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Debt Ceiling Warning: Inaction Would Double Interest Rates, Crash Market

Public efforts by both House Speaker John Boehner and President Obama to convince skeptical new Republican House members to add $2 trillion to the nation’s burdensome $14 trillion debt ceiling are being reinforced by dire warnings from business leaders that failing to OK the increase will lead to inflation, an immediate doubling of interest rates and a killer Wall Street crash.

“If they don’t increase the debt, there will be a huge impact on the economy,” a Wall Street executive told Whispers on background. “Interest rates would spike. S&P and Moody’s would downgrade U.S. debt, raising the price of borrowing, there would be a market sell-off, it would be a disaster.”

While Boehner, who yesterday called for a deal that would OK the debt ceiling increase in return for trillions of dollars in spending cuts, Wall Street lobbyists and banking and business leaders are meeting with several of the new Tea Party-backed House members who pledged to stop raising the ceiling to explain the impact of standing pat.

“A lot of freshmen are new to the issue,” said one of those meeting with the new members, some of whom signed pledges not to raise the debt ceiling no matter what.

Among the specifics the sources say they are telling the new members:

— Inflation could jump, though they aren’t giving any percentage growth.

— Interest rates could double if U.S. debt is downgraded. House loans, for example, that are now below 5 percent, could surge to 9-10 percent, killing any chance of fixing the housing slump or cutting the unemployment rate, now at 9 percent.

— The stock market could suffer a 10 percent drop, far more significant than the 778 point thrashing Wall Street took when the House rejected the government’s $700 billion bank bailout plan in September 2008.

“That market sell-off will look small compared to what we’ll see,” said a Wall Street executive.

So far, the campaign to turn the naysayers around is starting to work, say those involved. Helping is the expectations that the debt ceiling won’t actually be breached until August.

While there have been warnings that the vote must come sooner due to expectations that the cap will be breached this month, officials explained that Treasury can make several moves to postpone that until about August 2.

By: Paul Bedard, U. S. News and World Report, May 10, 2011

May 10, 2011 Posted by | Banks, Businesses, Congress, Conservatives, Debt Ceiling, Deficits, Economic Recovery, Economy, Financial Institutions, GOP, Government, Government Shut Down, Jobs, Lawmakers, Lobbyists, Politics, President Obama, Republicans, Right Wing, Tea Party, Unemployment, Wall Street | , , , , , , , , , | Leave a comment

Tea Party Puts The Screws To House Republicans Over Debt Ceiling

Tea party activists have taken some lumps lately, but they’re not going down without a fight.

With TV ads, petitions and grassroots lobbying, tea party organizers are gearing up to send an absolutist message to Capitol Hill: Don’t raise the debt ceiling under any circumstances. Tea party activists have already clashed publicly with some of the 87 GOP freshmen they helped elect last year, and they’re warning that Republicans who don’t keep their fiscal promises will pay a political price.

“We will remove as many incumbents as we can that do not do the job they were hired to do,” Darla Dawald, national director of the tea party group Patriot Action Network, said in an e-mail. “We are watching every member of Congress, their votes, position and language.”

A newly formed conservative political action committee has released an ad opposing a debt ceiling increase and disputing the $100 billion in cuts that House Speaker John Boehner, R-Ohio, touted in the recent budget agreement. The ad cites the Congressional Budget Office finding that cuts totaled less than $400 million. But its real target is President Obama and his “massive deficit spending.”

The ad was released by the new Campaign to Defeat Barack Obama PAC, a spinoff of the Our Country Deserves Better PAC, the party of the Tea party Express. The latter is about to launch its own national TV ad campaign opposing a debt ceiling increase, said Amy Kremer, who chairs Tea party Express. The PAC raised and spent $7.7 million in the 2010 cycle, according to the Center for Responsive Politics.

Another conservative activist group, Grassfire Nation, is gathering signatures from its 1.8 million members on a petition opposing “any increase in the legal federal debt limit,” to be delivered by hand in the coming weeks to lawmakers on Capitol Hill. A Grassfire Nation poll found that close to 80 percent of its members opposed raising the debt ceiling, even if conditions such as spending cuts or caps were attached.

“It’s no secret that the tea party movement’s unhappy,” said Kremer. “You’re seeing people on a local level really upset with their congressmen and women.” Reps. Michael Grimm, R-N.Y., Tom Price, R-Ga., and David Schweikert, R-Ariz., are among the House Republicans who have fielded flak from conservative bloggers, demonstrators, or town hall hecklers upset that Congress isn’t acting faster to bring down the deficit.

