Opinion

Anatole Kaletsky

With hostage taking over, a Washington deal beckons

By Anatole Kaletsky
October 24, 2013

Nobody should be surprised that Wall Street hit new records this week. After all, the U.S. has just witnessed the end of a sensational hostage crisis that was threatening national security and undermining economic confidence — and even more sensationally, this was the second such crisis in two months.

John Boehner was held hostage by Republican hardliners until last Thursday, when the U.S. Congress voted to continue pumping money into the U.S. government. The fiscal militants forced Boehner to endanger the U.S. economy with threats of a Treasury default. Boehner reluctantly paid this rhetorical ransom in order to preserve the appearance of party unity and therefore his own credibility as a political leader.

Now consider events a month earlier on the other side of Washington. Until September 18, when the Federal Reserve voted to continue pumping money into the U.S. bond market, Ben Bernanke was arguably held hostage by the Fed’s hardliners. The monetary militants forced Bernanke to endanger the U.S. economic recovery with threats of a premature end to quantitative easing. Bernanke reluctantly paid this rhetorical ransom in order to preserve the appearance of institutional unity and therefore his own credibility as an economic leader.

The fact that both these hostage crises were resolved without any bloodshed or major economic damage was naturally cause for financial celebration. But what happens next will depend on an interaction between Boehner, Bernanke and President Obama that has not yet been widely analyzed.

Let us begin with politics and the Boehner-Obama relationship. Both Republican and Democratic leaders now badly want to avert the next phase of automatic spending sequestration that is due to start in mid-January in the absence of a budget deal. Democrats want higher public spending as a matter of principle, while Republicans are under huge pressure from defense contractors to avert the next round of sequestration, which will bear much more heavily on defense spending than the cuts last year. Moreover, neither side has anything left to gain by threatening a budget breakdown — and both have much to lose if they are held responsible for extended gridlock.

Most importantly, a deal is now on the table that would be acceptable and even attractive to both sides: The Republicans could agree to lift the sequester and slightly raise government spending in the short term, in exchange for the Democrats agreeing to small long-term economies in Social Security and Medicare.

To clinch such a deal would take only one concession from President Obama: all the President has to do is drop his insistence on raising taxes. Obama may see ideological appeal in higher taxes, but in terms of practical politics, conceding to the Republicans on this issue could free his presidency from the misery of endless budget tussles and would be much easier now than at any time in the past five years.

The main reason why declaring a truce on taxes would be easy for Obama today is that he no longer needs extra revenues to stabilize the U.S. budget. Steady improvement in the U.S. economy, combined with the rate tax hikes already introduced in the January 2013 fiscal cliff deal, are sufficient to put the government-debt-to-GDP ratio on a declining path at least until the end of the decade. A second reason for Obama to drop his demand for tax hikes should be the recognition that this is the totemic budgetary issue on which the Republicans could not possibly compromise, just as Obama himself could not compromise on delaying Obamacare.

If the White House abandoned its demands for higher taxes, a comprehensive fiscal agreement could well be reached by the deadline of December 15 set in last week’s Congressional vote. And if no comprehensive budget deal could be reached by the December deadline, what would happen in Congress? Now that Boehner is freed from the Tea Party’s fiscal militants and able to exercise his own judgment, it seems almost certain that he would want to secure his reputation as a responsible politician by allowing a simple Congressional vote to implement the January sequester spending cuts, continue funding the government and extend the debt limit beyond the election of November 2014. Since the January spending cuts would amount to only around 0.5 percent of GDP, the resulting headwind to economic growth next year would be much less severe than the fiscal tightening of 2.5 percent of GDP in 2013.

How would all this affect monetary policy and financial markets? Now that Bernanke is freed from the Fed’s monetary militants and able to exercise his own judgment, it seems very likely that he would want to secure his reputation as a responsible central banker by starting to normalize U.S. monetary policy before his retirement at the end of January. If Congress agrees to a budget deal by December 15, Bernanke could well take advantage of the resulting upsurge in economic confidence to start tapering at the Fed meeting on December 19. Failing that, and assuming a simple continuation vote in December to implement the sequester, fund the government and extend the debt ceiling, Bernanke might still want to announce a tapering at his last Fed meeting as chairman on January 29. Either way, the many investors who believe that tapering has been indefinitely delayed by last week’s political shenanigans in Washington are likely to be proved wrong.

PHOTO: U.S. President Barack Obama (L) thanks Federal Reserve Chairman Ben Bernanke (R) for his service as he announces his nomination of Janet Yellen (not pictured) to head the Federal Reserve at the White House in Washington October 9, 2013. REUTERS/Jonathan Ernst

Comments
15 comments so far | RSS Comments RSS

There was not hostage taking and Government IS working. The Affordable Care act was not ready for implementation due to the incompetence of the Obama administration. Sibelius will not even respond to the press at this time. What can she say? The one who I want to hear testify is Lerner who has been hiding. She is the one who could provide details that would really have a positive effect on the country. The positive affect would be to impeach Obama, remove him from office and put him in jail for criminal acts. Those who drank the Kool Aid still don’t see it. Also, I think most people in Congress still have not read the AHCA but voted on it anyway.

Posted by Bighammerman | Report as abusive
 

War and taxes is all they are interested in, and nothing else matters?

Posted by 2Borknot2B | Report as abusive
 

Hostage taking is over? Says who? Certainly not the instigators of the last few efforts at extortion, some of which are still in effect such as the continuing disastrous sequester.

Posted by ptiffany | Report as abusive
 

@Big Ham:
Instead of impeaching Obama for imagined “criminal acts”, we should just lock up all the members of the More-On Party (MOP), a subset of the Party Of Stupidity & HYpocrisy (POSHY).

