James Pethokoukis

Politics and policy from inside Washington

Debt ceiling update: tax increases still a no-go

Jul 31, 2011 21:45 UTC

First, the outline of the emerging debt ceiling deal (via Reuters):

1) The emerging deal includes a two-step process to cut the deficit about $2.8 trillion over a decade while increasing the debt ceiling by a similar amount to cover U.S. borrowing beyond the November 2012 election.

2) Lawmakers have already largely agreed on caps to annual discretionary spending over 10 years, although their estimates of the savings, $1 trillion, are greater than the nonpartisan Congressional Budget Office’s tally of $750 billion.

3) A further $1.8 trillion would be recommended by a special committee appointed by Congress that would make its recommendations by late November.

4) Negotiators Sunday were trying to overcome one of the last major sticking points — a proposed enforcement mechanism, or “trigger,” to ensure additional deficit reduction gets enacted into law. Across-the-board cuts would be triggered if Congress failed to act on the panel’s recommendations.

It seems as if the cuts triggered by the enforcement mechanism will hit Medicare providers and defense, if  debt cuts can’t be agreed on. But it is also important to note that Republican leaders certainly believe that the structure  of the super-committee will be such that it would be virtually impossible for it to recommend tax increases.  This is key because the history of congressional committees and gangs would suggest that tax hikes would be on the table. A GOP aide describes it this way to me:

It has an undefined mandate of deficit reduction but the way that is constructed would essentially make it impossible to raise taxes. Anything scored by CBO is based on current law. Current law assumes that taxes are going to go up by three-and-a-half trillion dollars next year [over ten years].  So anything you do to the tax code, unless it starts off with a $3.5 trillion tax increase, it’s going to be adding to the deficit  … It’s almost impossible for them to touch taxes because if they do, almost anything will be scored as a tax cut, making it that much more difficult to reach the $1.5 trillion that they need to get to.

 

Sputter to stall: U.S. economy dips into danger zone for recession

Jul 29, 2011 20:45 UTC

More evidence, as if we needed it, that the U.S. economy is in sad shape. America’s gross domestic product grew just 1.3 percent in the second quarter, according to the Commerce Department. And first-quarter growth was revised down to just 0.4 percent. This is now the weakest two-year recovery since World War II.

More importantly, it means we’re in the danger zone for another recession. Research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.

Check out this depressing analysis from IHS Global Insight, one of the economics firms the White House regulatory likes to cite (but maybe not today):

There is little doubt that, since the summer of 2010, U.S. growth has faltered—the only question now is how much weaker could things get and how long will the (very) “soft patch” last. His Global Insight now expects that growth in the third quarter will come in much weaker than previously expected—probably less than 2 percent and possibly less than 1 percent.

There is no margin for error here. Nothing else can go wrong, such as, for instance, an EU sovereign debt crisis. Oh, wait:

Italian bond spreads have widened to new highs, while Spanish debt spreads are at the doorstep of their 2011 highs. The short-lived euphoria over last week’s expanded bailout proposal—a euphoria we did not share—appears to have worn off quickly. With weakness now bleeding into the European corporate bond market and into the core countries’ data releases, a double dip recession in the eurozone is a live possibility. We wish things were materially better on this side of the Atlantic … – Michael Darda, MKM Partners.

When Election Day 2012 rolls around, it will be the economy rather than the debt ceiling debate or the killing of Osama bin Laden that will most influence voters. And time is running for a dramatic turnaround that will substantially lower unemployment or boost incomes. Just today, Gallup released some nasty poll numbers for President Barack Obama:

 

The White House and its media surrogates will continue to argue that without the $800 billion stimulus, the economy would be even worse.  Their models and multipliers are never questioned.  But to many Americans, it looks like the car is headed back into the ditch, if it ever got out.

COMMENT

It will be a miracle if the US economy does not collapse before this turd of a President is removed.

If he is re-elected, things ceonomically will fall faster than anyone can immagine at this point in time.

If he is not re-elected, dozens of cities will burn, and there will be riots on the scale of the late 60′s early 70′s.

I do not have high hopes… Just a bussload of bullets.

Godspeed to all here and there.

