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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

Halting The “Disease Of Republican Compromise”: Intra-GOP Wars Block Path To Debt Ceiling Accord

What if they yield, even a little?

Call it GOP Primary Fear. A major hurdle to breaking the federal debt-ceiling impasse is the worry by House Republicans that they will invite primary election challenges from the right if they give ground to Democrats on the issue of higher tax revenues.

There’s even a verb for it: being “primaried.”

The challenger would not be a Democrat. It would be a fellow Republican, in a spring or summer primary that most voters would ignore. That could leave the field mainly to ideological die-hards, often with tea party ties and little appetite for compromise.

It’s the atmosphere that many House freshmen rode to victory last year, and that cost two GOP senators their party’s nomination.

“They talk about it all the time,” said Mike McKenna, a Republican lobbyist who closely follows the House and politics. If the House cuts a deficit-reduction deal with President Barack Obama, he said, “you’re probably going to see a lot of leadership guys get primaried,” along with rank-and-file Republicans. “It could be an all-time high.”

Such worries are a key reason the GOP-controlled House has refused so far to accept Obama’s debt-and-deficit overture, even though it includes budget concessions that many people never expected from a Democrat. Friday evening, after House Speaker John Boehner abruptly broke off the talks, an exasperated Obama declared: “One of the questions the Republican Party is going to have to ask itself is, `Can they say yes to anything?'”

Boehner blamed Obama for insisting on higher revenues. The package they were closing in on would have cut spending by $3 trillion over 10 years, and slowly started to trim Social Security and Medicare benefits. But to get it through the Democratic-controlled Senate, the deal also needed to include some increase in revenues from taxes aimed mainly at the wealthy, and generating up to $1 trillion over a decade.

That’s the needle Boehner can’t figure out how to thread. He’s been unable to persuade enough fellow Republicans to give just enough on higher revenues, or “tax hikes” — there will be a fierce fight, too, over definitions — to keep Senate Democrats from filibustering the bill to death.

Boehner must also reassure colleagues that they could survive primary challenges.

Obama confronted the issue Friday, at a forum in Maryland. Many House districts, he said, are drawn to be “so solidly Republican or so solidly Democrat that a lot of Republicans in the House of Representatives, they’re not worried about losing to a Democrat. They’re worried about somebody on the right running against them because they compromised. So even if their instinct is to compromise, their instinct of self-preservation is stronger … that leads them to dig in.”

Nearly all congressional Republicans have pledged not to raise taxes, although lawmakers quibble about what that means. Many tea partyers say it bars any action that would lead directly to a net increase in tax revenues. The Senate is almost certain to reject that definition.

Tea party activist Lee Bellinger recently urged colleagues to put lawmakers on notice “before the disease of Republican compromise infects Washington once again.” As early as mid-April, Tea Party Patriots co-founder Mark Meckler told The Hill newspaper he was “getting emails by the hour from people talking about primary challenges” to Republicans who seek budget deals with Democrats.

Rutgers University political scientist Ross Baker said Republican primaries are dominated by “the most ideological voters.” They “track votes and are unforgiving,” he said.

GOP pollster and consultant Wes Anderson said, “If we pass some deal that includes some form of tax increases_ even if we try really hard to couch it in `tax reform, closing loopholes,’ etc. — there are going to be a number of our folks, especially freshmen, who will face primaries. It’s just going to happen.”

Anderson said Boehner’s top staffer is counting votes every day, asking “what kind of deal can we get without losing too many?”

For Boehner, the math doesn’t require reaching the minimum 218 votes needed to pass a bill in the House (or 217, given two seats currently vacant).

If Obama eventually endorses a compromise, it probably will draw scores of House Democrats’ votes. That would allow Boehner to lose 100 or so of his 240 Republicans, and still pass the measure.

But if Boehner wants to remain speaker, he can hardly afford a bigger defection than that. He needs to find the political sweet spot, a compromise that can win the votes of 140 or so House Republicans and most of the Senate’s Democrats.

McKenna estimates that about 40 pro-Boehner House Republicans are politically safe enough to vote for a compromise with no worries. Beyond that, he said, “80, 90, 100 are probably going to vote `yes’ on whatever comes out. And they will be exposed.”

By: Charles Babington (With Contribution by Jim Kuhnhenn), The Associated Press, Yahoo News, July 22, 2011

July 23, 2011 Posted by | Budget, Class Warfare, Congress, Conservatives, Debt Ceiling, Deficits, Democrats, Economic Recovery, Economy, Elections, GOP, Government, Government Shut Down, Ideologues, Ideology, Lawmakers, Medicare, Middle Class, Politics, President Obama, Public Opinion, Republicans, Right Wing, Senate, Social Security, Tax Loopholes, Taxes, Teaparty, Voters, Wealthy | , , , , , , , , | Leave a comment

A Conspicuous Pattern: The GOP Is Really Not Interested In Governing

At his press conference the other day, President Obama noted the recommendations of the bipartisan deficit-reduction commission (which, by the way, failed to reach an agreement). He mentioned in passing that his White House set up the structure for the commission: “As you will recall, this was originally bipartisan legislation that some of the Republican supporters of decided to vote against when I said I supported it — that seems to be a pattern that I’m still puzzled by.”