Have YOU read the Patient Protection & Affordable Care Act – aka Americare (it’s all Constitutional and democratically voted), Obamacare or Romneyare?

People like YOU are an embarrassment to real Americans. Then, YOU probably voted to eliminate most insane asylums, basically voting away your homestead and any chance of redemption or rehabilitation from the brainwashing of the Idiocracy and controlled by the Plutocracy. (Big words you probably don’t understand, so they’re obviously criminal.)

Posted by ptiffany | Report as abusive
 

Lets see, the stock market is up, jobs are down, money guys are getting rich and the fed is driving interest down to move people with retirement savings into the stock market. Shortly the fed will stop buying bonds and the market will collapse and the retirement savings of the few people left who were middle class will be destroyed. The wealthy will then have a larger army of slaves who are forced to work until they die. Good plan guys.

Posted by brotherkenny4 | Report as abusive
 

The Multinationals who have made huge “investments” in both parties ……strongly suggest Entitlement Reform.

Posted by SaveRMiddle | Report as abusive
 

@brotherkenny4:
Right on brother! The Plutocracy used to keep quiet about their war on the US, but now that they’ve won, it’s all out in the open. Us Pee-Ons will just have to accept our fate and acknowledge what the United States used to represent in terms of equality and the Constitutional mandate to “promote the general welfare”, a Socialist dream and the failed American Dream. (How many millions of mortgage payers actually believed that they “owned” their homes?)

This government of the people, by the Plutocracy and for the very, very rich shall stand until the Chinese surpass us. (They have their own billionaires to contend with.)

The truly Entitled are the wealthy gamblers at the Wall Street Casinos who had their gambling losses reimbursed at full value using taxpayer funds. Of course, the wealthy among the Tenth of One Percenters in the Plutocracy like Mittzi Romney stash away their millions and billions in tax-free (and tax subsidized) foreign bank accounts. It’s okay. The Members of Congress get their cut and the Supreme Court now openly represents the interests of the Plutocracy. $ $ Money $ $ = free speech. It’s in the Bill of Rights. (NOT!)

Posted by ptiffany | Report as abusive
 

With Democrats already evidently caving (unbelievably) on Social Security, allowing Republicans to escape with their dogma of no raised taxes intact is not only unacceptable, it’s contradictory. If, as the author claims, no new revenues are needed, then why is Social Security on the chopping block in the first place ?

Posted by brianpforbes | Report as abusive
 

@brianpforbes

Dangerously common sensical, my friend…you are on to something there. Democrats keep looking for a chance to capitulate on social security… despite talking out of the other side of their mouth to voters

Posted by Benny27 | Report as abusive
 

But isn’t the biggest political problem in this country the fact that politicians always end up agreeing to increase spending to please Democrats while not raising taxes in order to avoid displeasing Republicans? At some point, you run into math.

Posted by Bob9999 | Report as abusive
 

Even as the Democrats and the Republicans wrestled over more government and less government for the denizens of the world’s biggest borrowing country, the uncertainty over the tapering of inordinately pumped up palliative to shore up confidence in the tepid recovery of the US economy has actually held the emerging economies hostage in particular. The renowned analyst Mr.Kaletsky has doubtless set at rest the agonies of many a policy wonk in the emerging economy by forecasting that the much-awaited taper that made misery-go-round to many a nation would be either in December or in late January 2014 before the celebrated Federal Reserve Chairman hangs the boot. In case by any quirk of fortune, this deadline cannot be adhered to, his successor will have to deal with this legacy issue that has immense implications across the universe of the emerging economies. It is time the US authorities mulled over the ramifications of their policy paradigm so that countries on the fringes or the emerging ones do not get the shock of flight of capital, currency devaluation and a breakdown of growth momentum that could put paid to the aspirations of millions of young people in these countries for a secure future. G.Srinivasan, Journalist, New Delhi

Posted by G.Srinivasan | Report as abusive
 

Let me see if I have this argument correctly: If Obama capitulates on revenues (despite the fact that government revenues are at a 60-year low based on % of NGDP) and if Bernanke capitulates on helping the economy with the only tools he has available to him (despite the fact that employment as a percentage of working population is at an all-time low), then Republics won’t blow up the government again (and they get to keep funneling money to their defense contractor contributors).

How is that any different than last time? (It’s not.)

Posted by Jeff9207 | Report as abusive
 

It’s an interesting myth that taxes are not being raised. Has anyone heard of the Federal Reserve that has been creating trillions of cyber dollars for over six years? No taxes? Don’t be so naïve.

This is why comparisons between federal government and family budgets fail. Families don’t have the power to create money out of thin air.

You’d think that in this country that claims to follow free-market capitalism (instead of corrupt crony capitalism), that every citizen would know this. It’s one of the fundamentals of America.

Posted by ptiffany | Report as abusive
 

It’s an interesting myth that taxes are not being raised. Has anyone heard of the Federal Reserve that has been creating trillions of cyber dollars for over six years? No taxes? Don’t be so naïve.

This is why comparisons between federal government and family budgets fail. Families don’t have the power to create money out of thin air.

You’d think that in this country that claims to follow free-market capitalism (instead of corrupt crony capitalism), that every citizen would know this. It’s one of the fundamentals of America.

Posted by ptiffany | Report as abusive
 

Social Security has nothing to do with the budget. The ‘shortcomings’ forecast can be eliminated by eliminating the cap on earnings and including all income.
And, a jobs’ program to reduce the unemployment number would be a grand bargain that would actually help the citizens instead of the bankers.
Wouldn’t that be a nice change?

Posted by VinnieTheSnake | Report as abusive
 

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