.  He may believe that it is his duty not to violate the interpretation he believes correct, and thus he may have already completely ruled out using the 14th amendment.   That would make him a politician of rare integrity, since for most the question of legality gets replaced by one of political realism — will it work, and can I get away with it.

To the latter, despite Republican calls for impeachment should he go that route (something that might actually help Obama in 2012), he can get away with it legally.   The Senate will never convict him if impeached, and at least until the Supreme Court rules, he could do it.    Could it hurt him in 2012?   That’s harder to say, and separate from the legal issue.   The President would frame it as a matter of leadership and doing what is necessary to protect America from Republicans who would be accused of threatening to do more harm to the US than Osama Bin Laden did on 9-11.   The Republicans would frame as a power grab by a leader who wanted to do things his way, regardless of the rules.   If the country believes the President, he’d win in 2012.   If the GOP convince the public he was out of line, he loses.

The GOP position now is weak due to the reputation the House has of extremism and refusing to compromise.   The GOP is in danger of looking as they did back in 1999 against Clinton when their over the top attacks backfired and helped the President increase popularity.   Of course, Clinton had a booming economy going for him, something Obama lacks.   If the Court ruled against him (something I would consider likely) that would aid the GOP argument and send a weakened Obama into the election.   In fact, if things got that bad Obama might give an LBJ like shock speech, announcing he would not seek the nomination due to the divisiveness of economic battles, perhaps opening the door for Hillary.   (That is not a scenario likely at this point!)

However, looking at the possibilities, it comes down to this: how serious is the threat to the economy, and how well can the US handle either a default, government shut down (which would come from using the available money to avoid default — a huge chunk of the government could not be paid for), or downgrade in the bond rating.   If the threat is serious, the President might decide that it’s worth risking his re-election on doing whatever possible to avoid that outcome.    He could try to couple that with a renewed effort to get significant spending cuts passed to get a debt limit ceiling raised (for longer than six months — which would do no good, really).   If that got passed before the court ruled, it would be worth it.   But more things could go wrong for the President than right, under that scenario.

On the other hand, new voices calling for invocation of the 14th amendment might have a political aim.   If this option once again appears plausibly in the Presidents arsenal, House Republicans (especially moderate Republicans) would realize that their capacity to force the President to do their biding by holding the economy hostage declines.   This would create a real push for an alternative deal that saves face for everyone and avoids clear winner/loser scenario.

Politically, Speaker Boehner has staked everything on his plan, and the drama of getting his own party support it sends a message to the White House and Senate — this is as good as you can get, we had to work to get this!   President Obama has vehemently opposed setting a rehashing of this chaos six months from now.   If either one gets their way completely, one comes away wounded.   Neither will accept that, making a stand off likely.    However, if McConnell, Reid and other power brokers can figure out a face saving deal that can pass and cannot be seen as a clear victory for either side, that will resolve the crisis.

So is the 14th amendment a serious option?   Yes, but only as a last resort, and perhaps not even then.   If it comes to that, it’ll be a very entertaining year in politics coming up, but that would not be good for the country.

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Bush and Obama’s Deficits: the Real cause

The above graph was printed in the Washington Post in Ezra Klein’s column.   What it says may shock you.  For all the talk about Obama wanting to massively increase government spending, it’s clear that the real drag on the budget these days comes from programs passed during the Bush Administration.    The graph does not just include Obama’s spending in his first two years, but projects it outward.    The only way to get spending under control is to undo things done during the Bush Administration!

Add to that the fact that the biggest debt increases happened under Republican Presidents — Reagan and Bush the Younger — and the whole narrative of this being a big government problem caused by the Democrats falls apart.

Now, don’t get me wrong.   I’m not trying to blame the Republicans.   There is too much blame being thrown around.   In many ways the debt spiral has been a cultural phenomenon, as Americans became hooked on consumption and credit, with private debt and credit card debt growing faster than government debt.    In our system you don’t get an economy this dysfunctional without it being a bi-partisan effort.

The blogger “From my inkwell” hits the nail on the head when he indicates that this is really a problem relating to values.   Coincidentally netflix happened to deliver the second Wall Street movie “Greed never sleeps” this week, and we finished watching it Tuesday night.    One thing clear in that world of high finance portrayed a bit caricature-ish but reasonably accurately by Oliver Stone, is that values don’t matter.   It’s a game.

