Sunday, July 31, 2011

Make sure you have the legal authority to pay the bills due now; then do another extension

Last night, on the dance floor at a local gay club in Washington DC three miles from the Capitol, a lot of cell phones were being watched, I mean A LOT.  Cab drivers were charging more because of unusual demand.

As of Sunday morning, the talks continue, and generally the media sounds more hopeful of a deal, but the optimism isn’t certain or consistent. The next critical vote is at 1 PM, about the time a baseball game starts. (The Nationals broke their losing streak last night after a trade with Maya tossing a surprise shutout; maybe that helps change the mood. And after all, the NFL got a deal, too.)

From the dance floor, I heard speak of an idea that sounds amazingly simple, in case the current talks “fail” Sunday morning.

Pass a minimal debt ceiling extension immediately that covers only the bills actually due. Include the bond interest, social security, veterans’ benefits, military pay, contractor and federal employee pay for time already worked, as well as Medicare and Medicaid payments for medical treatment already rendered to eligible patients. But do not continue any spending that creates more bills. That means massive federal government shutdown and furloughs of federal workers and contractors.  That could mean that the FAA and TSA shut down and airports close, for example, and new Medicare claims are not paid. Then have a second negotiation to extend the debt to allow the federal government to operate and incur new liabilities in proportion to what was appropriated for the rest of this fiscal year. Obviously, the appropriations for the FY2012 must match the legal ability to borrow. It will become apparent very quickly that a second, operations-based extension is necessary.

What seems wrong and illogical is the idea that you continue to operate the federal government at all if it cannot pay existing bills.  So, I agree with the idea, really, the president is authorized to pay existing obligations (but not create new ones) by existing constitutional authority, including the 14th Amendment  (and I believe he has authority now to borrow for existing Social Security.  Pay your bills to date, then stop incurring any new ones or creating any new liabilities until you have the legal authority to borrow to spend the money you have already appropriated.

Since we have an appropriation process, all of this makes me wonder, again, why we have a debt ceilig at all. The concept seems legally redundant.

Is the Tea Party really trying to "blow up" (Antonioni style) the economy?  Let’s point out one other show-stopper: if you don’t get your debt growth under control, we may soon reach a situation where we can’t roll over our treasury bond principal, even with a debt ceiling extended.  That point gets overlooked (it was pointed out by the Washington Times Friday).  So there is some reason to think the house could burn anyway.

There doesn’t seem to be any choice. We must have authority to borrow to pay our existing bills, and separate authority to spend money already appropriated to run the government. But we must cut spending in all areas, including both defense and entitlements (and, to an extent, means test), and have the moral debate that must follow it.  And we must roll back tax loopholes and gratuitous tax cuts.  

Friday, July 29, 2011

Bipartisan Policy Center appears to have the most credible day-to-day analysis of August govt payments (in case of no debt ceiling) and intake available; interest payment due Aug. 15

The past two posts, I have discussed the “denial” among those opposing lifting the debt ceiling (or tying unreasonable strings to it) that the world would face significant economic harm from a US default and credit downgrade.  Maybe this would teach people a lesson, provide purification, they may think.

One thing that is needed is credible “numbers” and tables (even the kind that SAS programs generate). The best I have been able to find on the Web so far is the recent paper by the Bipartisan Policy Center, with the most important PDF link here.

The paper, starting on p. 24, provides “daily analysis” of the revenues expected each day, and the outgoes ("committed spending") scheduled. It’s evident that the Treasury quickly falls “several runs” behind (like the Nationals these days, before coming to bat in the bottom of the first inning) and just doesn’t catch up.  On paper, even the full Aug. 3 Social Security payments are not met.

The group publishes its conclusions on p 46, warning of economic dislocations and writing that “handling all payments for important and popular programs will quickly become impossible.”

It is important to remember that, even without deficit ceiling extensions, a legal mechanism to use the Social Security IOU’s to borrow just for these payments may well exist (as I noted on my retirement blog yesterday).   The August 3 payment  is much larger than the August 10 one.

Furthermore, the Policy Center has elsewhere admitted that the Treasury may have about a week’s worth of cash in the till, postponing the “day of reckoning” until about Aug. 7 or so.

Finally, the interest on the debt is not due until Monday, August 15; so a former bank default would not happen before then.  But the Treasury would have to “roll over” about $500 billion in principal (that’s more than the supposed $130 billion shortfall), which could be difficult if there is a downgrade or investor resistance.  An editorial in the Washington Times July 29 (p B2) says that $90 billion in T-bills and long term securities mature on Aug. 4, but I presume that these are included in the $500 billion rollover total here. The Washington Times (as has various other conservative pubs) warns that it might not be possible to find enough buyers for bonds even when the debt ceiling is raised, to support these huge rollovers (leading to the printing of more money, probably). 

It’s also noteworthy that both Piers Morgan and Jeffrey Toobin on CNN last night suggested that Obama could invoke the 14th Amendment, risking impeachment trials (which would fail, just as they did with Clinton), at least in the short term.  There seems to be some agreement that courts would not stop Obama from borrowing without approval.

There is also talk of minting two $1 trillion coins.  

There exists, then, a practical argument that conservatives might have about two more weeks to play with their demands for a balanced budget amendment (which I actually support, in modified form, allowing flexibility in time or war or crisis). 

But this is playing with fire.  And members of Congress have shown they don’t have the professionalism and skill to “get things right” that we demand of our real experts (in medicine, space travel, information technology, etc).   There is a lot of uncertainty.  Maybe the president  or Treasury Secretary needs to spell out right now exactly what happens and who will not get paid on what day. But they need to back up their edicts with audited (and I don’t mean by Scientology), verified numbers and legal opinions (not just CNN show host or even blogger speculations), which so far have not been forthcoming. The  Bipartisan Policy Center numbers appear to be the best we have.