“There’s a frustration that we can’t move faster,” said Americans for Tax Reform president Grover Norquist, referring to the tea party movement. “But also an understanding that their job is to say: Let’s do more, let’s do more, let’s do more.”

The debt ceiling vote will be a key test of both the tea party and of the GOP on the threshold of the 2012 election. Technically, the federal government will run out of money in mid-May, but Treasury Secretary Timothy Geithner has signaled that accounting adjustments may give Congress until early August to actually vote.

It’s an open question how successful the tea party will be, both in the debt ceiling fight and on the campaign trail next year. Of the GOP freshmen, who’ve played a pivotal role in the unfolding budget drama, one bloc would raise the debt ceiling on the condition of substantive budget reforms or spending cuts, sources say. Another bloc opposes a debt ceiling increase flat out. And about a third are undecided.

Tea party activists are up against expert and administration warnings that failing to raise the debt limit could send the economy and the stock market into a tailspin. The tea party’s star, moreover, may be fading.

A Capitol Hill protest in March to demand more budget cuts proved underwhelming. The movement’s national leaders, most notably former Alaska Gov. Sarah Palin and Rep. Michele Bachmann, R-Minn., have drifted to the fringes of the GOP White House nominating contest. A couple of tea party PACs unveiled to much fanfare last year–Ensuring Liberty and Liberty First–have fizzled. And GOP leaders have signaled that certain tea party goals–repealing the health care law, partially privatizing Medicare–may or may not be on the table in ongoing debt limit negotiations.

It “absolutely is not true” that the movement is losing steam, countered Kremer. “You’re not seeing the great big rallies that you did before, because people are engaged on a local level doing things.”

Virginia tea party activist Jamie Radtke, who’s launched a Senate campaign for the seat now held by Democratic Sen. Jim Webb, concurred that the movement is shifting from a national to a local focus: “There is a strong desire in the tea party movement to keep the tea party local.”

Radtke predicted that activists will take the fight over the debt limit to the mat. “The GOP is on probation, because under President Bush they spent a lot of money, and added $3 trillion to the national debt,” she said, adding: “You will see that the tea party will have no problem whatsoever challenging the very freshmen they put in.”

Such warnings still make some on Capitol Hill very nervous. But as Republicans struggle between idealism and pragmatism, the GOP–and the tea party–might soon face a moment of truth.

By: Elizabeth Newlin Carney, Contributing Editor, National Journal Daily, May 9, 2011

May 10, 2011 Posted by | Budget, Congress, Conservatives, Debt Ceiling, Deficits, Democracy, Economic Recovery, Economy, Elections, GOP, Government, Government Shut Down, Ideologues, Ideology, Lobbyists, Politics, Republicans, Right Wing, States, Tea Party, Voters | , , , , , , , , | Leave a comment

Republicans’ 2012 Slogan: It’s Anything But The Economy, Stupid

The GOP has turned one of the most effective slogans in American political history on its head. The Republican rallying cry for 2012 will be “Anything but the economy, stupid.” Let’s see how that works out for them next year.

Last year Republican leader John Boehner promised Americans that his party’s priority would be fixing the economy and creating jobs if voters gave the GOP control of the House of Representatives. Republican House candidates echoed their leader’s call to focus on the economy like a laser beam. This year, they have done almost everything but. Two of the first three bills introduced by House Republicans at the start of the 112th Congress in January were designed to take away a woman’s right to choose. One of them, H.R. 3, would have allowed abortion only in cases of “forcible” rape. Like there’s some other kind.

Then there was the battle in the first week of April that almost led to the shutdown of the U.S. government and the end of all programs to create jobs. What was the GOP hang-up on waiting till the last hour to avoid the debacle? Concern that the budget wasn’t doing enough to create jobs? No. The issue that the GOP pushed in the negotiations until the very end was defunding programs at Planned Parenthood designed to limit the number of abortions.

But that’s not all Republicans are doing to create jobs. Tuesday, Speaker Boehner hired a lawyer at $520 an hour to defend an unconstitutional law, the Defense of Marriage Act. The law passed in 1994 defines marriage as the union between a man and a woman. President Obama wisely decided not to waste any money defending the law because it’s clearly unconstitutional. The 10th Amendment reserves the power to regulate marriages to the states. So much for wasteful government spending and states’ rights. But at least the GOP has created one good paying job.

