James Pethokoukis

Politics and policy from inside Washington

Where the debt ceiling debate might be headed

Jun 28, 2011 17:02 UTC

This decision tree from Societe Generale (via Business Insider)  seems more or less correct. I think there will be a deal by Aug. 2 (or whatever the deadline ends up being).  But it is the content of the final austerity plan that remains impossible to predict.






Does Pelosi want a debt ceiling crisis?

Jun 27, 2011 15:36 UTC

After watching Nancy Pelosi on Sunday, Jonathan Chait speculates that she just might:

Think through what happens if the government defaults on its debt. You have an economic crisis. People get mad at House Republicans, which helps Obama, but the economy also teeters, which ultimately hurts Obama but does not hurt House Democrats very much. Indeed, a default crisis would seem to increase the chances of the 2012 elections producing a Republican president and a Democratic House. I suspect Pelosi knows that.

Granted, this is a highly cynical view of Pelosi. But I would guess many members of Congress care more about keeping their seat and expanding their influence vs.  a member of their party winning the White House. And if the economy has to suffer in the process, so be it.  I will also add that GOP leaders on Capitol Hill think a debt crisis would definitely hurt the party — just like a government shutdown — not to mention the economy.

Already the media is framing Eric Cantor’s departure from the budget talks as a case of Rs putting the interests of the rich and oil companies ahead of that of the average American. And the White House seems to think playing the populist, class-warfare card is a winning strategy. So it seems that both Pelosi and Obama want to push this to the wall.


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Where we’re at in the debt ceiling debate

Jun 24, 2011 18:42 UTC

A few thoughts:

1) Rs had every right to walk out. Dems pushing unacceptable tax hikes (including, basically, axing Bush tax cuts, along with an automatic tax trigger and a host of  tax breaks done away with) with no real entitlement reform.

2) Aug. 2 is a phony deadline because Treasury has 10x as much revenue coming in as debt payments. No reason for default. I have heard Treasury’s counterargument and I just don’t find it persuasive.

3) That being said, Rs (Boehner, McConnell) would LOVE to settle this by Aug 2. Don’t want to risk upsetting financial markets, just as they didn’t want government shutdown. They want to show governing competence to the American people.

4) Obama’s Afghanistan bug out frees up $1.4 trillion over 10 years according to CBO baseline, but those are just the sort of phony cuts Rs should not settle for. Real cuts in discretionary spending along with the Corker-McCaskill spending cap are closer to an acceptable deal.

5) Then there’s this: US economy is not growing anywhere near maximum nor is it optimized for economic growth (taxes, spending, immigration, regulation). If Uncle Sam needs more revenue, we should grow the economy faster.

Debt ceiling talk hit impasse! Markets freak! Investors panic!

Jun 23, 2011 18:22 UTC

First, a summary of today’s galaxy-shattering news from my beloved colleagues at REUTERS:

U.S. budget talks hit an impasse on Thursday after a both Republicans walked out, throwing doubt on Washington’s ability to reach a deal that would allow America to continue borrowing and avoid a debt default. Representative Eric Cantor, the No. 2 Republican in the House of Representatives, said participants had identified trillions of dollars in potential spending cuts but were deadlocked over tax increases that Democrats want. ”Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue,” he said in a statement. Republican Senator Jon Kyl also left the talks, an aide said. House Speaker John Boehner said Democrats must abandon any tax increases for negotiations to continue. ”These conversations could continue if they take the tax hikes out of the conversation,” Boehner said. He added tax increases could never pass the Republican-controlled House in any event.

TPM adds this color:

A Senior Democratic aide suggested to TPM earlier that Cantor “threw Boehner under the bus” by calling on him to leap into talks, keeping his own hands clean of any tax increases unpopular with the GOP base. Pushing back on the notion, a senior GOP aide told TPM in an e-mail that the “White House has secretly been negotiating with Senior Republicans behind the Democrat Leaders backs, so it is understandable they don’t understand the dynamic at play.”

Will Republicans crack and agree to the elimination of some tax breaks in order to raise revenue? I sure hope not. There is certainly no economic reason to raise taxes. The U.S. economy is not optimized for growth. If we want more revenue, growth the pie. Or cut more spending. Or, preferably, both.  And certainly there is no way Rs should accept higher taxes for anything less than structural healthcare reform that moves the system to a form that is more patient-centric and market friendly.


China to US: Forget debt ceiling, cut spending

Jun 6, 2011 17:49 UTC

If you listen to Treasury Secretary Timothy Geithner and the rest of Obama administration, failure to raise the debt ceiling by Aug. 2 risks “catastrophic economic and market consequences of a default crisis.