Here is the link for the BPC report (pdf).

Thursday, July 28, 2011

Do we really KNOW whether gov't can make payments without ceiling lift? MSN piece asks for "sacrifice"; could FDIC deposit insurance be at risk?

Let me reiterate a point about yesterday’s Tea Party “spy visit.”

I think it is quite likely that the government can may most of its obligations (maybe all) in August without a debt extension by Aug. 2.  That would include bond obligations and Social Security obligations. But even with that, there can be day-to-day cash flow problems that can delay payments temporarily.

Obviously, without debt extension, the government could not go on for a long time without extraordinary cuts to future obligations – leading to economic dislocations with which we are already familiar (layoffs, to start).

 But at least it could have met its existing obligations, and its credit, if it stretched them out, was late with some, and then stopped spending, perhaps shutting down whole departments (Education, HHS, Commerce, etc).   I’m not advocating that, I’m just doing the analysis.

What galls me is that Tea Party legislators and supporters (including Michele Bachmann, who pretends to be a presidential candidate), claim that they know that the government can pay its bills, when there is no way they could know.  Then, if the president doesn’t, they can “blame” Obama and the administration for not paying the bills, when there is no absolute way to “prove” that the money is there or isn’t there (except maybe in court). This is the kind of maneuvering that goes on before political and social revolutions, and tremendous breakdowns.  This is essentially a kind of war that destroys lives. 

One point needs to be very clear. We are talking about the personal dislocations caused by the government’s failure to make good on existing obligations, which, if prolonged very long, causes others to fail, leading to a chain reaction and tailspin that could destroy the entire fiat economy quickly.  This is different from the more customary downturn that results from large cutbacks in spending (commitment to future obligations after paying existing ones), leading to more unemployment in a more conventional way. 

It is true that some of this was the case in 2008. After all, major financial institutions could not meet their obligations, which is almost like government not doing so.  I guess we’re refuting the idea that “government is too big to fail.”  And indeed the Bush bailouts did contribute to the huge deficits since Obama took office.

Total financial collapse did occur in the 1930s, and remember it wasn’t just stocks and bonds that were at risk, so were cash accounts. And even today some people criticize deposit insurance, and it’s not clear that the government could guarantee the FDIC insurance if it couldn’t pay its other obligations.

It’s in that vein that I was quite upset with the tone of this MSN piece posted a while ago, “Could social security checks stop? … some things to do if it does”.   Much of this applies to other items, such as welfare or veterans payments, food stamps, etc.  Look at some of the suggestions:

Cancel services -- cable, cellphones, Internet, newspaper, books -- that were necessities yesterday but now are a luxury.”

“Sell some belongings. A yard sale might get you by for a couple weeks.

“Ask family and friends for help. These will be tough times, so don’t be proud.”

They are talking about real personal sacrifices, not because of economic dislocation in the usual sense (recession), but because of what is almost tantamount to crime.

The crime consists of playing roulette with the ability to pay existing obligations, and then possibly trying to repudiate them later in some sort of “purification”.

The MSN reference was here.   

This is not something the nation or its people needs to go through.  It is possible to implement a deficit reduction program that satisfies the credit markets and that avoids sudden dislocations.  But there may be some people who want it to go through this so they can seize power.

Of course, sacrifice and destruction of stable lives occurs for all kinds of reasons.  These could include pandemics, and natural disasters (like a huge geomagnetic solar storm, which we are unprepared for).   And sacrifice is demanded because of the aggression of others, and that’s usually called War.  To say that one should never sacrifice because of the wrongs of another it sot say one should never serve in the military to answer aggression caused by the demands of others.  History repeats itself.


While John Boehner's control of his own GOP Party implodes tonight: 

CNN Money has this report on the Analysis of the Bipartisan Policy Center, high level link with some day-to-day analysis, link here.   The devil is in the details in the PDF link; we'll look at it more soon.  The BPC says the Treasury may well have enough cash to get to Aug. 10.  Stay tuned.  

Wednesday, July 27, 2011

Tea Party "Hold the Line" rally crowd small, members think government threat of default is a "lie"

Today, I went to the Tea Party “Hold the Line” rally, even though I got there a bit late.  It took place in front of the Senate Office Building.  I got there near the end of the rally, which seemed to be a bit small.

I talked personally to some Tea Party supporters.  Generally, they insisted that the “default threat” was a “lie”, and that the government has enough money to pay all current debts. But they don’t seem to have hard facts to back up their claims.

They also made the point that we have to slash spending now to prevent passing on debts to our grandchildren. OK, some people don’t have grandchildren, and maybe that gets to the heart of the problem.

One person being interviewed by other media had a “Captain America” uniform.

Fox 5 was there, but it denied that it was “politically” related to Fox Network or Bill O’Reilly.

There is some talk that if there were fiscal chaos for a while (and some people got "hurt", like in the movie "The Town"), the Congress and President could be forced to accept a Balanced Budget Amendment, which would constrain federal spending forever, no matter who was in power, no matter what massive national emergency (like another 9/11), no matter how much demographics change.  

Here is the account on Politico, link

Tuesday, July 26, 2011

The government must pay its bills on time. Period. Then you can cut future spending and deficits.

Okay, I hope this is the last time I have to do this. I’m going to reconcile the debt crisis plans and try to craft a “Compromise” that can pass. Right now.  Here it goes.

But just wait! Let’s address all the major points made by the two sides.

Point 1:  There are two crises. One is that the government must pay all the obligations it already has. The other is that the federal government must reduce future spending to reduce the deficit and bring the debt under control.  This was one of Obama’s main points last night.

That is correct.  The ratings agencies are concerned about both problems.  It is necessary to both pay the current obligations on time and to reduce spending on future obligations.  But  some House Republicans are trying to hold the government’s ability to pay current obligations hostage to its own agenda.
That is what is so dangerous.  I won ‘t repeat all the arguments made in the media.  But it is obviously damaging to the economy and to ordinary people for the government to suddenly become “deadbeat”.