Meanwhile, the religious right is busy attacking a conservative potential GOP presidential candidate, Mitch Daniels. He is the governor of Indiana and former director of the Office of Management and Budget. Daniels angered religious conservatives because he had the nerve to say economic issues are more important than social issues. The religious right feels anyone like Daniels who short changes social issues is either a heretic, a lunatic, or both. Yes, the Taliban wing of the Republican Party believes that persecuting gays is more important than creating jobs.  Good luck trying to sell that message to the millions of Americans who are one paycheck away from bankruptcy. If they are lucky enough to have a paycheck.

When Republicans go down to ignominious defeat in 2012, they will have only themselves to blame.

By: Brad Bannon, U. S. News and Worl Report, April 21, 2011

April 22, 2011 Posted by | Budget, Congress, Conservatives, Deficits, Economy, Elections, GOP, Government Shut Down, Jobs, Planned Parenthood, Politics, President Obama, Republicans, Right Wing, Voters, Women, Womens Rights | , , , , , , | Leave a comment

Standard And Poor’s Attempt To Influence The Political Debate

In what appears to be an attempt to influence the political debate in Washington over federal government deficits, Standards & Poor’s rating firm downgraded U.S. debt to negative from stable. Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.

The best thing to do is to ignore the raters — as markets usually do when sovereign debt gets downgraded — but this time stock indexes fell, probably because of the uncertain prospects concerning government budgeting. After all, we barely avoided a government shutdown earlier this month, and with S&P. joining the fray who knows whether the government will continue to pay its bills?

Mind you, this has nothing to do with economics, government solvency or involuntary default. A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.
Similarly Chairman Alan Greenspan said that Social Security can never go broke because government can meet all its obligations by “creating money.”

Instead, sovereign government spending is constrained by budgeting procedure and by Congressionally imposed debt limits. In other words, by self-imposed constraints rather than by market constraints.

Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.

Strangely enough, the ratings agencies recognized long ago that sovereign currency-issuing governments do not really face solvency constraints. A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.

While I certainly hope we do not repeat Japan’s economic experience of the past two decades, I think the impact of downgrades by raters of U.S. sovereign debt will have a similar impact here: zip.

By: L. Randall Wray, The New York Times, April 18, 2011

April 19, 2011 Posted by | Bankruptcy, Banks, Congress, Debt Ceiling, Debt Crisis, Deficits, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Ideology, Politics, Social Security, Standard and Poor's | , , , , , , , , , , , | Leave a comment

Standard And Poor’s Is The Broker Who Lost All Your Money: There Is No Real Risk Of Default

What does Standard & Poor’s action lowering the U.S. outlook to “negative” mean? What are the likely ramifications of the U.S. deficit and debt? I do not want to conflate two completely different issues, so let’s take each in turn.

First, I have stopped paying any attention to anything that S&P says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder. It is the broker who lost all your money, the girlfriend who cheated on you, the partner who stole from you. Since the portfolios we run never rely on its judgment or analysis, we simply do not care what it says about credit ratings.

But big bond managers like Bill Gross of Pimco do matter – he invests hundreds of billions of dollars. We pay close attention when smart managers like him announce they are out of the Treasury market, which he did last month.

Many people misunderstand the U.S. deficit. First, it is stimulative to both the economy and the markets. Look at what happened under Reagan and Obama and most of Bush II – the economy recovered from recession and the markets rose along with the deficit.

Second, Social Security is fine. Sure, the retirement age will go higher, there will be means testing, and the income cutoff for contributions ($106,000) will likely double. But it will remain solvent. Medicare is much trickier, as the United States pays two times what most countries pay for health care but gets lesser care.

The current debate about deficits looks like more politics. Look at the voting records of those posturing about the debt. The “deficit peacocks” voted for new entitlements (the prescription drug benefit — Medicare Part D), went along with a trillion-dollar war of choice in Iraq, and supported (for the first time in U.S. history) a major tax cut during wartime. I find it hard to take their deficit noise as a bona fide fiscal concern.

After Standard & Poor’s missed the greatest collapse in history – indeed, they helped create it by rating junk mortgage backed securities Triple AAA – they are now over-compensating. As I mentioned on The Big Picture, there is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.” That especially seems apt with regard to S&P.

The deficit has been with us for a long time. Since investors are continuing to lend money to Uncle Sam at exceedingly low rates, there does not appear to be any real fear of a default. That is what matters most to bond buyers — and it’s why I never care what S&P thinks on this.

By: Barry Ritholtz, The New York Times, April 18, 2011

April 19, 2011 Posted by | Congress, Consumers, Debt Ceiling, Debt Crisis, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Lawmakers, Medicare, Politics, Social Security, Standard and Poor's, Wall Street | , , , , , , , , , , | Leave a comment

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