Entries Tagged as 'default'

Republicans Win the Spin Cycle

David Frum August 1st, 2011 at 9:22 am 67 Comments

It’s going to be hard for Democrats to depict the Republicans as extremist and irresponsible when President Obama is hailing the results of the debt-ceiling showdown as a “bipartisan deal to avoid default and reduce the deficit.”

Boehner’s New Plan – Even Deader

July 29th, 2011 at 3:46 pm 75 Comments

A few thoughts on the implications of Boehner adding a “Balanced Budget Amendment” to his debt-ceiling bill (which would now require that Congress pass a BBA before a second debt-ceiling increase could take place early in 2012):

Adding the BBA makes the bill very likely to pass the House. This addition appeases Tea Partiers, who had denied Boehner the majority he needs to pass it.

The Boehner bill as it stood on Thursday night might not have been able to pass the Senate; the Boehner bill of today definitely can’t. The very thing that makes the bill likely to pass the House – its Tea Party pedigree – will kill it in the Senate.

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A Recovery Menaced By Dysfunctional Politics

July 29th, 2011 at 11:28 am 79 Comments

In a time of fundamental uncertainty, case what do we know for certain?

No, order that’s not a Yogi Berra kind of question.

Timing of passage of an increase of some size in the national debt ceiling remains uncertain.

Which side will blink first remains uncertain.

Final form of the legislation remains uncertain.

Market reaction remains uncertain.

But we do know some things for certain.

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States Will Be Slammed by Default

July 27th, 2011 at 4:22 pm 40 Comments

A federal default could cascade through state governments, cialis sale forcing tax increases and budget cuts on local taxpayers. Medicaid budgets could be slashed. Federal money for unemployment benefits could halt. State colleges could lose federal grants.

The Pew Center on the States reports that the municipal market would get swept along in the wreckage, severely constricting state budgets.

Different states would experience different kinds of shock.

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How to Protect Your Finances in a Default

David Frum July 26th, 2011 at 8:19 am 45 Comments

Six months ago I thought a federal default unthinkable. Default now seems all too sadly possible. How can individuals protect themselves from the economic consequences of a worst-case scenario?

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Stumbling Toward Disaster

David Frum July 22nd, 2011 at 7:22 pm 140 Comments

There’s blame for all in the debt talk breakdown.

The president walked away from Simpson-Bowles, declined to present plans to reach long-term budget balance, etc. etc. etc.

But in the argy-bargy, keep this in mind: the debt problem has become a debt crisis for one reason only: because Republicans put the threat of debt default on the table.

That never needed to happen.

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The Jobs Report is Awful, but a Default is Worse

July 8th, 2011 at 10:19 am 19 Comments

The latest jobs report is truly dismal in that it shows a slight gain in jobs. However, it isn’t the “death blow” or sure sign of a double-dip recession that might send President Obama packing even against a very weak Republican candidate. While two straight months of bad jobs reports creates a real opening for the GOP the problem is that with few exceptions neither the Republicans in Congress or the campaign trail have any novel medicine for what ails the nation or any plans to create jobs. (Some commercials coming out of Mitt Romeny’s campaign at least acknowledge the unemployment problem.)

In fact, a growing faction (and I count a few people I consider friends as members of it) somehow seems to think that a default on the debt would get the nation’s house into order on the basis that it would cut spending. It would cut spending, and cause a worldwide depression at the same time. Republicans need to do a lot more to convince voters that they can govern and a legitimate jobs plan would be a very good start.

Default Will Extract a Political Price from the GOP

David Frum July 5th, 2011 at 10:57 am 38 Comments

David Brooks delivers a withering column in today’s NYT:

The struggles of the next few weeks are about what sort of party the G.O.P. is — a normal conservative party or an odd protest movement that has separated itself from normal governance, the normal rules of evidence and the ancient habits of our nation.

If the debt ceiling talks fail, independents voters will see that Democrats were willing to compromise but Republicans were not. If responsible Republicans don’t take control, independents will conclude that Republican fanaticism caused this default. They will conclude that Republicans are not fit to govern.

And they will be right.

Republicans in Congress need to understand that there will be a political price to them, not only to the president, if they force the United States into reneging on its contracted obligations. They need to hear that message from inside, from donors and supporters. That’s not a “pro-Obama” message as some hot-heads charge. It’s a pro “full faith and credit” message. The Obama program can (and in large measure should) be repealed. But default is not an acceptable tool of politics.

Brooks’ column is a manifesto for the times, it should be nailed to the Republican equivalent of the church door at Wittenberg.

There is No Upside to a Default

June 30th, 2011 at 9:11 am 52 Comments

Can anyone explain to me slowly what exactly congressional Republicans are doing on the debt ceiling?

Yes, try I perfectly understand the need to restrain borrowing (relative to GDP), find since increasing debt means increasing interest payments, clinic that means an increase in overall spending, and that in turn forces the government to borrow even more. This vicious circle has to be broken sooner or later lest the country eventually goes bankrupt.

But would a refusal to raise the debt ceiling really restrain government borrowing? Yes, but only in a very narrow technical sense that the principal would stop increasing. However the default would cause the interest rates to increase, and that would increase the cost of the debt service – just as if trillions of dollars were added to the national debt! There are two important differences though: when we increase the national debt by deficit spending, 1) we buy something useful and 2) all that spending stimulates the economy. The default has no upsides whatsoever.

Furthermore, the default would raise interest costs not only for the government, but also for businesses and individuals. Essentially, it would have the same dampening effect on the economy as a tax increase would. Again, with an important difference: at least an actual tax increase would also reduce the deficit and therefore government borrowing. The default has no upsides whatsoever.

