Tag: Default in 2011

In the same way that Wall Street hoovering up a third of all corporate profits is the new normal. Or that 9% unemployment is the new normal. Or that obstruction, rather than legislation, is the new normal for Congress. Or that massive spending cuts during a recession is the new normal. Or that conducting three overseas wars at the same time is the new normal.

The new normal kind of sucks, doesn’t it?

Kevin Drum reflects on the “new normal.”
I think this phenomenon, more than anything explains why we’re going to default. Maybe not this time, but sooner than later. And even then, in the economic ruins that follow, there’s only a passing chance that the important lesson, the moral of the story will sink in.
More likely it’ll be blamed on ACORN, the EPA, and dread socialist fifth columnists and so forth. But I just don’t see how the boil gets lanced without the paroxysm. And, even then, the end result may be that the boil is simply inflamed further.

Dean Baker AND Ron Paul

An interesting read in which Dean Baker agrees with Ron Paul’s idea:

…the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.

In addition, there’s a second reason why Representative Paul’s plan is such a good idea. As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed. In this case, the interest payments would be a burden to the Treasury since the Fed would no longer be collecting (and refunding) the interest.

More detail at the link. I’m no economist, but it sounds like dodging the interest alone is worth doing in exchange for a fairly minor “bank tax” down the road as the reserve rate requirements would necessarily ratcheted up slightly to offset the eventual inflationary pressure caused by The Great Bond Shredding of ‘11.

Were I Obama, I’d get out on the hustings this very second talking about how under no circumstances should the Fed order these bonds be destroyed. Go have lunch with Joe Biden. Come back out and say “well, it is with a heavy heart I have to bow to the demands of my GOP overlords. We shall shred the bonds effective immediately. Bipartisan!”

After all, the only way to get something done in this government is for Obama to come out against it and wait for the GOP’s reflexive adoption of the opposite position no matter what the issue. That the Democratic leadership in DC haven’t yet figured this out is why they fail.

Dean Baker AND Ron Paul

Obama’s Other Card

Even as the political battle mounts over federal spending, the end result for federal policy is already visible — and clearly favors Republican goals of deep spending cuts and drastically fewer government services.

President Obama entered the fray last week to insist that federal deficits can’t be reduced through spending reductions alone. Federal tax revenue also must rise as part of whatever deficit reduction package Congress approves this summer, he said. Obama has been pushing to end a series of what he calls tax loopholes and tax breaks for the rich.

But even if Obama were to gain all the tax-law changes he wants, new revenue would make up only about 15 cents of each dollar in deficit reduction in the package. An agreement by the Republicans to accept new revenue would be a political victory for Obama because “no new taxes” has been such an article of faith for the GOP.

I think this analysis leaves out a critical piece of the calculation: the December 2012 expiration of the Bush tax cuts. Recall that Obama, above all else, is the “outcomes” President. He’s more than willing to take a temporary political setback or even a seeming political loss in the short term if that in turn leads to the long-term policy outcomes he prefers.

So: to get a deal on the debt ceiling he gives the GOP a fatter ratio of cuts to revenues for now. Keep in mind, these “cuts” are really a framework that then plays out over most of a decade and will ultimately be changed and tuned by several Presidents and Congresses (and that’s assuming they stick to the framework at all).
Next year though, assuming Obama’s reelected, everything changes on the revenue front. If the Congress simply fails to act, the full set of cuts expires. If they act, but the GOP includes extension of the cuts for those making more than ~$200k/yr, Obama vetoes it. And, really, if we assume that the GOP will fail in its efforts to destroy the economy in the next few weeks, Obama likely prefers one of those two outcomes. Why? Again, it’s because they are the best long-term outcomes for the country. That both reflect poorly on the GOP is a bonus side benefit going into the 2014 midterms. To be sure, a tax rise represents real short term pain for the less well off, but that pain yields long term stability and, let’s face it, sanity in the revenue structures of the United States.

