The confrontation underway in Washington DC isn’t as deadly as the Cuban Missile crisis. But in many ways, a misstep could be would produce collateral damage is hard to estimate but would unquestionably be large. So given the stakes, it’s remarkable to see Obama prove his manhood by telling those Republicans he is not intimidated by the possibility of default; it may be presented in “no drama Obama” lecturing, but his message remains that he’s not going to be the one to steer out of this game of chicken. From the Financial Times:
Barack Obama said the White House was “exploring all contingencies” in the event that Congress failed to increase the country’s borrowing limit, but warned that there was no “magic wand” to brush away the threat of a default on US debt.
“No options are good in that scenario,” the US president told reporters on Tuesday, shrugging off the possibility that the White House could use creative solutions to keep borrowing – from invoking the 14th amendment of the constitution that says the validity of US debt shall not be questioned, to minting a $1tn coin…
The president did not rule out the possibility that the US would prioritise debt payments over other government outlays, but said it would put the Treasury in the difficult position of having to choose which creditors to satisfy.
And Politico tells us that, as we anticipated, both sides are simply digging in harder in their entrenched positions:
Speaker John Boehner said President Barack Obama’s desire to negotiate after the debt ceiling is lifted and government is funded amounts to “unconditional surrender by Republicans.”
The message, delivered outside the speaker’s office on Tuesday afternoon as a response to Obama’s earlier press conference, does not bode well for solving the government shutdown or debt default this week…
The dueling statements from Obama and Boehner came on a day when there was little progress toward solving the standoff, but the rhetoric between the president and the speaker escalated.
As this stalemate progresses, the ugly truth is becoming more and more obvious: there is no bargaining space where the two sides’ interests overlap, short term or long term. On the Grand Bargain Great Betrayal, as we said before, Obama and the Republicans could not reach a deal last year because Obama insisted on at least some tax increases on the rich and the Republicans were not willing to yield on that issue. Neither side has budged an iota. On the immediate impasse, we have two outtrades. First, even though Boehner has stopped squalling about it in the last few days, the insurgents still want to whack Obamacare. From a different Politico story:
And as Republican leadership tries to broaden the debate beyond Obamacare to other areas of mandatory spending, many in the rank and file want to keep focus on the health care law. That’s a major reason they’re pushing party leaders to keep a government funding bill separate from debt ceiling legislation, worried that Obamacare could get lost in such a big fiscal package….
Right now, there doesn’t appear to be any incentive to back down. Republicans largely say they aren’t feeling any pressure from their constituents and instead say that people contacting their office are urging them to keep up the fight.
Paul Krugman recaps the views of various camps in the right-wing punditocracy, but they are variants of two themes: that either the damage done by a default (which might mean a default on Social Security payments rather than Treasuries) is being exaggerated by the Democrats, and that those profligates need to have that government tit taken away from them (this from representatives in red states that are net financial beneficiaries of Federal taxation and spending). The latter position is dressed up in proper Peterson Institute “we need to live within our means” packaging, but it’s an intellectually respectable cover for the apocalyptically-minded among the Republican base. As we’ve stressed, both the evangelicals and the Tea Partiers see government (and society generally) as corrupt, and if they can’t get their way, they believe they will do better if they wreck the entire system. So even if the doomsters are right and Obama were unsuccessful in escaping a Treasury default, many would say that a global financial meltdown would be a survivable event and would cleanse the system. They’ve got no idea what they are asking for.
We are already seeing damage from the first week of the Federal shutdown. Gallup tells us Weekly Drop in U.S. Economic Confidence Largest Since ’08
Americans’ confidence in the economy has deteriorated more in the past week during the partial government shutdown than in any week since Lehman Brothers collapsed on Sept. 15, 2008, which triggered a global economic crisis. Gallup’s Economic Confidence Index tumbled 12 points to -34 last week, the second-largest weekly decline since Gallup began tracking economic confidence daily in January 2008.
And mind you, this poll is as of the end of last week. There is no way were are going to have a resolution of this impasse this week; we’ll be lucky if there’s one by the end of next week. And even though the Republicans are caucusing internally, they aren’t agreed on how to proceed, so the lack of cohesiveness is a further impediment to dealmaking. I could well be proven wrong, but I don’t see Boehner conceding to Obama and letting his 20 or so moderate Republicans join the House Democrats to pass a continuing resolution and/or a deficit ceiling extension while the to-ing and fro-ing is still in process (meetings are scheduled for Wednesday, but the internal fissures seem so large that any agreement within the party is likely to take longer to hammer out). My guess continues to be he needs the excuse of a market upheaval or more evidence (economic or political) that the shutdown is doing damage before he’d pull that ripcord.
Note that Obama is still trying to get a short-term extension with the carrot of a Great Betrayal (which is framed as a bigger but yet to be determined deficit-cutting deal). But even if the Republicans get out of their own way and seek to exit the corner they’ve gotten themselves into, I don’t see how we get to a deal in four to six weeks. As much as Obama really really really wants his Great Betrayal, he also wants his tax increase fig leaf and won’t budge on Obamacare. And the Democrats are also likely to want lower cuts than were on the table last year, given how deficit levels were falling over the course of the year. So even if
Even though the stock market and gold did not react all that much today, it would be a mistake to think that investors aren’t getting rattled. MacroBusiness pointed out that the VIX rose to 20% and short-duration Treasuries have also suffered a wild ride. And while the markets continue to discount that the folks in DC would be so deranged as to default, pundits are pointing out how even getting this close to the brink will have long-term consequences. And let us not forget that if this impasse goes past October 17, which looking more and more likely, that the consequences of cutting off government spending and services even more radically to preserve the ability to ability to service debt will be tantamount to suddenly signing on to an IMF austerity program. If you thought the shutdown was ugly, you ain’t seen nuthin’ yet.
Now the Administration might plan to alleviate the severity of debt-ceiling inflicted spending limits by having the Fed use its “unusual and exigent circumstances” authority to monetize debt (I’m assuming Obama and Bernanke would wait for the deus ex machina of market upset to provide air cover). But even austerity lite would be ugly on top of the partial shutdown spending reductions.
And a final thought: Obama and the Democrats are confident that the Republicans will lose seats in the House if they keep refusing to blink on budget brinksmanship. But what happens if the game of chicken continues and we get a deeper economic downdraft as a result? Bill Clinton’s explained his 1992 campaign as “It’s the economy, stupid.” If the economy takes a hit next year, which seems certain, and the fact set is more complicated than just a Republican-induced showdown, I’m not certain the Democrats will escape blame. The incumbent Administration is generally seen as responsible for the state of the economy. If voters come to see the wrangle in “a pox on both their houses” terms, it could take more out of the Democrats than they now anticipate.
This piece is cross-posted from Naked Capitalism with permission.