Point 2: The government has more money to pay the bills for a while without a debt ceiling extension.

 That is partially true.  I noted this with links at the end of yesterday’s posting. It’s likely that government could get through August, and could continue making entitlement, military, federal salary, and certain other payments indefinitely, as well as bond payments to Wall Street (and to countries overseas like China).  But quickly, many contractors would not be paid. Many programs essential to national security would be stopped. Possibly critical infrastructures (power, Internet, communications) could be jeopardized without continued payments.  The ability to respond to natural disasters is reduced. National security is jeopardized, and the likelihood of terrorist attacks increases greatly.  With prolonged default, there is a definite risk of lawlessness, looting, and various breakdowns.

Part 3: The government could still borrow without an extension.  

That’s also a “maybe”.  There are several arguments floating (from law professors, mostly at universities in “red states”) that the president can borrow separately to repay the Social Security Trust Fund, that he could invoke the Fourteenth Amendment, or simply “do it” and challenge the GOP to stop him with improbable “troll” litigation. In fact, the requirement to pay existing bills, as apart from the ability to appropriate new spending, sounds so fundamental as to invoke constitutional questions that deserve court attention.

It would be a good idea for the administration to develop a formal legal position on this and publish it, by the end of 2011.

Part 4: There need to be immediate and large spending cuts, as well as more cuts over time; cuts proposed by the Democrats are not “real”.

That’s largely true.  Ratings agencies now demand this.  That means layoffs of contractors and some federal employees, but these parties must be paid for work already done.  In “retirement”, I am a part-time federal employee, and I have no problem with accepting the idea that my position could be one of those that goes.
Part 5:  Massive entitlement reforms, including means testing,  even for existing retirees, are essential to a deal.

Not quite true. Today’s “numbers” don’t support the idea that Medicare and Medicaid are overwhelming the budget.  But they are likely to in the future, particularly with the explosion of Alzheimer’s.  Means testing (and enforcing filial responsibility laws more closely, which no one has mentioned yet) may satisfy the “moral” agenda of many “conservatives” but it won’t make a large difference in the budget right now. Rand Paul is exaggerating the benefit of entitlement reform in some of his speeches.
Of course, it is necessary to make adjustments to these programs with future retirees, and that’s why I’ve been with the GOP on privatization for future retirees, which I think can work.

Part 6: A balanced budget amendment is essential.

Sovereign governments do need a reasonable ability to borrow and run moderate deficits during periods of recession. But an amendment that limits deficits in some way is appropriate.  The real problem is that it takes a long time to pass, and many states will not ratify it because they need to depend on the federal government.

There’s nothing wrong with Boehner’s idea of a vote on it in the fall.

Part 7: There is a partisan ideological divide that is growing.

True.  And it is dangerous. (Some time back, I reviewed a film called "Gerrymandering".) Some radical politicians may see a chance to force a change in power or “purification”.  The moral thinking of some social conservatives (the “natural family” and “demographic winter” crowds), and the “social contract” applies, and may indeed be affecting their motives.  That’s why a total social breakdown in case of prolonged default is a threat.  This is indeed one of the most disturbing points. Some politicians seem to want a revolution. There are parallels in history – Germany in the 1930s provides a warning, how an obscure party took over a country, threw people off the bus and started world war, over a particular “ideology”.

Part 8:  The deficit is out of control.

True, and this is a mathematical observation, based on the rate of change (a “derivative in Calculus) of the deficit.  It’s a mathematical chart a lot like that for global warming in Al Gore’s “inconvenient truth”.  This is another “inconvenient truth”.

Out of control deficits ultimately will provoke the kind of social crisis I mentioned above, as in Point 7.

Part 9: Obama is responsible for the deficit and isn’t serious about reducing spending (a persistent quote of Boehner).

Nope.  Most of the explosive deficit growth in Part 8 came from the bailouts, TARP, and rescue of the auto industry, which all began under Bush.  Properly managed, ObamaCare should not add to the deficit if health care costs themselves are brought under control.  True, some of Obama’s budgets his first year were generous, and he could have negotiated his debt extension sooner.

Part 10:  Some of Reid’s cuts are from the phantom zone.

Nope. If you can save a trillion dollars by bringing troops home prudently, I’m all for it. The problem is we don’t know that something else won’t happen that could require emergency spending. Maybe a coronal mass ejection leading a geomagnetic storm and massive power failure for months over half the country. Maybe nuclear terror.  I think it’s reasonable to count about $1 trillion from war savings, but insist on about $3 trillion in domestic savings over ten years.

Part 11: It’s unacceptable to have a debt on the vote ceiling again next year.

The ratings agencies are with the Democrats on this, and Boehner was wrong not to admit this or address it last night. The GOP must listen to the ratings agencies.  It really would be better if we did not have to update the debt ceiling, but could control new expenditures automatically. True, that’s the appeal of a constitutional amendment (“cap and balance”), but, as I said, it takes too long.

I really didn’t have a problem with a shorter extension, but we ought to listen to S&P and Moody’s on this.

Part 12:  You need revenue enhancements.

The president is right. Most mainstream Americans think that super-rich should pay more, and that closing abusive loopholes will not hurt job formation.  On the other hand, a family making $250000 a year is not “rich”.  And there is a moral argument that “rich” seniors should pay for their own medical care whereas working people should not.  The reported unwillingness of the “TP” to accept any revenue enhancements simply reflects ideological determination, that a safety net is not a public responsibility but belongs and families and as a personal obligation of private citizens.

Part 13: A reasonable bargain exists.

