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Personal Parachutes: How Elites Could Profit From A U.S. Debt Crisis

Have you developed a hedging strategy to protect against America’s rapid decline? Or repositioned your portfolio to take advantage of orphaned Treasury securities? Or stashed some cash so you can buy distressed assets from the newly bankrupt?

If you’re like most Americans, the answer is, of course not. But if you work on Wall Street, the man-made debt crisis that’s brewing in Washington might represent a surprising opportunity to make money. As the whole world knows by now, the U.S. government will no longer be able to borrow money as of early August, unless Republicans and Democrats swallow their vitriol and come up with a compromise deal that will begin dealing with America’s oversized debt and allow the government to function normally. The nation’s mushrooming debt load is a big problem, but abruptly halting all federal borrowing would transform it into a disaster, since it would require vast government spending cuts that would promptly trigger another recession.

The ongoing assumption is that legislators will puff and posture until the last second, then congratulate themselves for making a deal that should have been in place months ago. But even if politicians avert the worst-case scenario, the size of the debt and the deep dysfunction in the nation’s capital are likely to cause other trouble. It’s increasingly likely, for instance, that rating agencies like Moody’s and Standard & Poor’s will cut America’s credit rating from AAA—the top rating, which the United States has held for decades—to a notch or two lower. That would force thousands of institutional investors to determine whether they can keep holding Treasury securities or whether they need to dump them. Even small spending cuts that come as part of a deal to raise the federal borrowing limit could cut into weak economic growth, especially if they go into effect immediately.

The knock-on effects of a U.S. debt downgrade, sharp spending cuts or a “policy mistake” in Washington could rattle financial markets, depress hiring and drive confidence back down to recessionary levels. But smart investors know that one man’s crisis is another’s opportunity, and the monied class is planning how to profit if America goes bust. As the New York Times reported recently, some hedge funds are stockpiling cash, to buy U.S. government securities at fire-sale prices if there’s a credit downgrade and conservative investing vehicles like pension or money-market funds are forced to dump Treasuries. Others are trying to identify institutions that might be damaged by a U.S. debt crisis and forced to sell assets that vulture investors could buy on the cheap. Another way to gamble on America’s collapse is to invest in credit-default swaps that would pay out if the United States defaults on its debt. The price of such insurance has doubled recently, indicating a lively market for bets against America.

The modern financial markets are sophisticated casinos that allow steely investors to gamble on almost anything, including gloom-and-doom scenarios that could potentially harm millions. Though it might sound unctuous, betting on the likelihood of adverse events is a healthy part of a free market, because it creates an even stronger incentive for those who would suffer from bad outcomes to prevent them—and punishes those who destroy value, such as CEOs who mismanage their companies. But it doesn’t always work that way, and besides, this kind of gambling is generally open only to professional investors or those wealthy enough to have experts handling their money.

In his 2010 financial disclosure forms, for instance, House Majority Leader Eric Cantor listed a small investment in a fund that bets against U.S. Treasury securities and would benefit if the U.S. government defaulted or something else happened that devalued Treasuries. That became controversial, since Cantor is one of the key Republicans involved in the debt negotiations and a conservative stalwart who insists there should be no new taxes as part of a deal. Cantor’s office says the fund is in his wife’s and his mother-in-law’s name and amounts to less than $4,000, while the vast majority of Cantor’s retirement savings are invested in conventional securities that would lose value if there were a true U.S. debt crisis. But Cantor’s portfolio is probably similar to those of other affluent Americans, with traditional investments offset by a hedging strategy meant to minimize losses if something profoundly bad happens.