Funny, the Chinese government — holder of $1.1 trillion in U.S. government debt — doesn’t seem to think so. I recently returned from a fact-finding mission to the Middle Kingdom. And my big takeaway is that Beijing isn’t too bothered by the Washington back-and-forth over raising the debt ceiling — provided the result is a long-term budget fix. For that, even a delayed interest payment might be acceptable. But brinkmanship in Congress that only punts the issue, and shirks from meaningful reform, would quickly turn investors in Beijing and elsewhere off.

When asked about government reaction to a temporary stoppage of debt payments on those holdings, a respected top official with an influential government advisory group reminded that investment represents “patient capital.” If a delay in Washington facilitated deep spending cuts, Beijing would grudgingly accept it.

Not that Beijing would be thrilled about it. Chinese officials are concerned about the reaction from a nationalistic public that already thinks America is too quick to blame China for its economic woes. To avoid a subsequent worsening of already fragile relations with Washington, then, Beijing would need to persuasively argue that it gained something in exchange for its forbearance. So the worst-case scenario is a delay that only results in a temporary hike in the debt limit.

But then again, I don’t believe Geithner’s deadline. As analyst Dan Clifton of Strategas notes:

Treasury is not restricted from prioritizing interest payments over other expenditures, and revenues are coming in at 10 times the rate of interest payments. Moreover, cash flow is so strong that prioritizing interest payments over other expenditures will not jeopardize Social Security payments. As such, we expect continued interest payments but a semi-government shutdown to occur which would delay long term spending projects and aid to state and local governments until an agreement could be reached. The net effect of this is that investors should be focused more on the economic implications of a semi-government shutdown than the potential for a US default.

So my advice to the spending hawks on Capitol Hill — of both parties — is to listen to China, stand firm and get something big in return for raising the debt limit. At minimum this would be getting at least $1 in spending cuts for every $1 increase in the debt ceiling, along with the spending caps found in the McCaskill-Corker bill.  Even former Clinton economist Alice Rivlin thinks raising the debt ceiling should be linked to a long-term budget plan.

The debt ceiling provides an opportunity for real fiscal reform, one that shouldn’t be wasted.


>>Too Funny, the Commies telling Øbama he’s too far to the Left!>>

Even funnier when you consider that I’ve seen many moderate Progressives on Facebook regularly calling Obama a “Republican” President.
He certainly courts big corporate, and even more so come election season. Then again when it costs a billion dollars to run for office today, and so many can’t find jobs while CEOs pull in million dollar salaries, I suppose there is no where else to go for the money :(

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GOP should ignore Moody’s debt ceiling warning

Jun 2, 2011 18:31 UTC

Team Reuters reports:

Moody’s Investors Service said on Thursday there is a very small but rising risk of a short-lived default by the United States if there is no increase in its statutory debt limit in coming weeks.

In a statement, Moody’s said if there is no progress in increasing the debt limit, it would expect to place the Aaa sovereign credit rating on review for a possible downgrade.

“If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction,” Moody’s said.

I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense. Let me again replay what Stanley Druckemiller opined on the topic (via the WSJ):

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.

Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.”

Mr. Druckenmiller says that markets know the difference between a default in which a country will not repay its debts and a technical default, in which investors may have to wait a short period for a particular interest payment. Under the second scenario, he doubts that investors such as the Chinese government would sell their Treasury debt and take losses on the way out—”because I’ll guarantee you people like me will buy it immediately.”



Paper Number 3: The debt ceiling is raised, the gov’t, which won’t repair the budget, must print money (quantitative easing) to make its debt-service payments. Inflation rises to 7% while you lent money at 3%. Your “risk-free” T-bond portfolio loses much of its value.

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Ignore Geithner’s debt ceiling scare tactics

May 16, 2011 18:00 UTC

To employ the phrasing of Gov. Chris Christie, America hit the debt ceiling and didn’t vaporize. New borrowing has put the U.S. Treasury right up against its $14.3 trillion borrowing limit, but financial markets aren’t crashing over fear that this will lead to default.

So, given that non-reaction so far, just who is the Treasury Secretary kidding? This whole fear-fest over the U.S. debt ceiling is starting to resemble the bank bailout in 2008 when warnings of financial apocalypse shoved Congress into approving TARP. Here is how Timothy Geithner put it in a  letter to Sen. Michael Bennet:

Failure to raise the debt limit would force the United States to default on these obligations. … A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth, and increasing unemployment. … Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments. … Default would also have the perverse effect of increasing our government’s debt burden. … It would increase rates on Treasury securities, which would increase the cost of paying interest on the national debt.