The moral philosopher Adam Smith, embraced by libertarians who often never actually read what he wrote, did not think markets were magic.   Absent a system of ethics and values, markets can easily fall apart because people with inside knowledge can use that to manipulate the game and essentially steal value from others.   They don’t need weapons, they don’t need crude physical force, all they need is an advantage, knowledge and resources.

In 2008 we had an economic crisis caused by a greed induced orgy of marked endorsed insanity.   Mortgage backed securities, considered safe “AAA” bonds, were being manufactured and sold at an unprecedented pace.  The reason for the subprime debacle was not government, but private banks demanding more mortgages that they could bundle into bonds and sell to unsuspecting dupes (like people saving for retirement or municipalities for their firefighters).   Mortgage brokers, unrestrained by ethics, ignored the ability of the buyer to pay back the mortgage and approved insane loans — someone making $30,000 a year could get a $750,000 mortgage.

When this lead to a housing crash and a near collapse of the world financial system, the “dupes” took the loses, but most Wall Street players stayed in the game.    Insider politicians figuratively slept with the Wall Street big shots who are now making record bonuses and posting obscene profits just two years after this great swindle.   And on Main Street?   Well, recession and fear rule.   No values.   No ethics.  Just greed and the market.

It’s not that markets are evil.   It’s more that markets reflect the people who are in them.  If unethical folk driven by pure self-interest make up the market, then you’ll get a system devoid of morality.  The rich will make out big time, average folk will suffer.  The problem in our society now is not so much what policies the government makes, it’s one of ethics.

Yet most Americans are ethical.  Most work hard, care for others, give to charity, and recognize that they are part of a community, connected to others.   But they aren’t the ones with the wealth and power.   They aren’t the movers and shakers, the ones “playing the game.”  Also too many of us, including myself, have gotten caught up in the game of over valuing material possessions and not really thinking about the ethical, environmental and human consequences of our actions.  Pollution, exploited foreign workers, and a growing current account deficit are abstract and invisible, it’s easier to consume.   As MAD’s Alfred E. Newman would say “what, me worry?”

Which gets us back to the budget debate.   Republicans and Democrats have it wrong.  It’s not about whose plan to choose, it’s about embracing a different set of values.   One value is simply to live within our means.   That doesn’t mean never running budget deficits.   We installed a geothermal heating system this June, and we had to borrow to do so.  We’ll have it paid off in less than two years, but debt itself isn’t bad.   Most Americans have a home mortgage and car payments, after all.   That’s why a balanced budget amendment makes no sense — sustainable debt for a good cause makes sense.

But in the “something for nothing” mentality of the last thirty years debt became structural.  That has to change.   It will involve raising some taxes, but also cutting a lot of spending.   With all due respect to my friends on the left, unless the public becomes convinced that higher tax rates are acceptable, spending cuts are necessary.   They should be humane, fair, and involve a restructuring of programs to achieve their goals rather than a heartless slashing, but we need as a society to embrace the idea that government debt needs to be sustainable.

More than that, though, we have to give up the mentality that consumption is “good for the economy.”   Advertisers have created a load of  “artificial needs” (or wants) that people strive to fulfill, usually on credit.   Capitalism is excellent at producing value, but it needs to be shifted ethically to creating opportunities for those who have not, including the third world.   This means finding a way to be productive rather than focusing on mindless consumption.

President Obama gave a good speech Monday, but he needs to broaden his approach.   We need to talk about values, what it means to be part of the American society.   If not, then we’ll keep bickering our way into decline.   There is no magic fix.  Government can’t simply bring back the rah-rah days of hyperconsumption of the 2000’s.   We all have to look inside and recognize that values matter — be it on Wall Street, Main Street, or Capital Hill.

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Obama vs. Boehner

As John Boehner was leaving from giving his response to the President’s speech on the debt, he was heard to say “I didn’t sign up for mano-a-mano with Obama.”  Even he knew that his speech was small minded and weak compared to the President’s appeal to the public.

Regardless of who you think is right on the facts, Obama won the rhetorical war Monday night.   After admitting that the debt was a bipartisan problem resulting from not living within our means, he described the situation like the average American would:

“This is no way to run the greatest country on Earth. It’s a dangerous game that we’ve never played before, and we can’t afford to play it now. Not when the jobs and livelihoods of so many families are at stake. We can’t allow the American people to become collateral damage to Washington’s political warfare…Yes, many want government to start living within its means. And many are fed up with a system in which the deck seems stacked against middle-class Americans in favor of the wealthiest few. But do you know what people are fed up with most of all?