So the Republican negotiating position vis-à-vis Democrats seems to be “Unless you abandon your plans to increase spending and hike taxes, we will do the rough equivalent of these things, only with all the pain and absolutely no gain.” Why did Republicans start a high stakes fight over the debt ceiling when the extreme weakness of their position was obvious from the start? It’s not like nobody ever warned them.

Technical Default? Don’t Even Think About It

June 10th, 2011 at 3:52 pm 20 Comments

This past week, health differing assessments of the effect of a “technical default” on United States sovereign debt widened the debt ceiling split among politicians on Capitol Hill.

The first view we can, capsule for shorthand purposes, buy viagra call the “Toomey Plan,” after Pennsylvania Sen. Pat Toomey, who first publicly pushed it. That view is quite straightforward: enough cash comes into the Treasury each month that America can pay its debt obligations with ease.  Yes, that means some other functions of government may suffer or even end, but that short-term pain is worth it if a real long-term debt package can emerge from the chaos.

This view, approximately, lines up with some Wall Street investors who believe that even a technical default that causes short-term disruption among global financial markets can be tolerated. Again, yes we have short-term pain, but over the long run, the United States will be in a better financial position than it is likely to be in if we fail to have a long-term, credible debt reduction plan.

Some Members of Congress invoke the name of Stanley Druckenmiller, a very successful Wall Street denizen, who proposed this analysis earlier this year and had urged it on Congress during the 1995-6 debt ceiling showdown.  House Speaker John Boehner had a list of 150 economists who urged a large, credible debt stabilization plan as a pre-condition for passage of the increase in the debt ceiling and he took that list with him to the White House when he met with President Obama earlier this month.

The other view we can term the “Establishment Plan.”  Supporters of this analysis contend that even a short-term technical default would cause sufficient chaos in global financial markets such that the United States would suffer a grievous economic and financial wound.  Either a true default—in which the United States fails to pay on time and in full its outstanding sovereign debt obligations—or a form of the Toomey Plan leading to large-scale government agency shutdowns would cause serious harm. In this group are rating agencies like Standard and Poor’s, J.P. Morgan, Fitch, and Moody’s.

Not surprisingly, proponents of the Establishment Plan are members of “The Establishment.”  Think of the Department of Treasury, Wall Street advisors to the Treasury, CEOs and presidents of global and regional financial institutions, a large number of economists from academia and think tanks, as well as former members of the Washington, D.C., opinion elite and most mainstream media, including The Economist, Washington Post, New York Times, and similar voices.

Prominent among “The Establishment” stands Treasury Secretary Tim Geithner.  Geithner, of course, speaks with substantial authority for a number of reasons.  It is his department that manages the public debt.  It is his department that has to go continuously to global credit markets to sell and roll over our debt.  And, it is his department that publishes the daily income statement of the United States. Geithner knows America’s debt position and funding needs better than any other single senior official in the country.   Geithner also knows markets and market-makers very well, since he used to be the president of the New York Federal Reserve, which daily reviews activity in Wall Street.

James Carville, political strategist, said, “If I come back in another life, I want to come back as a God d***** bond trader.”  That was his way of highlighting the power that credit markets have over large sovereign debtors who follow sloppy fiscal policies (think of Greece as a modern example). And, it reflected the fear of the Clinton Administration and then-Treasury Secretary Bob Rubin when it came to suggestions to challenge the wisdom and power of markets.

So, who’s right?

Since it is a matter of first impression—after all, modern America has never defaulted to any significant degree on its debt—both sides have begun to argue and assert scenarios.  No one can “prove” either view right.

But a look at modern financial engineering gives us real clues to the likely answer.

Privately ask a Wall Street investor running money for others what would happen if the Toomey Plan prevailed.  Remember, in that plan, all United States sovereign debtors would be paid in full and on time.  Little money would be left to fund many other government functions, with the resulting overnight shuttering of entire departments and immediate layoffs of hundreds of thousands of government employees.

The consensus response is “chaos.”

Now if an active credit market maker tells you that chaos would occur if some scenario became a reality, the wise should listen.  This bond trader isn’t theoretical.  He or she is telling you what they would do in the event of a Toomey Plan—run for the doors.

The real question for Members of Congress, then, isn’t whether they “believe” Toomey or the Establishment view is right.  The real question is simply, “Which way do you want to bet your entire career and the economy of the country on?”  Even most of the new Members are beginning to enjoy the privileges of power, privileges that will disappear if their actions tank the economy and financial markets.

So, the prudent person should look askance at the Druckenmiller/Toomey suggestion.  If a majority of market participants and folks who have been out selling our debt to markets for decades say that the Toomey approach would severely injure America’s economy, that’s the way I am going to bet.

The long-run argument—the Toomey Plan that has at least a dozen supporters in the Senate–sounds so noble, so almost moral, so “gutsy,” that some may go that way. Testosterone will do that sometimes.

Such would-be warriors  would be well served to remember John Maynard Keynes:  “In the long run, we are all dead.”

Or if they want a more recent example, here’s Warren Buffet on the dangers of a form of modern financial engineering called derivatives:  “Derivatives are financial weapons of mass destruction.”

Just for the record, even a technical default on payment of American sovereign debt would shatter parts of the derivatives markets, endanger global financial markets, and have other “non-trivial” consequences.  Or, at least, that’s what folks who make a living in that market say.

The Toomey Plan sounds a little bit like a military advisor telling his superiors, “Well, you know we could always try a small tactical nuclear weapon to see if the doom-sayers are right.”