Expiration of the Bush tax cuts is a key pillar in the “do nothing” solution for our current deficit/revenue issues. The assumption that all or most of them are going to expire if Obama is reelected needs to be included in any meaningful political calculus regarding the ratio of cuts to revenue increases in the current negotiation. Assuming expiration, you ultimately end up with a number of difficult but doable fixes that can be handled one at a time. If those “fixes” are, you know, paid for, the country will once again be on firm financial footing, complete with a reasonably robust social safety net for as far as the eye can see. This is precisely the outcome Obama is playing for.

Obama’s Other Card

We’re at 15 percent revenue, and historically it’s been closer to 20 percent. We’ve never had a war without a tax, and now we’ve got two. Absolute bullshit.

Alan Simpson, former Senator from Wyoming and a Republican, reflecting on the state of the GOP and their “negotiating” posture.
Source: Slate

How You Negotiate

In reference to this and this, I think I’ve been less clear than I could have been about how I think Obama and his team should proceed.

For the sake of discussion, let’s take as written the Ezra Klein 83:17 cuts:revenue breakdown. The GOP wanted 85:15 in March, got offered 83:17 (plus a lot of exactly-what type details) in June and walked out. This is their choice. But there has to be a price for that choice.

Since there’s no deal, we’re going to take the GOP’s advice and just pay the interest on the debt. Seems like our only choice, thanks to the GOP’s intransigence re: corporate jet tax breaks and such. So we start by telling seniors to be ready not to receive their Social Security checks in August; if this troubles them, they should call their Congressional representatives. Medicare providers will not be compensated for the foreseeable future; they will receive IOUs in lieu of payment as of August 1. Is this going to be a problem for you? Call the Congress. We tell Wall Street they’d best to do like Cantor and get out of Treasuries.
And, we make clear that the deal, as of right now and for a limited time only is going to be 80:20. Take it or leave it. But if you do leave it, on July 1 it becomes 70:30. July 15th it is 50:50. Want to see where we go on August 1?

Once the GOP actually starts losing things when they pull the old football away, they will stop using the tactic. And until they do start paying a price for it, they’d be foolish not to use the tactic. So far it’s gotten them everything they want and hung blame on the Democrat. That needs to stop. So: you make your case, you state the stakes in clear and unmistakeable language, and then you set the timeline for agreement. Take it or leave it.

So when the GOP’s economic policy team sat down to make the strongest case they could for growth-inducing deficit reduction, they recommended a mix an 85:15 mix, not a 100:0 mix. And then, when the Obama administration agreed to an 83:17 mix, the Republican leadership walked out of the room and demanded that taxes be excluded from the deal altogether. How do you negotiate with that?

Ezra Klein asks the right questions.
Source: Washington Post

At least the tile is cool

And so it’s (finally) come to this. Democratic Senators and various other denizens of Washington DC have recalled that, hey, that Constitution of ours specifically has something to say about the national debt:

The validity of the public debt of the United States, authorized by law […] shall not be questioned

Though a post-Civil War shim, it seems pretty applicable to this non-Constitutional-scholar. As the linked article states:

This is an issue that’s been raised in some private debate between senators as to whether in fact we can default, or whether that provision of the Constitution can be held up as preventing default,“ Sen. Chris Coons (D-Del.), an attorney, told The Huffington Post Tuesday. "I don’t think, as of a couple weeks ago, when this was first raised, it was seen as a pressing option. But I’ll tell you that it’s going to get a pretty strong second look as a way of saying, ‘Is there some way to save us from ourselves?’”

By declaring the debt ceiling unconstitutional, the White House could continue to meet its financial obligations, leaving Tea Party-backed Republicans in the difficult position of arguing against the plain wording of the Constitution. Bipartisan negotiators are debating the size of the cuts, now in the trillions, that will come along with raising the debt ceiling.