True. Ezra Klein proposes one today in the Washington Post (link).  I think Congress should spell out the details of immediate (next six months) and longer term (next ten years) cuts in terms of entitlements, contracts, and federal employees in various agencies.  There certainly will be layoffs. But the key to making an agreement work is to publish the details of the cuts (and of the people affected) as quickly as possible.  I notice that Reid apparently won't do entitlement cuts, but I agree with Boehner that some entitlement cuts should be put back into the compromise package now -- and wealthier seniors (and their families, under filial responsibility) should pitch in something on means testing of entitlements (esp. Medicare claims) now, after all, it's "the next generation's turn". It may not be possible to spell all of them out and pass them by Aug. 2, but much more detail should be available before the start of the next FY on October 1.

In general, the “compromise” is to follow a plan like Reid’s, but to publish more much details on non-defense cuts and particularly entitlement cuts, implement some means testing (outside of the value of contributions already made from FICA and Medicare taxes, as noted above), and publish this, and make all the longer term changes in entitlements.  (The publication of details answers Boehner's complaint of a "blank check").  There should be a vote on a “modified” balance budget amendment by Oct. 31, 2011.  And, to listen to the ratings agencies, we should never go through a debt ceiling exercise again.

Monday, July 25, 2011

Boehner/TP and Obama/Reid play Dueling Banjos; can Obama turn the tables by raising the debt ceiling on his own?

Okay, there are now the “dueling banjos” from the movie Deliverance – that’s what we call the two competing plans by Boehner and Reid.  Remember that scene in the 1972 movie with the knife readied for chest shaving?  This debate is taking on Freudian dimensions.

The Wall Street Journal has an editorial Monday morning suggesting that Congress pass Boehner’s plan, and confront Obama with the chance of being blamed for default (hence, no re-election) if he doesn’t take it. Boehner seems to be putting the president on probation.

That missive is titled“Toying with Default.” The WSJ says that the president isn’t serious about spending cuts. That doesn’t make sense in view of Obama’s recent speech Friday, until you look back to his demands last April. The president seems to have underestimated the extent to which some GOP “anarchists” would take this.

The WSJ link is here

But the New York Times has an interesting piece by University of Chicago professor Eric A. Posner and Adrian Vermeule, “Obama should raise the debt ceiling on his own”.  Bill Clinton has even said this, citing the 14th Amendment. Posner is making an analogy to Lincoln’s actions during the Civil War with habeas corpus.  The Cato Institute has suggested that as a practical matter it would be difficult to find standing to sue to stop him.  The White House denies it has any power to do this. But investors would feel reassured if it did.  If this were possible, then Obama and Reid would have the last card, and could force the GOP to accept extension through 2012.

There are other papers around saying that Obama could still borrow to pay the IOU's to the Social Security Trust Fund and guarantee all Social Security payments (up to a FICA actuarial limit). 

But the real problem then is spending. Ratings agencies and to see details of spending cuts, and fast.  And Republicans and Democrats both have to say who is going to take the hits.

That gets into the “moral values” debate and a WSJ piece by Arthur Brooks (p. A13), which I will discuss in a post on my main blog.

Update: 4: 30 PM

President Obama addresses the nation tonight at 9 PM EDT on "stalemate over avoiding default and the best approach to cutting deficits," (ABC).  Boehner will also speak (pun). 

Update: 10 PM, after the speeches.

The Washington Post has an important story by Zachary A. Goldfarb, "US could avoid default a few days longer", new reports say (link).  Bloomberg has a similar story where a Wells Fargo analyst John Silva says actual default would not happen until September, link

Sunday, July 24, 2011

Congress needs a preliminary deal today, before markets open; but the "Chaos Experiment" continues; If no deal today, do investors panic Monday?

Dana Milbank has a particularly alarmist column Sunday morning Washington Post, “Dangerous Dealings with the Default Crisis,”  link (website url) here.  All of this appears while the media Sunday morning grill Congressional leaders and Timothy Geithner (note the lisp in the name) on whether Congress can reach broad outlines of a deal before Asian markets open Sunday evening and particularly US markets on Monday.  The scuttlebutt is that Democrats are still refusing a two-extension deal, insisting on enough debt extension to maintain financial stability through the 2012 election.  Yet, a "plan" needs to get posted on the Internet today (they're free to ask me to post it on this blog -- stay tuned.) 

On the latter, Benjamin Applebaum and Eric Dash have a sobering story on p 14 of the Sunday New York Times, “Default seems unlikely, but markets prepare; stalled debt talks jar wary investors”, link here.  Particularly scary is the idea that investors should dump stocks and even bonds quickly for cash, raising the possibility of a panic Monday. Then if there is a settlement, many investors and retirees could have suddenly lost a lot of principal.  It might be wise to hold on if you don’t have too many immediately pressing bills.

As for Milbank’s piece (somewhat in the style of Andrew Sullivan’s, quoted yesterday), it reflects a sandbox mentality associated with bullying. “You’d better blink because my side has some crazies, and they might just blow us all up.”  So the side with more radical members now gains an advantage.   It sounds like a kind of “chaos experiment” (or “steam experiment”).

This morning, Diane Feinstein, answering a question from Candy Crowley on CNN on whether she was optimistic or pessimistic on the deal to extend the debt ceiling:  “I am neither. This is the first time in my 19 years in the Senate that something that can be done being very simply is being held hostage for a very high stakes game.” 

Just remember, though, the math of all this (which Rep. Price mentioned on CNN). It really is possible to pay everything for a while after Aug. 2 through some more obscure tricks, but not "forever".  

Make no mistake: I'd like to see Congress extend the ceiling one more time through 2012, and commit itself to the $4 trillion cuts in 10 years, what the ratings agencies are telling Congress it must do. (You don't need a constitutional amendment right now, just a statute.)  It's that simple.

