Another weekend of business casual negotiations in Washington failed to deliver a deal to raise the debt ceiling.
In response, President Obama held a press conference on Monday morning to urge a compromise and repeat his position on the size and shape of a deal.
Size:
Monday, July 11, 2011 11:20:32 AM RTRS – OBAMA: I WILL NOT SIGN A 30 DAY, 60 DAY OR 90 DAY EXTENSION ON DEBT CEILING
Shape:
Monday, July 11, 2011 11:33:37 AM RTRS – OBAMA: IF SOCIAL SECURITY IS PART OF DEBT CEILING PACKAGE, GOAL WOULD BE EXTENDING PROGRAM’S LIFE
Monday, July 11, 2011 11:39:23 AM RTRS – OBAMA AGAIN CALLS FOR PAYROLL TAX CUT TO BE PART OF DEBT CEILING DEAL
Monday, July 11, 2011 11:22:33 AM RTRS – OBAMA: TAX INCREASES WOULD COME IN FORM OF CORPORATE TAX BREAKS AFTER 2013, “A LITTLE BIT MORE” FROM WEALTHIEST
The negotiations are falling into a pattern familiar to anyone who followed the equally excruciating government shutdown debate. The President occupies a position of baffled reasonableness, infuriating Congressional Democrats and encouraging Congressional Republicans to press for more concessions.
The Economist is right: Republicans are acting shamefully. But their desire to prolong negotiations shouldn’t come as a surprise, nor does it mean they will conclude a shameful outcome. Though a renewed effort on the employment side of things wouldn’t go a miss. (Reuters has a good guide to the contours of a deal here.)
In this case, one man’s “moderate” is another’s extreme. Republicans leading the negotiations do not have to appear as reasonable as the President. Their districts are polarised, while the President must appeal to independent voters. (It’s also more keeping with his philosophy but that’s another point.) There’s also a perception — as per the shutdown negotiations — that a tough stance can only be achieved by pushing talks to the wire.
Furthermore, the “Republicans” aren’t — contrary to caricature — a homegenous rabble. John Boehner, the speaker of the House of House of Representatives, wants a deal. But he’s got to take fired up members of the Tea Party with him while tempering the ambitions of Eric Cantor, House majority leader, and Mitch McConnell, Senate minority leader.
With public and market opinion still just about insouciant, there’s no need for Republicans to budge yet. Perhaps if, as forewarned, Moody’s puts the US on negative watch this week, it’ll spur a deal to conclusion.
And there almost certainly will be a deal, of course. But as we’ve worried before, the problem is how long that deal will last for. Research notes from investment banks (Nomura, Credit Suisse and Citigroup) in the last few days are betting on a short-term deal in the region of $1,000bn – $2,000bn. Which means we could be looking at further negotiations taking place during the Presidential election campaign. Oh, joy.
The President doesn’t want that, as he reiterated Monday. But the Republicans may want to take a gamble when their chances of winning the White House aren’t looking so good.
If so, some of the apocalytpic warnings from analysts may come in handy quite yet. Here’s the latest, from Citigroup on Monday:
If the U.S. could spend only its revenues, spending would need to be slashed by about 40%, or over $100 billion per month. That’s about 8% of current GDP non-annualized.
A near immediate income decline of 8%-9% of GDP, and the uncertainty around policy, would weaken expectations priced in asset markets, reducing economic activity by an even larger amount before long. Such would be the likely case even if Treasury debt payments were maintained and “prioritized.”
In the event of a Treasury debt default, we would note that U.S. Treasuries are a key risk-free asset on bank balance sheets across the world and the single-largest form of loan collateral. The U.S. Treasury is the ultimate guarantor of bank deposits. The financial implications of an actual Treasury default, even briefly, could represent the largest financial shock in history, potentially creating a domino of defaults. As such, creating quantitative economic projections on a default scenario seems like a foolish errand.
Bad news, then.
An alternative to all this has been offered by James Hamilton. Here’s the University of California professor’s draft statement for the President to release should the debt limit be reached.
Anything I instruct the Treasury to do at this point would be in potential conflict with existing legislation, for the simple reason that existing legislation is self-contradicting. I have therefore made a decision that, until instructed otherwise by the Congress, Social Security checks will continue to be sent on time. Soldiers and their families are going to receive the funds that Congress has already authorized. And U.S. debts will always be honored. And I will make sure all this happens by authorizing the Treasury to borrow the funds necessary to implement existing legislation.
Translation: Congress, I spit on your debt ceiling.
Related links:
Debt ceiling options – Econbrowser
Wonkbook: Three reasons the debt deal collapsed – Washington Post