But why, exactly? There is no reason for the U.S. to miss a debt payment, even after the supposed Aug. 2 deadline. Team Geithner has plenty of flexibility about which bills to pay and plenty of dough with which to do it. Here is economist Ed Yardeni:

Over the past 12 months through April, net interest expense of the federal government was $213.1 billion. Will there be no money to make these payments if the debt ceiling isn’t raised? There will be plenty. Over the past 12 months through April, the Treasury collected $2.27 trillion in revenues. In April alone, when individual tax returns are due, revenues totaled $289.5 billion, a bigger than expected gain, confirming that the economy recovered smartly over the past year.

It would be criminally insane for the Treasury to stop making interest payments on our debt just because Congress failed to agree on raising the ceiling when the revenues are certainly available to make the payments and auctions will continue to rollover maturing debt. It is insane for administration officials to suggest otherwise.

And just how badly would markets take it anyway if there was a temporary payment delay but the result was a deal which significantly cut spending today and capped spending tomorrow? Famed investor Stanley Druckenmiller is willing to take his chances:

Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.

Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.

The White House would love a clean up-or-down vote on raising the debt ceiling. But David Walker, the hawkish former U.S. comptroller general said this today:

While the debt ceiling must be increased, any extension should include appropriate conditions to reduce short-term spending while also addressing the huge structural deficits that lie ahead. This should involve bringing back tough statutory budget controls, including new debt-to-GDP targets with automatic enforcement mechanisms beginning in 2013. Adopting a number of initial steps designed to reduce direct spending and tax expenditures as down payments to meet the new target would also be appropriate.

We must not allow what has already happened in Greece and Ireland to happen in the U.S. No one really knows when the markets will lose confidence in the willingness and ability of the federal government to put its finances in order. If it does, we will see a sudden and dramatic increase in interest rates that will only increase our already serious economic, fiscal and unemployment challenges.

The debt ceiling provides an opportunity to make a big dent in America’s dangerous debt situation.  Not taking advantage of this moment is what scares me.


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Which party is at greater risk from a debt ceiling debacle?

May 12, 2011 14:58 UTC

Stu Rothenberg thinks there is plenty of danger to go around:

The nature of the Republican risk is obvious. If the GOP looks inflexible, excessively ideological and extreme, voters are likely to turn against it. This is more likely, of course, if Democrats look reasonable and emphasize their willingness to compromise. (Swing voters love the idea of compromise.) It’s also more likely if the most vocal and ideological elements of the GOP define their party.

But even partisan Democrats agree that their party faces a considerable risk if they look as if they are insufficiently committed to cutting spending. Indeed, merely by supporting an increase in the debt limit, Democrats play into an image that they are trying to change — that they are fiscally irresponsible.

This is why, some observers speculate, that if a “clean” vote on increasing the debt limit occurs soon (as some predict), large numbers of Democrats will vote against it. That would give ammunition to House Republicans, of course.

While Democrats surely would attempt to blame the GOP for a spike in interest rates due to a loss of confidence in the U.S. government’s reliability, it is far from clear that the president would avoid serious damage if the U.S. economy were to suffer from any chaos produced by the government reneging on its obligations.

Still, the only group of players that doesn’t appreciate the potential negative fallout from a deadlock is House Republicans, many of whom seem to think that failing to raise the debt limit wouldn’t be all that big of a deal. That view may well be delusional, but it gives them a great deal of power in any negotiations, since they don’t feel the pressure to act that others do.




There are societies that don’t see challenges coming, so they never take the time to develop solutions. There are other societies that see challenges coming, but they lack the skill and wherewithal to implement solutions. And then there are societies that see the challenges coming, know exactly how to respond, and still falter due to a dysfunctional political system that is sabotaged by misguided ideologues.

The near-collapse of the global economic system just happened. Wall Street isn’t exactly popular with the American mainstream, but Congressional Republicans don’t care, pursuing a strategy that would have been unthinkable just a few years ago. They’re counting on the public not knowing the difference, and the GOP is paying no price whatsoever for their financial industry antics.

The debt ceiling is not the only easily preventable crisis area in which the United States fails to act, due entirely to Republican intransigence and foolishness. We face a climate crisis, and extreme volatility in the energy sector, but the GOP refuses to consider sensible solutions even they supported a few years ago. If we don’t raise the debt ceiling, we risk a crisis of Congress’ own making. All because our political process has placed enormous power in the hands of incompetent ideologues who prefer inaction to action, and crisis to stability, even when the threat is staring us in the face.