CNN video, "the debt crisis is being driven by math" (Price).  Yup, I've been a math teacher myself. Learn to work the Algebra I story problems:

Here is White House Chief of Staff on debt ceiling and deficit this morning:

Saturday, July 23, 2011

Conduct of politicians, Boehner's behavior Friday, rattle confidence of investors in future US stability

What upsets me about yesterday’s “blow up” was the conductor of the negotiators, especially Boehner, rather than the "numbers".  I won’t rehearse the details, which the media have reported ad nauseum now. 

What does he mean, that the White House is not serious about cutting spending, with $3 trillion in cuts on the table?   Why would revenue enhancements by close fringe loopholes destroy jobs?

I get the ideology. OK, it’s not the responsibility of government or the public (in GOP parlance) to provide and maintain safety nets for the vulnerable, it is the personal responsibility of every one of is, in and around the family.

I also understand that the GOP thinks it can call the administration’s bluff on what really happens if the debt ceiling isn’t raised. I understand the ambiguities in the numbers and in the law. I’ve discussed these points several times recently.

But when you hold individual people hostage to your agenda, you show you have no regard for them. You say you’re willing to throw them off the boat and let them drown.  Authoritarian governments do that all the time. No wonder the right wing talks about survivalism.

Why would Boehner work on a plan with the Senate without a deal?  The president has called him right back at 11 AM today.

What should people do to prepare themselves?

Clyde Anderson’s advice on CNN:

Focus on safe assets:  gold (not sure I agree, gold could go down later).

Think more about Roth IRA, pay taxes now to avoid inevitably increased taxes later.

Make your big purchases now, before interest rates go up.

But rates can go up very quickly. 

Talk to your broker about unloading bonds (yes, that’s what he said  -- but then what?).

I spoke to mine Monday.  It takes three days to sell securities.  Will there be a panic Monday morning and it be impossible to sell?
I don’t see a read early Saturday AM on how the financial markets are taking this.  Yahoo! Finance repeated the AP story here

The Washington Post has a detailed account here, and it looks like the two sides were not as far apart as the hissy-fit makes it look. The administration supposedly added a demand for $400 million more in revenue increases (taxes??), resisted more cuts to Medicaid (small in proportion to the whole problem), and the GOP wanted to put some of ObamaCare at risk.  

Judge Judy should show up at the 11 AM meeting and give both sides in the sandbox one of her lectures. 

Andrew Sullivan has an alarming piece in his "Daily Dish": "The Cold Civil War", here.  He calls The GOP now a faction of anarchists, and writes "Their fiscal anarchism has now led to their threat to destabilize and possibly upend the American and global economy because they refuse to compromise an inch. They control only one part of the government, and yet they hold all of it hostage."  And they hold "ordinary people" hostage , too.  Welcome to the 1930s.  

Friday, July 22, 2011

Tea Party probably not numerous enough to block eventual debt extension deal, but their "anti-Chicken-Little" claims have more credibility than I had thought

As for today’s debt missive, I guess I could focus on Charles Krauthammer’s suggestion of a “Half-Trillion Dollar” plan: a half-trillion extension of the ceiling before Aug. 2, but a legislated commitment to $500 million in cuts over the next six months, or almost $100 a month.

That’s more than what might actually be cut every month with no ceiling extension, if you follow the math and logic of a Texas A&M economics professor  (Thomas R. Saving) whose article I discussed today on my Retirement Blog.  On the surface, this idea gives the Tea Party’s claims some credibility.

But it’s close – maybe even stricter – than the plans advocated by Moody’s and by Standard & Poor’s, and it’s a bit like a Grand Bargain. His Washington Post link is here. And it keeps the good name of the US behind its obligations, keeping the dominoes from falling.

There are some other pieces of this. Fareed Zakaria sees the debt ceiling debate as a side show, on his CNN blog here

On July 7, Robert A. Levy had published in “The Daily Caller” and later on Cato an article “Defaults, Debt Ceilings, and the 14th Amendment”, link here.There is some discussion of the difference between default and repudiation, but an admission later that a prolonged default amounts to repudiation.  The relevant case is Perry v. US (1935).  He discusses the constitutionality of the debt ceiling itself, but also suggests that the government could be compelled to do whatever is necessary to pay existing obligations (with Social Security that’s tricky, as with the Saving article from Texas A&M),and in doing so, the president could still borrow money (through a well-known but clandestine securities operation in Washington near the Treasury Building), because no one would have standing to sue to stop him  -- but only in the short run, to pay existing obligations.

In other words, as much as I hate to admit it, the hardliners do have a point – there is more the government can do to meet its current obligations than it is admitting. It’s like going to bankruptcy court and hiding assets.
All of this leaves us with the likelihood of some rather draconian cuts in spending soon; a look at the numbers tells me that the fattest place to cut is not entitlements but contractor abuse.

Can members of the Tea Party Caucus in the House really block any attempt to block the debt ceiling extension?  A website with a list dated March lists 56 such members, hardly enough to block a reasonable debt extension bill, with link here. Barney Frank, on the other side, said there are worse things than default.

But the idea that a sudden new majority can barge in to the scene, effectively repudiate previously made obligations and throw a lot of people overboard for the sake of their own “grandchildren”, is indeed frightening. History tells us it’s happened many times before.

Thursday, July 21, 2011

Federal Reserve prepares for possible default

The tone of the reporting on the debt crisis is variable Thursday morning, with the Washington Post hopeful of a deal in stages, leading to a grand bargain – while still concerned about ideological intransigence --  but CNN still reporting “no progress” last night.

AOL and Adriana’s Huffington Post, however, report that the Federal Reserve is preparing for the possibility of a default. For example, it’s necessary to determine which payments have “cleared”.  Even in “The Event” (NBC-speak) of default, the Fed could step in as a “lender of last resort” if the markets seize. That sounds like a paradox.

Here is Huffington’s link.