Posted by mmercier | Report as abusive

Boehner I vs. Boehner II vs. Reid

Jul 28, 2011 15:41 UTC

Still lots of confusion about the fiscal impact of the various budget plans. This chart from Barclays, looking at just non-war, discretionary spending, helps explain things.


COMMENT

Obviously the plans accomplish close to the same amounts but at what costs and to whom?

Posted by Bollweevil | Report as abusive

Is Boehner’s job at stake?

Jul 27, 2011 19:42 UTC

John Boehner is fighting hard to right Washington’ s finances. But is he also, in effect, fighting to keep his job?

To achieve either, the speaker  of the U.S. House of Representatives has to make the budget math work. His first bid to boost government borrowing authority and cut debt was flawed in this regard. With his debt plan already under fire from the right, a low-ball CBO score was the last thing he needed.

But the Boehner Plan still looks like the likeliest path through the debt ceiling crisis. And it is a more fiscally responsible option than the Reid Plan.

Failure would show a party divided and perhaps give Tea Party Republicans reason to oust him during the next Congress. Of course, some members of his party have doubted Boehner since they recaptured the lower chamber of Congress last November. The former boss of a small business in Ohio is too much of a deal maker, these conservatives contend, not enough of a true believer.

Skepticism among the faithful increased as Boehner took the lead in negotiating with President Barack Obama. From their perspective, Boehner has come perilously close to conceding a calamitous “grand bargain” that would crack the Tea Party wing’s anti-tax platform. (But I think he’s been acting like Reagan at Reykjavik in 1986.) And his current two-step plan to raise the debt limit is far too timid for many in his caucus. Those folks still want a Cap, Cut and Balance plan, which is the best plan out there.

And it didn’t help matters when Boehner’s $1.2 trillion spending reduction turned out to save only $850 billion over ten years, according to the Congressional Budget Office. Just as damaging, the proposal is backloaded, cutting a mere $1 billion in 2012. Now Boehner has to quickly tweak the plan and hope he can lock down the 217 votes needed for passage. For the moment at least, his bill still looks to be the vehicle most able to pass the House for an eventual compromise with Senate Democrats and Obama.

Bottom line: if Boehner’s bill dies in the House, all bets are off. There’s no obvious plan B. Investors better hope Wall Street number crunchers are correct that the U.S. Treasury might have an extra week or so beyond Aug. 2 before a cash-flow crunch. (Team Geithner has pushed back against this notion.)

Speculation from one long-term Capitol Hill watcher: Boehner may then decide to jettison the tea party rump and cut a deal with Democrats and more moderate Republicans. Now I doubt such a scenario. But if that happens, he will have to start looking over shoulder at a rival more in sync with a caucus shiftingto the right. (Indeed, a new poll of tea party activists found expressed a desire for a new House speaker.)

Republicans think the current fiscal conflict may pale next to a coming war over taxes and spending after the 2012 presidential election. But will Boehner still be one of the generals? It may depend on the fate of the Boehner Plan.

 

COMMENT

Oboma has NOT brought CHANGE, In fact ~~ THE ONLY real THING needing CHANGE !

Was Barack Hussein Obama II.

Barack Hussein Obama II ( Who hates American Values )

Who who is A ” SELF PROCLAIMED Enemy ” ~ of responsible, Morally Conscious HARD WORKING Americans.

oBOMAS supporters KNOW~ that Barack Hussein Obama II, WILL FORCE YOU to paY THEM, out of your PockeT ….

This UN~CHANGABLE fraud, has done His VERY BEST to Inspire VIOLENCE.

THESE ARE OBAMAS OWN WORDS.. saying “Bring it on” To his supporters.

Oboma ~ Demands Saying “Get ready for hand-to-hand combat with your fellow Americans”

– Obama has ALSO DECLARED to his Supporters

“I want all Americans to get in each others faces!–

Obama demands !

“You bring a knife to a fight pal, we’ll bring a gun” – Obama Cant wait to get everybody involved in some kind OF CONFRONTATION of some sort….

THESE ARE OBAMAS OWN WORDS..

Obama has ALSO DECLARED “Republicans are our enemies”-

** Obama on ACORN Mobs: “I don’t want to quell anger. I think people are right to be angry! I’m angry!”

ANGER VIOLENCE and more taxes….. THIS IS OBAMAS Change for america

/“Hit Back Twice As Hard”. He commands !