Ordinary Americans who lack investment funds or live paycheck-to-paycheck don’t have much of a hedging strategy, however, which makes them directly vulnerable if Washington wrecks the economy and jobs gets even scarcer. Some economists think the drawn-out debt drama—and the near-total absence of action on other big problems, like the foreclosure epidemic or sky-high unemployment—is already causing harm. Businesses, for instance, have virtually stopped hiring while they await the outcome of the Washington Follies. A sliding stock market reflects jittery investors who can’t figure out if they should invest in a global recovery or gird for Armageddon. “Washington is locked in a budget war that will determine the U.S. economy’s fate, not only for this year and next but for generations,” writes economist Mark Zandi of Moody’s Analytics. “Lawmakers may well misstep on this path to fiscal sustainability.” If they do, many of them will no doubt have their own personal parachutes. If possible, get your own.

By: Rick Newman, Columnist, U. S. News and World Report, July 22, 2011

July 24, 2011 Posted by | Capitalism, Class Warfare, Congress, Conservatives, Consumers, Debt Ceiling, Debt Crisis, Deficits, Democrats, Economic Recovery, Economy, Federal Budget, GOP, Government, Government Shut Down, Ideologues, Ideology, Income Gap, Jobs, Lawmakers, Middle Class, Politics, Public, Republicans, Unemployment, Wall Street | , , , , , , , , , , , , , , | Leave a comment

Debt Ceiling: What Killed The Deal And What Might Make One Happen This Week

There are a lot of good articles running through what happened between Thursday night, when a deal seemed likely, and Friday evening, when the talks fell apart. New reports suggest that Boehner is trying to prepare a deal by tomorrow evening, to prevent the markets from dropping Monday. So here’s the short version of what just happened, and where we’re likely to be going:

On Tuesday, the Gang of Six proposed a deal that would raise tax revenues by $2 trillion — which showed there was support among Senate Republicans for a deal that raised taxes by about $2 trillion. On Thursday, congressional Democrats rebelled over reports that the deal Boehner and Obama were negotiating had only $800 billion in new revenue, and it wasn’t even clear how those would be achieved. That night, Obama called Boehner looking for about $400 billion more in revenue to have something he could sell to Democrats. That would have brought the deal from $800 billion in revenue to $1.2 trillion in revenue. He didn’t get a call back until the next day at 5:30 p.m. — by which point the call was unnecessary. Boehner had already told the media that he was leaving the talks.

Republicans are emphasizing that the White House went from asking for $800 billion in revenue to $1.2 trillion. The word you’re hearing from them is “reneged,” but the White House emphasizes that negotiations were ongoing, and both sides were asking for more as they tried to figure out what they could both agree on and pass through Congress. Boehner, for instance, wanted further cuts to Medicaid, a trigger that would repeal the individual mandate and the Independent Payment Advisory Board if the entitlement cuts didn’t come through, and a tighter cap on discretionary spending. “They make it seem like the president made some ultimatum on $1.2 trillion in revenue,” says a senior administration official. “He didn’t. He said, ‘If you can’t do this, let’s figure out what we can do.’ ”

The “what we can do” would probably have been to ratchet back the entitlement cuts. Or maybe another solution would have been found. It’s hard to say because Boehner didn’t come back with a counteroffer. He simply left the negotiations.

But let’s zoom out on where the negotiations left off. Spending cuts would have totaled about $3 trillion, with a bit less than a trillion dollars of that coming from entitlements and other forms of mandatory spending. Revenue increases — none of which would have come from raising marginal tax rates — would have been between $800 billion and $1.2 trillion. The package would have extended the unemployment insurance and payroll tax cut provisions passed in the 2010 tax deal. All in all, that’s about a trillion dollars less in revenues than the Simpson-Bowles/Gang of Six deals advocated, and about $2.6 trillion less in revenue than simply letting the Bush tax cuts expire in 2012.

There’s a question as to whether this was the very best deal Republicans could get or simply close to it. But it’s hard to believe that it was so bad that it ended the talks. What seems likelier is that Boehner spent some time between Thursday and Friday talking to his members and found that his party simply didn’t support a deal with the White House. For one thing, a deal would include some amount of revenue, and that was a hard sell under any circumstances. For another, letting the president look like a dealmaker would potentially dim the GOP’s chances of retaking the White House in 2012. As my colleague George Will put it Thursday, a deal “would enable President Obama to run away from his record and run as a debt-reducing centrist.”