There’s still some double talk about the “seriousness” of default, because, in a sense, the Tea Party is partially right. In the short run, the government could still make its interest payments,  pay normal entitlements, and pay federal salaries (you can look at the numbers).  But the situation would become dangerous quickly. Probably contractors wouldn’t be paid.  Eventually – and fairly quickly – interest payments and the values of bonds and stocks and even cash would be jeopardized, risking wholesale panic.  Don’t play with fireworks.  You can’t make a permanent 40% cut in the Federal budget in one week.

I still sense a desire of some Tea Party house members to throw people off the bus “because they can”.  This is the old case of “two wrongs don’t make a right.”  Someone can be destroyed for good by what someone else does, and perhaps there is a tragedy in that the “victim” never would admit his own dependency.  Everybody loses.  Here, the Tea Party blames the president for taking seniors as “hostage”, but in a month or so there will be a lot of “hostages”.  And, yup, they will be people whom some think should be taken down.

We’re all sinners. 

How many members of the House said pledged they would never extend the debt ceiling?  I thought it was "only" about 40 or so. 

Also, the New York Times (Louise Story and Julie Creswell) and MSNBC have a story about Wall Street's preparations for possible default here. MSNBC is reporting that the US may already have passed a critical point in avoiding a credit rating downgrade. 

Wednesday, July 20, 2011

"Les Six" offer a debt deal: guarded optimism that it will stick

So there are two pieces of legislation: Cap, Cut and Balance from the House, which we know will not pass the Senate, and the staged and somewhat vague “Gang of Six” proposal, bipartisan, cooking in the Senate, which the president can sign. (There was a group of French music composers called “Les Six” at one time, and there is another such group of young composers in New York now. Is there something about “The Number Six”?)  Also, “cut, cap and balance” sounds like former Washington Blade editor Chris Crain’s phrase, “piddle, twiddle and resolve”.  Try naming a bill that. Nero fiddled while Rome burned.

Wall Street was encouraged by the Senate and is steady early Wednesday.  But many observers see considerable resistance among House freshman Republicans to any deal. But most polls show an increasing disgust among Americans with Congress, and with government in general.

And this reminds me of debates I have with myself over questions I get: if I have so much to say, why won’t I run for office?  Or why won’t I help specific candidates.  Isn’t it obvious why?

I still think that there is a mentality of “throw people off the Raft of the Medusa” (an opera by Henze) among some Republicans, or maybe even in some of the president’s own statements. 

One problem is, as I wrote on my retirement blog Monday (feeling prodded by Bachmann and the Tea Party to really look at the numbers myself), the math shows that it really is possible to pay all the bond interest, entitlements, and military and federal salaries in August with no extension, but contractors won’t get paid – dangerous – for work already done (hence, down goes the credit rating); and the GOP has yet to explain how it could sustain the country very long doing this. Cancel most contracts?  Cancel all foreign aid?  Be specific, now, GOP freshmen!

But, maybe the sky doesn’t fall Aug. 3.  Maybe it falls Sept. 15 (like 2008).  But a real financial panic could set in during the meantime if deadlock continues.

It also strikes me that a lot of the debt comes from the bailouts in 2008.  Plenty of my own personal friends still insist we should never have done the bailouts.

Here’s Bloomberg’s account of the partial gospel, link

One good thing about “Les Six” and their plan (“It takes a long time to become a good negotiator”), is that the ratings agencies (especially Moody’s and Standard & Poor’s) have more or less endorsed the same solution: about $4 trillion in specific cuts in 10 years, with at least $500 billion in the next year, and a modest debt ceiling extension. Also, wouldn’t the Tea Party like to see lower tax rates for most people and the alternate minimum tax eliminated as part of the deal?  

 It's interesting to me that while Congress chokes on its job, private-business America tries to move along, ignoring the icebergs ahead. On the same day of a major setback in Congress, Facebook announces its Skype deal. "Les Six" announces its schedule for next year: more polytonal versions of Mozart and maybe "bargemusic" and concerts in condos overlooking Central Park.  I try to announce the outlines of my DADT movie concept.  Hollywood plans life after Harry Potter (maybe another "Inception"). We're back to what the late libertarian Harry Browne said in the 1990s: "government doesn't work." 
I'm not sure I follow the logic of a group called "No More Blank Checks", link

Sunday, July 17, 2011

Look at the August numbers: On paper, you could pay most "critical debts" without debt extension; does Tea Party have a point? But it gets VERY dangerous.

This morning, a White House budget director on CNN refused to speculate on who might not get paid in August in the event of default, despite extensive prodding.

It you look back to Thursday’s posting, there is a link to a Washington Post chart on August. There is a bill of about $307 billion and receipts of about $172 billion, and no savings.

It looks like, you could pay bond interest  $29 billion and Social Security payments (that is, legitimate Trust Fund obligations based on FICA receipts, maybe slightly less than the total $49 billion), and have about $90 billion for everything else (of about $210 billion due).  Pay the military and veterans and you still owe about $84 billion. It gets tough, because you fully cannot pay contractors, and may not be able to fully pay federal employees.  You could cut Medicare considerably by very stiff  and immediate means testing.

The bottom line is, the government would be in default to vendors and employees, but not of the full $130 billion shortfall, probably more like $90-100 billion.  (The ratings agencies will still downgrade the government when this happens even if bond interest is paid.)  Much of this (like federal salaries) is owed for work already done, even if you make immediate and permanent draconian budget cuts without a debt limit extension.  Maybe a federal court makes you borrow to pay these obligations, and then you make the cuts, starting in September.

The “Tea Party” crowd (even the “no extension” gang like Bachmann), as much as I hate to admit it, has a point.  It’s possible to spell out extremely draconian and permanent cuts, take your emetic (no, don’t eat your vegetables first), and start over.  But it sounds like throwing a lot of people off the Titanic (those we think don't "deserve" to be there in a crunch) so the remaining people can "live" and start over. 

But, yes, it’s very dangerous. Just think about national security and homeland security, for openers.