THESE ARE OBAMAS Very OWN WORDS..

*Obama on the private sector: ~~ “We talk to these folks…~ / so I know whose ass to KICK.“
OBOMA wants to KICK your ass /

Shouting THAT Republican victory would mean ~ “hand to hand combat”

HE IS EXPECTING people to kill & BE VIOLENT / for their immoral CAUSES

THIS IS WHAT HE LIVES FOR
THESE ARE OBAMAS OWN WORDS..
* Obama Tells democrats: “ I’m itching for a fight.” !

PLEASE go to reXes NEW WebsiTe ~ ! Oboma *( Just like Adolf Hitler~~ In that oBOMA~~~ Demands ! — [ THE FINAL SOLUTION – ~ For Un~Wanted Children

Barak Obama A MURDERER .~Torturing UNWANTED babys on DEATH ROE

http://obomanationinfanticide.sharepoint .com/Pages/default.aspx

OBAMA supports TAKING a little NEW BORN innocent child.. / BORN. ALIVE ~

sTabing it iN the head & SUCKs ITS BRAINS OUT.

He also demands, that a Child SURVIVING a FAILED ABORTION, Has no RIGHT to Life or medical care.

Posted by reXteryalizer | Report as abusive

Two cheers for Boehner’s two-step plan

Jul 26, 2011 14:26 UTC

Now is not time to let the perfect be the enemy of the good. Neither the Reid budget plan nor the Boehner budget plan packs the fiscal wallop of Cut, Cap and Balance. But significant progress on cutting debt can still be made before the Aug. 2 (or is it Aug. 8 or 10 or …) debt ceiling deadline. And by that measure, the Boehner plan is not only far better than the Reid plan, it is a pretty darn good plan in and of itself. While both plans would cut some $1.2 trillion in discretionary spending over a decade, Reid would then close up shop until 2013. The only other major cuts would be to future defense spending that no one really expects to happen.

I can’t believe S&P and Moody’s would find the Reid plan a compelling reason to keep the U.S. debt rating at AAA. While it is better than not cutting spending at all — as President Obama originally intended — and doesn’t raise taxes, Americans should expect and demand more from Washington.

Boehner, on the other hand, would keep the debt cutting process going and more likely result in substantive spending cuts of $3 trillion, nearly three times the Reid plan. (And if you tack on the Reid defense cuts, you suddenly have a $4 trillion plan, including interest savings. The raters would like that.) I don’t think spending hawks should fear the Boehner debt commission if it has real teeth and doesn’t create a trigger for higher taxes.

But wouldn’t financial markets be upset by the continued uncertainty of having to address the debt limit issue again in a matter of months? Goldman Sachs doesn’t sound particularly alarmed in a new report:

A short-term increase, with another shot at deficit reduction later this year? A two-stage process continues to look like the most likely agreement, since it is very difficult to generate savings of the magnitude being discussed without developing more complex policy reforms in a number of areas, including health programs and potentially tax policy, and those would take time.

And after that, both parties can use the upcoming election season to make their respective cases to the American public for sweeping entitlement and tax reform. I think Boehner’s plan will pass the House and become the core of the budget bill that actually gets signed by Obama. And the sooner, the better.

 

COMMENT

Now suddenly, you like the Bohner plan? What a suprise? Wow, you mean you support the Republican plan. I’m shocked. What a thoughtful commentary. However it too late. The House will get neither the Boehner or the Reid plan through. That is what happens when you support people whose best talking point is, “I raised a family so I know how to control a budget” I guess participants in the International bond markets are the same as getting a 12 year old to do their homework. No James, it’s too late for that. And even if it did it would never get through the Senate, and once again you are wrong saying the president would sign it. He and the Democrats have given up everything. He may have the most idiotic political and economic advisors in history, but even they can figure that out. Do really think he is going let go of his one last requirement? I guess we will see. I wish I was more secure in my convictions.