And so Boehner walked. Fundamentally, this looks like the same calculation that ended the last round of talks over a 4 trillion deal. What’s different this time is Boehner’s plan B: The Speaker of the House appears to believe that a deal struck between congressional leadership would perhaps be easier to sell to his members. Since it’s hard to see Nancy Pelosi and Harry Reid making deeper concessions than Obama did, it’s hard to see why that would be true, save that the deal might not look like such a victory for the White House.

Perhaps taking the benefit for Obama off the table will be enough. I’m doubtful. It’s more likely that what we’re really doing now is wasting time until the markets plummet and Boehner’s members decide that a deal is better than no deal. And there’s a very good chance that the first major show of market concern could come tomorrow night, when the Asian markets open. Boehner is hoping to present a plan by then, but a plan is very different from a deal. A plan is something politicians can come up with. A deal, we’re increasingly finding, is something that we need the markets to force.

By: Ezra Klein, Columnist, The Washington Post, July 23, 2011

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July 24, 2011 Posted by | Congress, Conservatives, Consumers, Debt Ceiling, Deficits, Democrats, Economic Recovery, Economy, Elections, Federal Budget, GOP, Government, Government Shut Down, Ideologues, Ideology, Individual Mandate, Lawmakers, Media, Medicaid, Politics, President Obama, Press, Public, Pundits, Republicans, Right Wing, Tax Increases, Taxes, Voters | , , , , , , , , , , , , , , , , , | Leave a comment

Americans Finally Realize GOP Handling Debt Debate Poorly

And the loser is… the GOP!

Or so says the latest CBS poll showing 71 percent of Americans don’t like the GOP’s handling of the debt crisis. And why would they? Americans have shown in polls, time and time again, that they want both sides, Democrat and Republican, to work together to get business done in Washington. To get the business of raising the debt ceiling done, that takes compromise; a word I fear Republicans don’t like or perhaps aren’t that familiar with. A great man once told me the best negotiations are when both parties leave the room winning and losing. The president has shown his ability to compromise; he put cuts to Medicare and Social Security on the table. Heck, he’s even willing to talk about cuts rather than just raising the debt ceiling on his own!

To read the polls is not only confusing, but it shows how confused we the people are. Some polls show Americans want to cut spending, but they don’t want to raise taxes. Other polls show a majority of Americans want the Bush tax credits to end for the wealthy. And after Rep. Paul Ryan put forth his machete to Medicare, he was booed at town hall meetings, and a Democrat won a congressional seat in a district which had been a Republican stronghold for decades.

This current proposal by Republicans is not a GOP plan, it’s a Tea Party debt plan, appealing to the overwhelming minority of their base, obviously pandering to the “Teapublicans” for their cash for the upcoming election.

It sickens me when I hear the GOP talk about leaving something for our children and future generations when their proposals cut more education and Medicare and Social Security, making those programs a memory for our children. And without them, our children will be financially strapped, taking care of sick and elderly parents and grandparents.

These poll numbers show the GOP cannot even convince their own party of what they’re doing, which is obviously playing politics and puffing their chests out like chicken hawks, trying desperately not to blink first in this game. And for all their talk about the Democrats’ scare tactics, the poll shows the majority feel the president raises valid concerns if the debt ceiling is not lifted.

My favorite president, and a man who I think is the most intelligent of all of them (maybe not in choices he made in his personal life), is Bill Clinton. President Clinton says he would raise the debt ceiling using powers granted under the 14th Amendment—“validity of the public debt shall not be questioned…”

Maybe it’s time President Obama took a page from the Clinton handbook and took his advice. After all, he was a constitutional lawyer. If President Obama stops the economy from going into a double dip recession by raising the debt ceiling, he’ll not only be re-elected, he’ll show America that the GOP are the losers, and prevent the American people from being so—which is what would happen if he signed that GOP plan into law.