But it is possible to “target” beneficiaries of federal spending (and loopholes) based on “deservedness” in a kind of “revolution”, as dangerous as this sounds (look at history  -- the 1930s, for example).

So my point now is this. To get a deal, stop playing chicken.  Spell out the exact cuts that happen if there is never another debt extension (because it does sound thinkable).  Tell the American people who has to make the sacrifices.  Publish it.  Don’t hide anything. Tell the truth.

I think the result afterwards would be a “deal”, and maybe even a bigger one, like the president wants. And you need a big deal soon to keep a sustainable civilization intact.

(Also: listen to Larry Summers on Fareed Zakaria today; here is SFGate story.) 

Note also: The Democrats beat the Republicans, 8-2, at Nationals Park Thursday night. I don't know who was the home team. 

Saturday, July 16, 2011

What happens Aug, 2 with a sudden 44% cut in the federal budget?

Last night, while at the Town DC, I peeked at the headlines on my cell phone – the debt negotiations were supposed to be going on somewhere, at a secret place – maybe the Town, for all I knew, or the 930. I saw this “screenplay treatment” by Jeff Greenfield documenting how the two party system could fall apart and we could have a third party president (Jesse Ventura?) in 2013.  It’s called “What Happens to American Politics if We Default?  Hello, Third Party”. The Washington Post link, not so obvious in print, is here

 His “film” would play well at Washington’s West End.

There is some confusion about what the Tea Party wants (or maybe there isn't -- below).  It is written that about 40 members of the House will not vote for debt extension unless Congress passes (with 2/3 majorities) a Balanced Budget Amendment (as part of the so-called Cut, Cap and Balance Act).  But others are reported as unwilling to vote for debt extension under any circumstances (apparently this includes Michele Bachmann). And at least one wants the debt extension limit reduced. “It’s morally wrong” was the comment. A typical story is in the National Journal July 14, here. But I can remember “balanced budgets” as being proposed for platforms, even with Democrats, as far back as 1980.

The demand for immediate cuts and balancing have a result that is much more draconian than Obama’s grand plan of $4 trillion cuts over 10 years, a benchmark proposed by the rating agencies (especially Standard and Poor’s). 

It’s apparent to me that a rule that ties debt extension limits to specific cuts in the future is a good thing. That’s what investors want.  (So that’s what Boehner’s GOP should want.)  And it should be written into law (getting it into the Constitution is much more difficult – and remember that in 1997 I wrote a book proposing major constitutional amendments; I’ve been there before). 

But an immediate cut, effective Aug. 2, of 44% of the federal budget (that’s what the numbers say) is entirely a different matter.   Technically, the Treasury Secretary might forestall formal default for a while by not paying many federal workers but by paying bond interest.  Eventually, default would occur, sooner rather than later.  And there is the economic and psychological effect of a first-ever default, and a failure to protect US creditworthiness.  Moody’s and S&P both have said that they regard failure to pay anyone (including social security obligations and federal workers) as a default.

Do Tea Party Republicans really get this?  There are reams online about how “trust” works in credit markets (see Ezra Klein, also in the Washington Post today, as well as the Post’s own “unnecessary” editorial), but the effects would be long lasting and obviously affect many or most Americans (and voters) personally. Real sacrifices would have to be made that are just unheard of how.   Possibly the Social Security Trust Fund would be shielded by a federal court (the AARP would certainly sue to do so). Many federal workers would not be paid, many essential services (like air traffic control, border control) would be compromised, and national security would be at risk. (Would soldiers get paid? Veterans probably wouldn’t).   The US would become much more vulnerable to another 9-11 attack.  I don’t think that even Michele Bachmann wants that.
In view of this, the Obama DOJ could try to get a federal court to rule that the 14th Amendment bans default, and get a defacto extension. That sort of logic may underlie the proposals from Mitch McConnell.  It’s hard to say if a federal judge would go along with this reasoning.

So, Dr. Phil should ask the Tea Party freshmen, “What were you thinking?”  (Maybe Suze Orman will give them all smackdowns.)  I think I can guess, and it isn’t good.

There's a story on CNN by Shannon Travis, July 15, that is revealing, "Tea Party to GOP: We could make 'examples' of you over debt ceiling", link here. This sounds like something playground or sandbox bullies would say. Social and political power is more important than truth. But incredibly, Mo Brooks as saying in another Post story ("GOP dissent complicates resolving debt crisis) July 14 by David A. Fahrenthold, link here, "There should be no default on August 2.  In fact, our credit rating should be improved by not raising the debt ceiling."  Just plain wrong. Listen to Moody's and S&P. 

Some of their muddy perceptions may come from lack of intellect, or their belief that they have to give their constituents, who may sometimes not be well educated, what they “want”.  (One comment to me complained " What gives you the right to the idea that you are intellectually above the' cretins 'of the world?")  One Tea Party member wrote that it was “arrogant” to impose his own “reasoning” on his constituents! Some do not really get how credit markets work. But what’s worse is that some cannot do simple Algebra I “story problems” like those in middle school.  Figuring out who to pay in August is basically an eighth grade algebra test problem.  Geithner will simply have to solve for some “unknowns”.  There is not enough money.

But what’s scarier is that some TP ("toilet paper") members may really want to see a “purification”.  Impose misery on this generation, make it suffer and pay for living beyond its means, let some poor and elderly perish.   Particularly, target the “undeserving” or the “losers” or the “parasites”.  The “next generation” will do well.   History has plenty of examples of governments that have done this, sometimes with catastrophic outcomes.  Look at Germany in the 1930s.  Make no mistake, if there is no debt extension by Aug. 2, it’s possible there will never be one. Our government could break down and real chaos like we have never seen could develop.

I still think that the key to any “deal” is to specify, in advance, the cuts that are necessary, right now and over time, and come clean as to who is affected.