Posted by robscheerger | Report as abusive

The stark difference between Reid’s defense cuts and Ryan’s

Jul 26, 2011 12:41 UTC

Here’s the big problem House Republicans have with Sen. Harry Reid’s budget plan: Some $1 trillion of its $2.7 trillion in savings over the next decade — or 37 percent — come from factoring in an expected troop drawdown over the next few years from Iraq and Afghanistan. This is something everyone expects — other than the Congressional Budget Office baseline fiscal forecast. It assumes no drawdown, and it is against CBO’s unlikely scenario that Reid compares his plan.

So, Republicans say, the real savings are just $1.3 trillion, excluding $400 billion in interest payment reductions. That is far less than the $2.4 trillion hike in the debt limit Reid is asking for. And recall that Republicans want spending cuts to at least equal the increase in the debt limit. So Reid is still short, from the House GOP perspective, anywhere from $700 billion (if you accept the interest savings) to $1.1 trillion.

But Democrats charge hypocrisy, noting the recent House Republican budget from Rep. Paul Ryan also assumes a troop drawdown. So GOPers should quit playing politics and embrace the Reid plan.  But what Democrats aren’t saying is that even with that assumption, the House-Ryan budget plan cuts spending by $6.2 trillion vs. President Obama’s 2012 budget since the Obama plan also assumes savings from a drawdown.

So zero percent of Ryan’s $6.2 trillion in spending savings vs. the Obama budget comes from the drawdown. And even against the CBO baseline (which assumes perpetual war with no drawdown), just 17 percent of the House-Ryan budget comes from the drawdown. It still has $4.8 trillion in actual cuts.  This chart from the House budget committee helps explain things. The key spending line is “Global War on Terror”:

 

COMMENT

I appreciate your response and PLEASE, don’t misinterpret me. I am NO fan of Mr. Obama, not at all. My objection is numbers going out ten years in the future and treated as though they are real and unassailable. I also disbelieve this whole global warming thing because it relies too much on predictions of the distant future. Nobody, and I mean NOBODY, can predict the future with even remote accuracy. Certainly not politicians, so these numbers showing surpluses or deficits well into the future, and with three-digit accuracy no less are, in my huimble opinion, worthless.

Posted by Elektrobahn | Report as abusive

Why a debt ceiling deal is (probably) going to get done

Jul 25, 2011 14:23 UTC

If you believe in a) free enterprise and b) fiscal solvency, would the emerging Harry Reid proposal to raise  the debt ceiling and cut debt be so terrible an outcome? First some general deets:

House Speaker John A. Boehner, Ohio Republican, pitched his colleagues on a plan to raise the borrowing limit by about $1 trillion and match that with similar sized spending cuts — enough to last through the rest of the year, and leaving for later the heavy lifting on taxes and bigger spending items.

Meanwhile, Senate Majority Leader Harry Reid said he is working on a plan to raise the debt limit by $2.7 trillion, coupled with an equal reduction in projected future spending. In a concession to Republicans, he said that plan would not include tax increases, but that the new debt level would last through the 2012 elections.

On the surface at least, this would seem to meet the baseline demands that Boehner and Majority Leader Eric Cantor expressed in their conference call with House GOP members on Sunday. Here is Cantor:

The only way to overcome [Obama] is to remain united and insist that every dollar the debt limit is increased, we have equal or more dollars in spending cuts without ANY tax hikes.

Well, the Reid plan would seemingly cut $2.7 trillion, a few hundred billion more than the debt limit increase. And no new taxes. Republicans will gripe about the quality of those spending cut, of course. And they should. Perhaps $1 trillion — maybe more — would come from no longer assuming perpetual war in Iraq and Afghanistan. But House Rs already passed a budget with the same accounting change, which may make it hard to savage the idea.

In forecasting future spending, CBO feels bound to project the cost of wars forward, even when they already show signs of winding down. Thus, in its March baseline, the CBO assumes $1.67 trillion in war funding through 2021; since the administration forecasts only $630 billion, budget writers can credit themselves with more than $1 trillion in added savings. … House Budget Committee Chairman Paul Ryan of Wisconsin counted the savings to show a larger deficit reduction than he otherwise could have. The whole scoring of the White House “grand bargain” also rested on large war savings.

The rest of the cuts would come from discretionary spending (maybe $1.2 trillion), non-healthcare mandatory spending ($300 billion), and interest savings. And maybe tack on some sort of new debt commission to help keep the credit raters at bay.