It is, to be sure, quite a pattern. For two-and-a-half years, Obama has run into congressional Republicans who not only refuse to take “yes” for an answer, but routinely oppose their own ideas when the president is willing to accept them.

This seems especially relevant in the context of the current debt-reduction talks. At a certain level, it’s almost comical — here we have a Democratic president agreeing with a conservative Republican House Speaker on a massive deal that would lower the debt by over $4 trillion over the next decade. It would tilt heavily in the GOP’s direction, and address the problem Republicans pretend to care about most. Obama is even willing to consider significant entitlement “reforms,” which should be music to the ears of the right.

And yet, in the latest example that “puzzles” the president, Republicans aren’t interested.

Now, part of this is obviously the result of Republicans adopting a faith-based approach to revenue, which happens to be wildly disconnected to reality. But that’s not the only angle that matters. Matt Yglesias had a good item the other day that raised a point that’s often lost in the shuffle.

[H]ere we get to the problem that’s recurred throughout Obama’s time in office. If members of Congress think like partisans who want to capture the White House, then the smart strategy for them is to refuse to do whatever it is the president wants. The content of the president’s desire is irrelevant. But the more ambitious his desire is, the more important it is to turn him down.

After all, if the President wants a big bipartisan deal on the deficit, then a big bipartisan deal on the deficit is “a win for President Obama,” which means a loss for the anti-Obama side. When Obama didn’t want to embrace Bowles-Simpson, then failure to embrace Bowles-Simpson was a valid critique of him. But had Obama embraced Bowles-Simpson, then it would have been necessary for his opponents to reject it.

For weeks, many have marveled at the priorities of the Republican policy wish-list — given a choice between the larger debt-reduction plan in American history and preserving some tax breaks for the wealthy, GOP officials at nearly every level strongly prefer the latter. Indeed, for nearly all Republicans, it’s such a no-brainer, this question is almost silly.

But there’s a separate challenge — Republicans have a choice between advancing policies they ostensibly agree with and Obama scoring a legislative victory. And as it turns out, that’s a no-brainer, too, since GOP lawmakers don’t really care about governing so much as they care about denying the president political victories. It might make them appear ridiculous — why would anyone reject their own ideas? — but looking foolish isn’t a major concern for congressional Republicans.

Obviously, this makes compromise literally impossible, and all but guarantees the least productive legislative session in many years. But it also suggests the president needs to adapt to an awkward set of circumstances: given Republican beliefs, Obama must realize his support for a legislative idea necessarily means it’s less likely to happen.

By: Steve Benen, Contributing Writer, Political Animal, Washington Monthly, July 17, 2011

July 18, 2011 Posted by | Budget, Congress, Conservatives, Debt Ceiling, Deficits, Democracy, Democrats, Economic Recovery, Economy, GOP, Government, Government Shut Down, Ideologues, Ideology, Lawmakers, Medicare, Politics, President Obama, Republicans, Right Wing, Tax Loopholes, Taxes, Wealthy | , , , , , , , , , , | Leave a comment

The Incredible Crazies: Finding Someone The House GOP Will Listen To

Negotiating with House Republicans isn’t just difficult because they refuse to compromise; it’s also because they don’t even appreciate the point of the exercise. Told, for example, that failure on the debt ceiling would lead to a disaster, the House GOP simply doesn’t believe the evidence.

It’s challenging enough trying to craft an agreement when the parties have the same goal. But what happens when the crew of the Titanic says, “The captain’s wrong; icebergs are no big deal”?

The trick is finding someone the crazies find credible. (thanks to T.K.)

Republican leaders in the House have begun to prepare their troops for politically painful votes to raise the nation’s debt limit, offering warnings and concessions to move the hard-line majority toward a compromise that would avert a federal default. […]

At a closed-door meeting Friday morning, GOP leaders turned to their most trusted budget expert, Rep. Paul D. Ryan of Wisconsin, to explain to rank-and-file members what many others have come to understand: A fiscal meltdown could occur if Congress fails to raise the debt ceiling. […]

The warnings appeared to have softened the views of at least some House members who, until now, were inclined to dismiss statements by administration officials, business leaders and outside economists that the economic impact would be dire if the federal government were suddenly unable to pay its bills. [emphasis added]

Right-wing freshman Rep. Steve Womack (R-Ark.) said he found the presentation, particularly the parts about skyrocketing interest rates, “sobering.”

Oh, now it’s “sobering”? We’re 17 days before the drop-dead crisis deadline, and now it’s dawning on some House Republicans that they’re not only playing with matches, but may actually torch the entire economy?

At this point, of course, I’ll take progress wherever I can find it. If some of the House GOP’s madness is “softening,” maybe they’ll be slightly more inclined to be responsible.