Is it really left to me to fill in how this path ends? I think the debt ceiling is as stupid as the next guy, and the hostage-taking debate over “whether or not” we raise it: even dumber and, frankly, dangerous to the economy. Obviously we are going to raise it. Every plan, from Ryan on down includes raising it. There is literally no other way forward regardless of your non-zero target for future federal budgets. The GOP and their media enablers act like this isn’t so, but it is. Sorry if I was the first one to let you in on that.
But: if you just blow through the entirely arbitrary ceiling and continue on as if nothing happened, mayhem will ensue. You’ll have to fight it out in court, where party-line rulings will be the norm, much as is happening with the far less divisive ACA or the Wisconsin brouhaha (and that’s saying something; WI included a Supreme Court Chambers strangling). The media, never one for issues with much complexity greater than, say, “Sam and Dianne: will they or won’t they?”, will simply report the horse race (that’s six rulings for a debt ceiling, seven against! Reactions at the top of the hour! But first, somebody’s cooch was briefly visible!!!). Ultimately, after a few years of this living hell for anyone that ever comes into contact with so much as a single federal dollar, the issue reaches the Supreme Court…and, well, then it basically comes down to who’s out sick that day and the particular details of Scalia’s ever-tortured logic. And he’s never out sick.
The Congress, meanwhile, will be irrevocably embroiled in endless impeachment proceedings or attendant “investigations” and simply gridlocked when not. You think anyone in the GOP is going to vote to release one cent after the debt ceiling hobby horse is simply taken away forever? Unless 2012 suddenly delivers Democratic super-majorities in both chambers, you’re shit out of luck. Then, substantive control of the government and its many critical functions basically boils down to Obama, individual departments, or the military essentially seizing control from and simply ignoring a Congress and broader government that has demonstrably ceased to operate and is endangering both itself and the lives of its citizens. I’m sure the markets will take this development with all the sober assessment that any Master of the Universe could muster. This outcome would please the Tumblr anarchy division, but few others. Frankly I’m just not quite ready to live out my remaining years trading pelts down by the nearest navigable river.

Government in this country, in any democracy, is ultimately about mutual consent. The minority has to consent to being governed by the majority. That is the only way that elections mean things, and because there are fewer of Major Party X as a result of said election(s), the minority party gets to contribute to but not control the legislative agenda and its terms. Since Obama’s election, an electoral landslide and the first non-plurality win in ~20 years, we’ve been operating without the consent of the GOP. It’s as though he stole the thing. Yes, the GOP has occasionally given consent, in fits and starts, when forced to (most often this came as a result of simply being overidden by then-large Democratic majorities). They’ve grudgingly agreed to a few votes that had to happen, but nothing else. By and large, though, the GOP has been allowed to operate in pure obstructionist fashion with no reprisal. Generally speaking, if you don’t take part in the act of governing in Congress, your ideas simply aren’t included. That simply hasn’t happened here. They’ve obstructed in numerous ostentatious ways and but also always gotten what they were demanding in the end even though they withdrew from the “governing majority” at some point in the process each time. It’s what Duncan Black refers to as the “Lucy and the football” system: extract compromises and painful alterations on the given bit of legislation, withdraw support, blame Democrat for problems caused by compromises and painful alterations. If possible: actually reverse position on issue such that you now oppose the very thing you demanded in the kabuki “serious adults talking” phase of the legislative sausage making.

Sooner or later, that’s the problem we have to fix. The majority, be it Democratic, Republican, Tea Klan, Quantum Presbyterian, or whatever has to be able to govern. Period. Uniform obstruction of all the business of government is unsustainable. It’s frankly incredible that we’ve stumbled along for this amount of time already. Only the public can force the change, though, whether through elections or sheer popular pressure (e.g. standing on the steps of the Capitol with pitchforks and torches). With a MSM showing no interest in educating the public as to the stakes, the debate, or even the vaguest terms of the issues at hand, it may just take the Social Security and military pay checks (and everything else) not showing up one morning to make the needed awakening happen. And the sooner we go through a convulsive spasm to clear the systemic poisons that currently have us writhing on the bathroom floor of democracy, the better off we’ll be.