 

By: Leslie Marshall, U. S. News and World Report, July 20, 2011

July 20, 2011 Posted by | Congress, Conservatives, Constitution, Debt Ceiling, Deficits, Democracy, Democrats, Economic Recovery, Economy, Elections, Federal Budget, GOP, Government, Government Shut Down, Ideologues, Ideology, Lawmakers, Medicare, Politics, President Obama, Public, Public Opinion, Republicans, Right Wing, Social Security, Taxes, Tea Party, Voters | , , , , , , | Leave a comment

“You Talkin’ To Me?”: Obama Calls The GOP’s Bluff

Here’s how to negotiate, GOP-style: Begin by making outrageous demands. Bully your opponents into giving you almost all of what you want. Rather than accept the deal, add a host of radical new demands. Observe casually that you wouldn’t want anything bad to happen to the hostage you’ve taken — the nation’s well-being. To the extent possible, look and sound like Jack Nicholson in “The Shining.”

This strategy has worked so well for Republicans that it’s no surprise they’re using it again, this time in the unnecessary fight over what should be a routine increase in the debt ceiling. This time, however, something different is happening: President Obama seems to be channeling Robert De Niro in “Taxi Driver.” At a news conference last Wednesday, Obama’s response to the GOP was, essentially, “You talkin’ to me?”

Obama’s in-your-face attitude seems to have thrown Republicans off their stride. They thought all they had to do was convince everyone they were crazy enough to force an unthinkable default on the nation’s financial obligations. Now they have to wonder if Obama is crazy enough to let them.

He probably isn’t. But the White House has kept up the pressure, asserting that the real deadline for action by Congress to avoid a default isn’t Aug. 2, as the Treasury Department said, but July 22; it takes time to write the needed legislation, officials explained. Tick, tick, tick . . .

“Malia and Sasha generally finish their homework a day ahead of time,” Obama said, gratuitously — but effectively — comparing his daughters’ industry with congressional sloth. “It is impressive. They don’t wait until the night before. They’re not pulling all-nighters. They’re 13 and 10. Congress can do the same thing. If you know you’ve got to do something, just do it.”

Obama’s pushing and poking are aimed at Republicans who control the House, and what he wants them to “just do” is abandon the uncompromising position that any debt-ceiling deal has to include big, painful budget cuts but not a single cent of new tax revenue.

The president demands that Congress also eliminate “tax breaks for millionaires and billionaires . . . oil companies and hedge fund managers and corporate jet owners.” Without these modest increases in revenue, he says, the government will have to cut funding for medical research, food inspection and the National Weather Service. Also, presumably, whatever federal support goes to puppies and apple pie.

In truth, some non-millionaires who never fly on corporate jets would also lose tax breaks under the president’s proposal. And it’s hard to believe that the first thing the government would do, if Congress provides no new revenue, is stop testing ground beef for bacteria. But Obama is right that the cuts would be draconian — and he’s right to insist that House Republicans face reality.

My view, for what it’s worth, is that now is the wrong time for spending cuts or tax increases — that it’s ridiculous to do anything that might slow the lumbering economic recovery, even marginally. But if there have to be cuts, then Republicans must be forced to move off the no-new-revenue line they have drawn in the sand.

Even if they move just an inch, the nation’s prospects become much brighter. This fight is that important.

Every independent, bipartisan, blue-ribbon panel that has looked at the deficit problem has reached the same conclusion: The gap between spending and revenue is much too big to be closed by budget cuts alone. With fervent conviction but zero evidence, Tea Party Republicans believe otherwise — and Establishment Republicans, who know better, are afraid to contradict them.

The difficult work of putting the federal government on sound fiscal footing can’t begin as long as a majority in the House rejects simple arithmetic on ideological grounds.

“I’ve met with the leaders multiple times,” Obama said, referring to House Speaker John Boehner and Senate Minority Leader Mitch McConnell. “At a certain point, they need to do their job.” The job he means is welcoming fantasy-loving Republicans to the real world, and it has to be done.