But I can’t help but find it interesting the limited pool of individuals Republicans are willing to listen to. The Treasury tells the House GOP caucus members they have to raise the debt ceiling, and Republicans don’t care. The Federal Reserve tells them, and they still don’t care. House Speaker John Boehner tells them, and that doesn’t work, either. Business leaders, governors, and economists tell them, and Republicans ignore all of them.

But Paul Ryan warns of a meltdown and all of a sudden, the House GOP is willing to pay attention.

I guess we should be thankful the radical House Budget Committee chairman is only wrong 90% of the time, and not 100%.

 

By: Steve Benen, Contributing Writer, Washington Monthly-Political Animal, July 16, 2011

July 17, 2011 Posted by | Budget, Businesses, Class Warfare, Congress, Conservatives, Consumer Credit, Corporations, Debt Ceiling, Deficits, Economic Recovery, Economy, GOP, Government, Government Shut Down, Ideologues, Ideology, Lawmakers, Middle Class, Politics, Republicans, Right Wing, Taxes, Wealthy | , , , , , , , , , , , | Leave a comment

Why The Tea Party Should Stop Fearing Compromise

Among tea party voters, there is a belief that the right is always getting sold out  by the political establishment. In their telling, Reagan-era conservatives agreed to an amnesty for illegal immigrants on the condition that the law  would be enforced going forward, then deeply regretted having done so.  George H.W. Bush broke his “no new taxes” pledge. The  Contract with America failed to deliver on many of its promises. George  W. Bush joined forces with Ted Kennedy on No Child Left Behind, changed  positions on campaign finance reform, and closed out his presidency by  bailing out undeserving Wall Street firms. In all this, he was abetted  by GOP legislators.

These tea party voters  are sometimes justified in feeling betrayed. Other times, they misinterpret what happened. Right or wrong, however, they’re powerfully averse to compromise. Mere mention of the word aggrieves them. They  don’t think of it as a means of bringing about a mutually beneficial  change in the status quo, where one of their priorities is addressed in return for giving up something on an issue they care less about. When  they hear the word compromise, the knee-jerk reaction is to oppose it.  In their experience, going along with compromise is tantamount to  getting screwed. The insistence that pols “stand on principle” is a  defense mechanism.

This attitude helps explain why tea partiers  are so frequently attracted to relatively inexperienced politicians like Sarah Palin, Marco Rubio, and Michele Bachmann. More experienced pols  have been forced to compromise as the price of achieving something, just as a President Palin, Rubio or Bachmann would be forced to compromise  in order to pass the parts of their agenda most important to them. Having  gotten so little of substance done in their careers, however, they haven’t yet had to give up anything significant, so they can maintain the fiction that they never would. As Daniel Larison puts it, “Bachmann’s lack of  achievements is in some ways a blessing for her, because it is proof  that she has never compromised. In today’s GOP, that is very valuable,  and she doesn’t have many competitors in the race who can say the same.”

The tea party movement should know better. The Founding Fathers engaged in an endless series of compromises. Abraham Lincoln  compromised. Franklin D. Roosevelt compromised. So did Ronald Reagan. Every consequential leader in the history of the United  States has had to compromise.

It defies common sense to think the next  Republican president will be different. So why are tea party voters asking  themselves, “Which of these presidential candidates is least  likely to compromise?” They ought to be pondering different questions, such as: “What  style of negotiation and compromise does this candidate employ? How much have they  gotten in the past for what they gave up?”

“Do the issues they’ve treated as most important align with my priorities?”

Viewed in  that light, Mitch Daniels’ talk of a truce on social issues in order to  focus on the budget deficit should’ve appealed to a large faction of tea partiers. He laid out his  priorities. They aligned perfectly with tea party rhetoric: it is a movement focused on economic issues and individual liberty far more than social conservatism if you trust what its typical adherents themselves assert. But even tea partiers who  shared Daniels’ priorities didn’t like that he talked of compromise.

They got self-righteous about it.

Tea partiers would be better off accepting that every politician cares about some things  more than others, that there is no such thing as successfully governing America as an uncompromising social, economic and national security conservative, and that pretending otherwise results in choosing candidates who are  marginally less likely to choose the best compromises.

Another way to put this is that if tea party voters were  less naive about the centrality of compromise to politics — and more  willing to believe that a principled person can compromise — they’d  feel  less victimized by an unchangeable fact of democracy. They’d also be  more frequently empowered to bring about  policy outcomes that better align with what they care about most.

 

By: Conor Friedersdorf, Associate Editor, The Atlantic, July 15, 2011

July 16, 2011 Posted by | Budget, Congress, Conservatives, Debt Ceiling, Deficits, Democracy, Economic Recovery, Economy, Elections, GOP, Government, Government Shut Down, Ideologues, Ideology, Iowa Caucuses, Liberty, Politics, Republicans, Right Wing, Taxes, Teaparty, Voters | , , , , , , | Leave a comment