Roland S. Martin, CNN Political Contributor,  has an op-ed "Stand up, America, demand a deal on debt". So I did so, yesterday. Perhaps I am like Chicken Little in that 3-D Disney film, when "CM" got dinged by his father for ruining the family's reputation of the Web.

Here’s the letter I wrote to James P. Moran, D-VA, 8th District, yesterday.


Rep. Moran:

We’ve corresponded many times before, most of all on managing and finally ending the “don’t ask don’t tell” policy for the military.

I just wanted to take a moment to express my shock at the behavior of some members of Congress during the debt negotiations.  Some freshmen congresspersons seem to believe the government can just not pay some of its bills with impunity, and expect Americans to live locally with increasing chaos and breakdown that would follow.  I cannot believe some of the rhetoric I have heard.  Some members of Congress think their constituents want them to drive the economy off a cliff.

One Congressman said he was elected to do what his constituents want (anarchy, I guess), not what is right. It would be “arrogant” he said, for him to judge his constituents.

I think to get a deal, you have to do two things:

(1)    Specify the exact spending cuts.  That could even mean some means testing even of current Social Security and Medicare beneficiaries, to the extent that the benefits they receive may exceed the actuarial value of their past FICA and Medicare taxes (a difficult calculation, to be sure, given all the levels of benefits).  But it’s obvious that there are many cuts in contracting, pork, even things like drug enforcement (making marijuana illegal is very expensive for government).  Some big roads and rail projects can be paid for by higher tolls and fares rather than taxes.  Cuts in areas like Metro transit would have to be specified. But you have to lay down the details now, in a way that anyone can read.  Cuts in mortgage assistance would sound likely.
(2)    Specify the revenue increases.  Generally, they can be achieved by closing loopholes, but remember closing them still affect some people and jobs.  Generally, the GOP is right in that there should be a mathematical relationship between debt extension, spending cuts, and revenue.  But the problem is that no one, in all these weeks of bickering, can get specific as to the consequences.

All of this reminds me of the 1975 New York City financial crisis, and the New York Daily News “Ford to City: drop dead”.  But the unions soon settled.

The consequences of a default could be grave and long-lasting and dangerous to the lives of some people, especially the elderly (I am 68 myself).

Let’s get the deal done, now.   I feel that I could go into the conference room and get a deal out of them in three hours!

Thursday, July 14, 2011

Moody's warns Congress; so does Standard and Poor's (but more gently); Balanced Budget amendment, temper tantrums, and more

Moody’s Investor Service announced on July 13 that it was placing the bond rating for the United States, now at “Aaa” on review.  The most comprehensive link, open to the public, of the action is (website url) here.
Moody’s says it offers no opinion on specifically what spending cuts should be made, but that it sees two basic dangers: first a default on the bond obligation if the debt limit is not raised by Congress on time, and then an unconvincing case that it will be able to control spending in the future.

It suggests that a default would probably be short-lived with restoration of payments, but the result could be a permanently lowered rating.  To quote the paper, “To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

Standard and Poor’s “Credit Matters TV” has an interview with Paul Coughlin, from London, on the effect of a possible failure to raise the debt limit. The link is here.The scenario is not as alarming as painted by the US media.   It says that the debt limit has been raised 78 times since 1960.  He says some bonds could be “rolled over”. 

However, Standard and Poor’s (aka "Standard & Poor's")  has been reported by the WSJ as having said that even if the government makes all its bond interest payments but misses social security or veterans’ payments (or is just late with them), it would probably drop the US government’s rating.

A variety of convoluted short-term solutions are appearing, such as a variation of McConnell’s that would require Congress to provide some rough draft’s of spending plans. All of these are designed to reduce the “political” damage, especially to Republicans who promised things they can’t deliver to constituents based on ideological grounds.

One particularly interesting variation calls for the House to vote on a Balanced Budget Amendment by Aug 2. There are some escape hatches to the amendment that allow Congress to override the balancing by super-majorities. Bailouts, TARP, and the rescue of GM would not longer be possible, and investors would be at the mercy of the next derivatives scam or the next AIG.  Even deposit insurance could come into question. People might turn to gold, which can be shady.  (I remember a deal to sell two krugerands back in 1985.)

It still seems to me that both sides need to be specific as to what they will cut and how quickly. It’s apparent that many cuts would not hurt ordinary consumers – such as pork projects, military contractor abuse, and particularly drug enforcement.  I wonder how much making marijuana illegal costs the federal government every year, compared to other needs including “entitlements”. 
But there are real questions on “entitlements”, even for current beneficiaries, and I have written that anyone receiving them should know the “value” of his own (or family’s) past contributions through FICA and Medicare taxes.  The idea of scaling back entitlements for future generations by quasi-privatization and ownership makes sense if done right, but this may not be convincing enough; the current beneficiaries still represent an issue because longevity in increasing so rapidly, as is use of medical services and the projection for much more long term disability in the future (as with Alzheimer’s).  Legal pressures for filial responsibility on other family members could increase, and this could hit the childless particularly hard.  The “right” has a point when bringing up “demographic winter”.

The Washington Post online has an “amusing” chart on “You choose: who gets paid (and who doesn’t)?”  The link is here. Read it this way: it sounds like bringing back the era of the playground bullies:  Who is “it”?  Who gets selected to become the “sacrifice”?

Obama has even said that this matter could end his presidency. That sounds like throwing a temper tantrum.  Despite Standard and Poors’s benign video, it seems like a real breakdown could happen if the federal government cannot be counted on to pay what it “owes”.  The value of retirement portfolios, even for those with little debt, could fall sharply.  Real lives could become shorter.  None of this is good. Both parties need to get over their boorish behavior. 

Here is Ron Paul's movie preview from "Balanced Budget Productions", rated PG-13:

Would Rand Paul join in?  He probably wants wealthier seniors to give up all their entitlements now.