The stakes are perilously high, but Obama does have a doomsday option: If all else fails, he can assert that a section of the 14th Amendment — “The validity of the public debt of the United States, authorized by law . . . shall not be questioned” — makes the debt limit unconstitutional and instructs him to take any measures necessary to avoid default.

Maybe that’s why, in this stare-down, the president doesn’t seem inclined to blink.

 

By: Eugene Robinson, Opinion Writer, The Washington Post, July 4, 2011

July 5, 2011 Posted by | Class Warfare, Congress, Conservatives, Constitution, Corporations, Debt Ceiling, Debt Crisis, Democracy, Democrats, Economic Recovery, Economy, Federal Budget, GOP, Government, Government Shut Down, Ideologues, Ideology, Lawmakers, Middle East, Politics, President Obama, Public, Republicans, Right Wing, Tax Evasion, Tax Increases, Tax Loopholes, Taxes, Tea Party, Voters, Wealthy | , , , , , , , , , , , | Leave a comment

Mitch McConnell’s Insincere Invitation

One can only dream of a Republican Party led by grown-ups. Instead, we have this.

Senate Republican Leader Mitch McConnell (R-Ky.) challenged President Obama on Thursday to meet with Senate Republicans to hear firsthand about the political reality of passing tax increases through Congress.

A day after Obama challenged Republicans to give up special tax breaks for corporate jets and major oil companies, McConnell issued a challenge of his own on the Senate floor.

“I’d like to invite the president to come to the Capitol today to meet with Senate Republicans. Any time this afternoon if he’s available, to come on up to the Capitol,” McConnell said. “That way he can hear directly from Senate Republicans … why what he’s proposing will not pass.”

McConnell says once Obama learns from GOP lawmakers that ending special tax breaks for oil companies and wealthy families has no chance of passing the Senate, “we can start talking about — maybe, finally — start talking about what’s actually possible.”

Let me summarize the message McConnell announced this morning: “If the president has some free time in a few hours, he should stop by and listen to us tell him we want to lower the deficit, but only in ways we see fit.”

Soon after, White House Press Secretary Jay Carney told reporters the president need not hear Republicans “restate their maximalist position,” adding, “We know that position. That’s not a conversation worth having.”

Of course not. Everyone knows what everyone thinks and everyone’s position at this point. Obama doesn’t need to listen to Republicans demand 100% of what they want, anymore than McConnell needs to listen to Democrats tell him he can’t get 100% of what he wants.

This entire process made a right turn at farcical quite a while ago. Mitch McConnell isn’t just threatening to crash the economy, he’s also threatening to make mockery of the institution he claims to serve and turn the American political process into a reality-show circus.

Not to be outdone, NRSC Chairman John Cornyn (R-Texas) said President Obama has “diminished” his office by urging lawmakers to do their duty. If anyone explain what on earth Cornyn was blabbering about, I’m all ears.

And then there’s Sen. John Thune (S.D.), the chairman of the Senate Republican Policy Committee, who told Fox News this morning that the president goes golfing too much.

These aren’t random House backbenchers — McConnell, Cornyn, and Thune are three of the top four highest-ranking Republican members of the Senate. And they all appear to be rambling incoherently.

I was about to type that there are no adults left in the Republicans’ room, but that’s not entirely true. There are still a couple left, but they’re stuck in primary fights, so they have to go along with the madness to save their careers.

It’s a pathetic display.

 

By: Steve Benen, Contributing Writer, Political Animal, The Washington Monthly, June 30, 2011

July 1, 2011 Posted by | Congress, Conservatives, Debt Ceiling, Debt Crisis, Democracy, Economic Recovery, Economy, Federal Budget, GOP, Government, Government Shut Down, Lawmakers, Politics, President Obama, Republicans, Right Wing, Taxes, Wealthy | , , , , , , , | Leave a comment

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