All and all, not a bad day’s work for a party that only controls one chamber of Congress and faced a White House that wanted a clean debt limit hike in April. (Though I would like a closer look at those discretionary cuts.)

After that, make the 2012 elections about the size and scope of government — and how to pay for it. Will it happen? Wouldn’t surprise me a bit. And, after all, markets won’t stay calm forever.

COMMENT

Democrats are the party of freeloaders. Freeloaders produce nothing much of value to society, while taking, taking, taking and demanding more. A society cannot long exist where 50% of citizens refuse to shoulder their own burden. Time to grow up, freeloading Dems. Time to put your money where your mouth is and accept responsibility for yourselves.

Republicans are seen as the party of business. Business produces jobs, taxes and economic vitality. Society cannot long exist without these. Time to stop seeing business as the enemy. Time to pull together and accept that those who take the biggest risks reap the biggest rewards. It’s only fair. If you have a problem with that, start a business.

So, everybody, quit your whining and accept your own complicity in our country’s current condition. Do as JFK exhorted in his inaugural address: “Ask not what your country can do for you. Ask what you can do for your country.”

Posted by Royalsan | Report as abusive

Obama vs. Boehner: Tax battle again plagues debt ceiling tax

Jul 23, 2011 01:08 UTC

First the basics from Reuters:

Here is what’s happening on Friday in negotiations to raise the U.S. government’s $14.3 trillion debt limit by Aug. 2 and avoid a credit default:

* U.S. House Speaker John Boehner walks away from talks with President Barack Obama on a deficit reduction deal that was to clear the way for an increase in the debt limit. Boehner says Obama wanted to raise taxes. Boehner says he will now begin talks with U.S. Senate leaders.

* Obama says it “hard to understand” why Boehner would walk away from what he called an “extraordinarily fair” deal. Obama says deal would have cut $1 trillion in discretionary spending and $650 billion from Medicare, Medicaid and other entitlements. Deal would have sought $1.2 trillion in revenues, which could have been achieved with raising income tax rates.

Roll Call is all over this, too. And here is the take of congressional GOP source to me:

We never had agreement on a revenue number. But the WH did demand more revenue post gang of 6 – a lot more revenue. Entitlements [changes included] Medicare raising age, significant savings, combining Medicare parts A and B, means testing. Also chain cpi on social security and additional savings. GOP proposed over 200 billion in medicaid savings, WH up to 120. But n agreement on$800 billion. But there would have been tax reform and 3 flat rates – broadened base, lower rates. WH wanted higher rates post gang.

Here is how I see it:  Boehner says they had an agreement on $800 billion in revenue, but then Obama asked for $400 billion post Gang of Six report. The “goal posts” were moved. That extra $400 billion would come from higher tax rates. That is an absolute, no-go, red-zone issue for Republicans. Where would the original $800 billion have come from? First, extra revenue from more economic growth generated by tax reform efficiencies. Second, and this is a pretty good guess based on what Boehner said, better tax enforcement. Here is Boehner describing where the money came from ” … and a tax system that was more efficient in collecting the taxes that were due the federal government>”

That is a classic item on the liberal agenda, and I can easily see Obama pushing it. Here is the Center for American Progress describing it:

An estimated $400 billion to 500 billion in taxes go uncollected every year in the United States because of tax evasion and noncompliance.  … This yawning “tax gap” increases the deficit and undermines the faith of honest taxpayers who don’t cut corners. Every additional $1 invested in tax enforcement and compliance can shrink the deficit by at least $3. President Barack Obama’s proposal to invest an additional $13 billion in IRS enforcement and compliance activities over the next decade will generate more than three times that amount in additional revenues—$42 billion, according to official estimates. The funding will allow the IRS to contact potentially noncompliant taxpayers that “it currently identifies but cannot contact given resource constraints” and strengthen pre-refund compliance checks, according to the Government Accountability Office. Better enforcement leads to greater compliance: After the IRS in recent years began targeting people using offshore bank accounts to evade taxes, about 19,000 taxpayers entered a voluntary compliance program and paid billions in back taxes and penalties.

My best guess is still $1.5 trillion in cuts  (no tax increases) plus a debt hike through 2012.