They’re fed up with a town where compromise has become a dirty word. They work all day long, many of them scraping by, just to put food on the table. And when these Americans come home at night, bone-tired, and turn on the news, all they see is the same partisan three-ring circus here in Washington. They see leaders who can’t seem to come together and do what it takes to make life just a little bit better for ordinary Americans. They’re offended by that. And they should be.  The American people may have voted for divided government, but they didn’t vote for a dysfunctional government.”

Speaker Boehner’s short five minute rebuttal was red meat for the tea partiers, using one liners like “Obama wants a blank check.”  Never mind that the money has already been appropriated by Congress and Obama isn’t asking for more spending.   It was partisan, put blame on Obama, and essentially gave a performance that looked like the kind of thing most Americans, especially independents, are sick of.

Don’t get me wrong.  I like Boehner and Obama both.  I think one reason Boehner’s performance was poor is that his heart wasn’t into the speech.    It had to be written before they knew what Obama would say, so it was full of blame for the Democrats and claims that Obama was unwilling to make cuts.   But that was in direct contradiction to what the public had just heard from the President:

“Let’s live within our means by making serious, historic cuts in government spending. Let’s cut domestic spending to the lowest level it’s been since Dwight Eisenhower was President. Let’s cut defense spending at the Pentagon by hundreds of billions of dollars. Let’s cut out waste and fraud in health care programs like Medicare — and at the same time, let’s make modest adjustments so that Medicare is still there for future generations. Finally, let’s ask the wealthiest Americans and biggest corporations to give up some of their breaks in the tax code and special deductions.”

I daresay that if Obama is serious about this — and I suspect he is (much to the dismay of many in his own party) — then most Republican rank and file would be thrilled.    Yet the reason major cuts can’t happen is because Obama wants revenue enhancements — eliminating tax breaks and other so called loopholes — as part of the solution.  It would only touch the wealthiest, and amount to only 15% of the spending cuts.

In that the GOP is playing a dangerous game.   The gap between the middle class and the wealthiest Americans has been rising.    The budget cuts and poor economy will cause continued and increasing pain among the poor and working class.   Pain may be a metaphor, but in this case it’s also real — families will see their lives fundamentally altered in ways they would not have imagined just a few years ago.   The argument that the wealthiest shouldn’t pay part of the price, given they’ve gained the most in the last 30 years (while the bottom 60% haven’t even kept up with inflation), will lose its appeal.    When times are good the Republicans can say “they’re playing class war” and most people recoil.  When times are bad, there very well could be “class warfare.”

Right now we’re at an historic point.   We have a Democratic President who says we need severe budget cuts in order to stay solvent and be able to adapt to the demands of the 21st century.  He’s taking on the left of his own party to make that case.   He says we need structural reform of medicaid and medicare.   He is calling for deep cuts in domestic spending.   And all that Boehner can do is give a partisan speech and reject the package because the tea party wing in his own party won’t accept any new revenues?

Obama won the rhetorical war on Monday night with a call for citizens to contact their representatives and urge them to compromise (apparently the Congressional websites crashed from heavy volume right after his speech.)    Boehner vowed to try to win a partisan war to avoid tackling the issues and put off the question to another day.   His “super Congress” idea probably won’t yield anything not already discussed, it just buys him cover from the tea party faction of his own party.

I believe Boehner is better than that.   He knows not making an historic compromise now will threaten the American dream and risk putting the US on a path towards further dysfunction and severe economic crisis.    He has a good chance to win the partisan short term war and get his plan passed — but that might cause him to miss out on the long term compromise that’s needed to really get the country on the right track.    It’s time to put political posturing aside and make an historic compromise.   The economic future of the country is on the line.

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A Game of Chicken With the Debt Ceiling?

When I was 16 a friend of mine challenged me to a game of chicken.   I had my 1963 Chevy Bel Aire, he had a 1966 Chevy Nova, both old cars.   He described the game — we’d go to a parking lot, start driving toward each other at high speeds, and the first to veer away would lose and have to buy the other a pizza and root beer.    After thinking it over we decided not to, and just went for the pizza.

In a game of chicken the key to winning is to convince the other person you are actually crazy enough to keep going straight ahead even if it means a potentially fatal head on collision.   The other person, realizing that his or her opponent might actually refuse to swerve will ‘chicken out’ and swerve away first, losing.   Two top quality players will wait until the last possible second and both swerve away in time to narrowly avert a crash.   That’s exciting!