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Boehner really isn’t asking for that much to raise debt ceiling

May 10, 2011 18:19 UTC

On  its face, House Speaker John Boehner’s demand for perhaps more than $2 trillion in spending cuts may look like a dangerous escalation in the political battle over raising the federal debt ceiling by a similar amount. But the reductions would be over 10 years, they’d be in line with several budget proposals, and they would represent only a modest down payment on austerity.

A group of Wall Street executives and other business leaders  listening to Boehner on Monday evening in Manhattan seemed unenthusiastic. They would almost certainly prefer to disentangle the issue of expanding the federal borrowing authority — and thus avoid even the whiff of possible default — from how best to deal with America’s long-term deficit and debt problems. After all, both parties have agreed on a budget that requires more borrowing next year. That is the White House position, too. “To hold one hostage to the other remains extremely unwise,” spokesman Jay Carney told reporters today on Air Force One as Obama flew to Texas.

But, thankfully, politics keeps pushing the two issues together. The powerful Tea Party wing of the GOP wants party leaders to get something substantial in return for enabling more Treasury borrowing. That might include some or all of congressional approval of a balanced budget requirement, a legislative cap on future federal spending, and deep budget cuts. Boehner’s speech certainly gave the impression he’s on the same page. “The cuts should be greater than the accompanying increase in debt authority the president is given,” he said.

Treasury Secretary Timothy Geithner may want as much as $2 trillion in new borrowing capacity through 2012. It’s not a small number, but matching that with cuts over 10 years is manageable. President Barack Obama’s debt commission called for $2.2 trillion over a decade, while his own recent budget proposal contemplates reductions almost as large. And if defense cuts are in the mix, as Boehner implied, it all could be done without touching Medicare and Social Security outlays.

Of course Democrats want to see increases in tax revenue as well as spending cuts. The elements of the Republicans’ three-part package, meanwhile, would force greater fiscal discipline on this and future administrations. Failure to do a deal could lead to a series of repetitive fights over temporary, even monthly, debt limit increases up until the 2012 elections. That won’t suit Wall Streeters, so they should hope Boehner’s equation can accommodate a compromise.



Just remember that this is the same Republican Party that wants to gut medicare and honestly believes that private companies will rein in healthcare costs. These are the people that brought us the Iraq war. Do we really want them back in the driver’s seat? Maybe we do. Maybe we haven’t had enough economic distress, social stagnation and loss of American lives in stupid wars to feel the great sense of satisfaction that they obviously feel for themselves. Oh yes, give it to us, GOP, give us your brilliant ideas and your wonderful future of bread lines and sixth-grade education for all!

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Should Congress raise the debt ceiling? And for what price?

Apr 21, 2011 16:06 UTC

Conservatives have many flavors of views on this, as can be seen at an online symposium over at National Review Online. Here are two of the more interesting takes:

1) Pass it quickly, with conditions. This is the Doug Holtz-Eakin plan:

Conservatives should attach to the debt limit annual caps on total spending for the next ten years equal to those in the House-passed budget. There are other viable contenders ranging from alternative spending limits (such as those proposed by Senator Corker) to a balanced-budget amendment that limits taxes and spending (such as that of Senators Hatch, Cornyn, and Toomey). But the House has already agreed to the levels in the budget. If it passes those caps quickly, the onus will be on the Senate to pass a debt-limit increase and on the president to sign it. If either balks, the battle shifts from raising the debt limit to whether there should be spending restraint.

2)  First, make sure default is not an option. From Phil Kerpen:

To win the debt-ceiling showdown, the Republican House leadership must first do what all 47 Senate Republicans did when they voted for the Toomey-Vitter amendment …   also known as the Full Faith and Credit Act and championed in the House by Tom McClintock (R., Calif.) and Scott Garrett (R., N.J.), would take away from the administration the discretion to default on Treasury bonds. It would require bondholders and Social Security recipients to be paid first in the event the debt ceiling is reached. There is more than enough revenue on a cash-flow basis to take any default risk off the table.

Passing this legislation in the House — even though the Democrats already have stopped it in the Senate — would help educate the public that default is not at stake. … By passing the Toomey-Vitter bill, the House can gain real leverage to demand that the administration make deep cuts in spending and fundamental reforms like the Medicaid block grants at the heart of the Ryan budget — or face the daunting prospect not of default, but of operating the government on a cash-flow basis.


This administration would never default, despite the rhetoric. They would lose prestige in the eyes of those they love best. Congressman with enough spine should simply refuse to fund this obese goverment. Just say no.

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