UPDATE: Here is bit more from another GOP aide:

Despite what WH briefers may be saying, any new revenue in the framework would NOT have been generated by letting the current tax rates expire. That is simply false. Under the framework discussed, a CEILING was agreed upon that could generate $800 billion in new revenue over ten years. This would be done through comprehensive tax reform that would clear out deductions, credits, and loopholes in the system – and spur economic growth. After the gang of six plan came out, the White House moved the goal posts and insisted on $400 billion more in higher taxes – a 50% increase in revenue – and wanted that to be the FLOOR instead of the ceiling. The President acknowledged this in his remarks tonight. “Letting tax cuts expire” was never part of the tax reform agreed to.

COMMENT

Did you know that right now, the IRS is in a comment period on a new regulation revision. (REV.Proc. 2000-43)
The IRS, bending to the administration wishes, wants
the IRS commissioner, and deputy commissioner to be
able to discuss details of individual cases with the
currently INDEPENDENT Office of Appeals
without the knowledge of the taxpayer (or his
representative). The basis of this sought after change
in the existing ex parte communication rule is
said to be only supervisory in nature. Bull.
A supervisor needs to talk an independent body behind
close doors…maybe even lean on them a little?

Well, I think so. Here is another great
example of the liberal socialistic/communistic-leaning
mentality currently in the WH that wishes to bend
and control tax cases so that due process isn’t
going to happen no matter what…only what is beneficial to the governing authority! If a tax case goes
before the Appeals….the person is guilty on arrival,
why bother?

In a democracy, independent MEANS independent!

We just saw the CFPB’s (Consumer Financial Protection
Bureau) birth this last week wishing to be the first
agency (in a democratic country!) that doesn’t need
to answer to Congress, and therefore the people.
The CFPB is the silencing of the American majority!

In this debt ceiling debate, there is more at play and it is Boehner’s wish to stop the trampling of the democratic process.

I’m from Wisconsin and in this state, we’ve witnessed
the democratic process going-to-the-dogs under the
stresses of union/minority fiscal and political power,
mainly the democratic party.
A republican governor stepped in and fought
like everything to get the movement turned back
to sane, equal, and forthright.
Yet, the Obama administration and Chicago-
style politics forced it’s way into our state struggle against (yes) communistic-like leanings.
Well, the tables are turned by law now. Democracy
is once again working properly, but the communistic-like
leanings are STILL in Wisconsin trying to recall
themselves back into power. And much, much
of that funding is being generated at the bidding
of Obama and gang.

In this current debate on Washington Hill,
Congress MUST show whose boss and that’s the whole of it. Boehner has to win here and stop the
momentum of this whole country turning eventually away from democracy.

Posted by limapie | Report as abusive

A brief chat with Rep. Jim Jordan

Jul 22, 2011 21:27 UTC

Any good wrestler will tell you that the key to success is knowing a limited number of moves very well — not trying to mastery every counter or attack in the book. Rep. Jim Jordan, chair of the conservative Republican Study Committee, was a champion college grappler who’s brought that focused approach to the House. I talked with him briefly this afternoon about some of the compromise deals floating around Capitol Hill. For instance, Nancy Pelosi said she’s open to this deal (via Talking Points Memo):

“We’re willing to bite the bullet and make serious cuts in discretionary spending,” Pelosi told a small group of reporters and bloggers. “That could go to a trillion dollars or more. And the interest saved on that can take us to like a trillion and a half dollars saved. .. We could go even further with non-health mandatories, could take us almost to two trillion. We could use the offshore — the Overseas Contingency [the wars in Iraq and Afghanistan] — could take us to two-and-a-half trillion dollars. Which is the dollar-for-dollar for the lifting the debt ceiling. I don’t think we have to have dollar-for-dollar, but for those who think they do, there’s a path to get there.”

Jordan said that sounds to him like more “gimmicks and games” and would be a poor substitute for the GOP’s Cut, Cap and Balance plan. And how about a temporary debt hike to buy time to work out some grand bargain? He was again quite clear: “No, no, no.” To him, these deals are business as usual to avoid fundamental reform. Forget them. Jordan’s focus is on CCB. “And the time is now.”