Right now in Washington it appears  something analogous to a game of chicken is taking place.   The Republicans, in control of the House but neither the Senate nor the Presidency, what to use the debt ceiling issue to push through legislation that they would otherwise have no chance to pass given their relative lack of power.    The President, recognizing that the House needs to pass something, has tried to broker a compromise, promising significant spending cuts in exchange for both letting the Bush tax cuts expire and closing some loopholes.

Many Republicans, especially those in the Senate and probably House Speaker John Boehner, recognize that this is a good deal for them.    The cuts are significant, the revenue increases minor (still far below what taxes were after Reagan’s tax cut) and the people most upset are Obama’s own liberal base.   Take this deal and the GOP might be setting up a split in the Democratic party.

Speaker Boehner, however, has a problem with his own party — many of them seem to believe that compromise is a lack of principle, and they should stand firm.   So what if the government defaults — most of them don’t like government anyway!    Going into 2012 with the Democrats potentially threatening to take back the House, Boehner doesn’t want a Republican civil war, so he has to get a deal acceptable to his majority.

President Obama’s efforts to negotiate a deal went far, but ran into a barrier when the “Gang of Six” put forth their ideas.  This group of moderate/conservative Democrats and Republicans apparently had more revenues in their plan than Boehner and Obama had been talking about.   Politically, Obama now realized that to get a plan past the Democratic Senate he could not be closer to the GOP side than the Gang of Six was.   He had to increase the new revenues in his compromise plan, causing Boehner to walk out.

Realizing that the Senate rather than Obama was the big hurdle, Boehner sat down to work out a deal with Senate Majority leader Harry Reid.   After all, just as the Republicans in the House want something they can support, the Democrats in the Senate aren’t going to sign on to a partisan Republican bill.   Yes, the House has to pass it, but so does the Senate — and then it has to be something the President can sign.

Sunday night those meetings broke up without a positive conclusion, causing markets in Asia and Monday morning in the US to go down, fearing that the world’s largest economy and major super power might become insolvent.   Symbolically, this would mark the date when the US officially lost its perch as the world’s dominant power.   The potential chaos this could cause in markets scares even the most seasoned investors and bankers.     No one wants this, and some of the biggest donors in the GOP have sent a message to Senate Minority leader McConnell and Speaker Boehner that this would be catastrophic for the US.

Headlines Monday morning told of the talks breaking down, Boehner accused Reid of not bargaining in good faith, and Reid shot back that the Republicans want it “their way or the high way,” unable to compromise.   Meanwhile both the Treasury department and the Federal Reserve are working on contingency plans of what to do if the US defaults, silent about the specifics so as not to cause more market speculation.

To me this looks like a high stakes game of chicken.  Both sides know a head on collision would be potentially fatal to the US economy.     The Democrats come into this a bit stronger.   Besides having both the Senate and the Presidency, they’ve successfully cast this as the Republicans trying to simply get their way, unwilling to compromise.   Indeed, most Democrats in the House believe that compromise proposals out there already give too much to the GOP, they’d prefer the President to be less willing to compromise.

With time running out to reach an agreement to have it passed and signed by August 2nd, the two cars are racing towards each other.   Reid and Boehner stare coldly at each other as they step on the gas, determined to get the other to swerve first — to give in to their demands.   The analogy isn’t perfect.   To “swerve at the same time” they have to find ways to craft a compromise that each side can accept, even without enthusiasm.   There could be some creative flourishes (agree to consider a Balanced Budget amendment later?) or symbolic victories that can allow each side to “save face” for the concessions they make.

It appears the GOP would like to have the debt ceiling raised for a short period, to bring the issue back around election time.   That’s risky for both them and the Democrats.   It also could get a very negative reaction from markets.  The Senate probably will not back down on that — at least not in the form of  the GOP would prefer.

My prediction is that they will “swerve at the same time,” an argument will be made, each side will claim they gave up more than they wanted to, but it was necessary for the good of the country.   They’ll then say that if the voters strengthen their side in 2012 they’ll be in a stronger position, and this will become a campaign issue.   President Obama will hail the compromise, and this bit of political theater will pass.

Then again, sometimes in a game of chicken the two cars crash, even if both drivers realize too late that they’ve waited too long and try to swerve away.   Small miscalculations can have devastating consequences.   So now is the time that Reid and Boehner have to show they’re competent to steer their parties vehicles in this high stakes game.

Though as entertaining as this is, one has to wonder if this really is the best way to obtain compromise and help the country out of an economic crisis?

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