At least the tile is cool

“We’ve known from the beginning that bombing the moon would be a poison pill to any debt-reduction proposal,” Senate Minority Leader Mitch McConnell said in a speech on the Senate floor. See? Or: “President Obama needs to decide between his goal of bombing the moon, or a bipartisan plan to address our deficit,” said McConnell and Sen. on Kyl in a joint statement. Or: “First of all, bombing the moon is going to destroy jobs,“ said Speaker John Boehner. "Second, bombing the moon cannot pass the US House of Representatives — it’s not just a bad idea, it doesn’t have the votes and it can’t happen. And third, the American people don’t want us to bomb the moon.”

Ezra Klein replaces mention of taxes with “bombing the moon” and ends up with a more cogent set of statements.
Also: strangely, he wasn’t going for a Mr. Show reference.
Source: Washington Post

Making it Up

Across several posts, Dean Baker lays into the dread Liberal Media for just plain making it up when it comes to pushing their preferred, center-right “cut deficits now” agenda.

On the Washington Post:

“The national debt will exceed the size of the entire U.S. economy by 2021 — and balloon to nearly 200 percent of GDP within 25 years — without dramatic cuts to federal health and retirement programs or steep tax increases, congressional budget analysts said Wednesday.”

Actually, this is not what the projections showed. The CBO projections showed that if Congress simply followed current law, letting the Bush tax cuts expire, not fixing the alternative minimum tax, and most importantly, allowing the spending caps in the Affordable Care Act (ACA) to remain in place, then the debt to GDP ratio will soon stabilize and head downwards.

On the New York Times:

“The national debt is on pace to equal the annual size of the economy within a decade, levels that could provoke a European-style crisis unless policymakers take action on the federal deficit, according to a report by the Congressional Budget Office.”

This is not true. The CBO report did not warn of “a European-style crisis.” The reason it did not is that a European style crisis does not make sense in the context of the United States. The United States can never be like Greece or Ireland for the simply reason that we print out own currency.

In the event that we actually ran up against serious constraints in credit markets the United States would have the option to have the Fed buy up its debt. Greece and Ireland do not have this option. This could create a risk of inflation, but there is not the risk of insolvency that euro zone governments face.

On NPR:

In the top of the hour news segment on Morning Edition, NPR told listeners that the Congressional Budget Office warned that the national debt will soon equal the annual size of the economy and this could lead to a European-style crisis [see: New York Times above].

This is critically important stuff. Deep cuts right now will strangle the economy and deeply hurt Obama’s chance at reelection to boot. This, coupled with the knowledge that as conditions improve, the ability (in the form of public desire) to make huge cuts to the social safety net will diminish precipitously is precisely why the GOP is for deep cuts now. They know that doing nothing and simply letting the Bush tax cuts expire will do more for improved deficits than almost any of the “plans” on the table. The CBO has said so again and again. These “plans” are not and never will be about the deficit. They are about pushing a preferred social agenda. Period. We just can’t get anyone in the media to break free from their “view from nowhere, compromise must always be the preferable, serious person postion” lens for long enough to get them to even report the simple facts of the case at hand.

tl;dr: We’re doomed. There will be a default. Maybe not this time, but soon. Once you’ve set up the terms of debate such that they always include wrangling over lifting the debt ceiling and treating it essentially as a hostage situation, then you’ve created a system that, sooner or later, someone will push too far for their own purely political purposes. And when that happens it will be the end of America as we’ve known it. And I suspect that will be happening pretty damned soon.

Making it Up

If a bondholder misses a payment for a day or two or three or four — what is more important is you are putting the government in a materially better position to better pay its bills going forward.

Paul Ryan being serious and courageous and, yet again, showing just how absolutely determined the GOP is at all levels, extreme far right or merely far right, to have a default on the debt of the United States. Why, we’ll barely notice it’s even happened.
It’s the only way they see getting the White House in 2012. It’s been the plan all along. They assume Obama will get the “egg on his face” and they’re probably right. Once in control it’s goodbye filibuster (assuming the Democrats lose the Senate), goodbye social safety net, and hello freedom is just as free as what of it you can afford to buy. After that, when the money’s gone: kindly go die in the streets.
But hey, taxes will be pretty low. On the already rich, anyway.