The beauty part of CCB is that it cuts spending right away, by $111 billion in 2012.  Any cuts beyond that are promises, he says, and promises from Congress are not like “promises from your wife or a trusted friend.” And while Jordan is in favor of tax reform — lower rates, fewer tax breaks — that should be done separately and not distract from the important business of cutting spending.

I also asked him about the possibility of a U.S. credit rating downgrade. He took it quite seriously but also made the point that if Washington doesn’t get its fiscal house in order, a downgrade is coming anyway — and probably a lot worse.

Debt ceiling update: What Wall Street thinks is happening

Jul 22, 2011 16:15 UTC

One reason financial markets have been relatively sanguine about the debt ceiling negotiations is that investors have been almost certain that something gets done by August 2. Here is what one bank lobbyist told me today:

1-1.5T in spending cuts and an equal 1-1.5T on debt ceiling lift (a short term reprieve) — with the next 120 days battling over the Grand spending/revenue Deal (that uses Bowles/Simpson – Gang of 6 as the starting point).

And this is what BankofAmericaMerrillLynch is saying:

We expect a deal to come in two stages: a smaller up-front deal of possibly $50-100bn per year in deficit reductions (relative to the President’s initial budget offered in February 2011) over the next decade, combined with a more comprehensive deal to be passed either at the end of the year or early next year. The comprehensive deal would include both tax and entitlement reform and cuts to discretionary spending. However, our concern is that policymakers struggle to come up with a credible longer-term plan before year-end, particularly since it is an election year. This would mean we could face the risk of another debt ceiling crisis and ultimately rating agency downgrades.

With this plan, we believe the debt ceiling will be raised before August 2nd, but probably by only $500bn to give Congress six months time to write and pass the new legislation. Any agreement to raise the debt ceiling by a much larger amount in the future would likely be conditioned upon passage of the more comprehensive legislation.

We expect the US credit rating to remain on negative outlook and for a downgrade to AA to occur only when the rating agencies believe there will be no serious follow through. This means a downgrade would not likely occur until after the six month period of negotiations which puts us in early next year. Following any federal downgrade, we would expect downgrades of insurance companies, government related enterprises and state governments that depend heavily on federal funding. S&P has taken a more aggressive stance then the others, and may downgrade to AA+ as early as August if there remain significant risks to implementing a $4 trillion longer term fiscal plan.

Also, my pal Phil Klein had this takeaway from his chat with House Speaker Boehner today:

I asked Boehner whether some sort of short-term agreement would be necessary given that they’re closing in on the Aug. 2 deadline, and even if a late deal were struck, it would have to be written, scored by the Congressional Budget Office, and passed by the House and Senate.

“It is not what the goal here is,” Boehner responded. “As I said, there are two challenges here that we have to overcome. We have to raise the debt ceiling, and we have to have a serious down payment on reducing our budget deficit and our debt.”

Saying it isn’t the goal is different than saying it isn’t going to happen. Some sort of short-term extension seems inevitable, if nothing else but to give them time to do all the procedural things if they’re close to a bigger deal. There’s nothing ideologically preventing either side from this, and as I’ve noted, both chambers have already voted for deficit spending through Sept. 30, so there’s an easy argument for extending it at leas through then.

Read more at the Washington Examiner.

 

COMMENT

The British minister was correct in stating that “right-wing nutters” in the House of Representatives are responsible for the position we find ourselves in as tea-party Republicans are trying to implement their far right-wing agenda by holding the American economy, and working American men and women, hostage with actions that could seriously damage the economy and the middle class and poor. To those of you who voted for these nuts, I hope you’re satisfied with what you got because the bottom line is the actions of these fools will hurt you too unless you happen to be part of the 2% that hold most of our country’s wealth. To the rest of you, I ask that you consider the proposition that there needs to be a redistribution of wealth in this country by making the wealthy pay their fair share of taxes. We cannot keep going the way we’re going or we’ll end up an extremely polarized country wherein 98% of the citizens live at a third-world level and 2% live a life of unimaginable luxury. This country will then become completely dysfunctional as we’re close to being right now, and there will be violence as the 98% take wealth from the rich whether they like it or not. Don’t think it can’t happen because it has happened many times throughout history. And, it will soon happen in this country, if Republicans continue their nonsense.

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