A Flea in the Fur of the Beast

“Death, fire, and burglary make all men equals.” —Dickens

Category: Debt Ceiling

Time for a New “De-Americanized” World Order?

by bisonmessink

It seems like only yesterday there was hand wringing in Washington about America’s diminished credibility in the world if the United States failed to inject itself into the Syrian civil war.  Today, the international credibility of the United States has taken a far bigger plunge, after U.S. lawmakers pushed the world economy to the brink of collapse, just to prove a point about American domestic policy.

Many in the world are taking note of an editorial this week from the Chinese news agency Xinhua blasted the United States and called for a new “de-Americanized” world order.

Instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies…

Most recently, the cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.

Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated, and a new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing.

While America is fixated on the military threats to its world supremacy, what’s left of the Axis of Evil — North Korea and Iran — emerging economic powers China, India, Russia and Brazil are poised to become dominant global players, without or without America’s cooperation. The stability and surety of United States debt has long been America’s biggest economic advantage, and one that U.S. policy makers seem all too willing to give away.

A piggyback editorial in the Asia Times warns that China’s move to the top has already begun:

The time to capitalize has now arrived. By 2009, after the Wall Street-provoked financial crisis, there were already Chinese rumblings about the “malfunctioning of the Western model” and ultimately the “malfunctioning of Western culture”.

Beijing has listened to Dylan (with Mandarin subtitles?) and concluded yes, the times they-are-a-changing. With no foreseeable social, economic and political progress – the shutdown is just another graphic illustration, if any was needed – the US slide is as inexorable as China, bit by bit, spreading its wings to master 21st century post-modernity.

It will take far more, of course, than a couple threatening editorials to unseat the United States as the world’s top economy. It will take something like the United States defaulting on its debt, or even becoming involved in another costly and unnecessary war — thin ice that Washington is far too eager to tread upon.

Tea Party Rep Takes Founders Comparison to the End of the Line

by evanmcmurry

Ladies and gents, fallacy by analogy:

[Rep. Morgan] Griffith suggested the House should reject an unfavorable agreement from the Senate, even if it resulted in a debt default that severely damaged the economy.

“We have to make a decision that’s right long-term for the United States, and what may be distasteful, unpleasant and not appropriate in the short run may be something that has to be done,” he said.

Griffith, a former majority leader of the Virginia House of Delegates, cited as an example the American Revolution.

“I will remind you that this group of renegades that decided that they wanted to break from the crown in 1776 did great damage to the economy of the colonies,” Griffith said. “They created the greatest nation and the best form of government, but they did damage to the economy in the short run.”

Too bad he didn’t work Hitler into that.

The Anti-Cavalry Has Arrived

by evanmcmurry

No:

Obama has work to do as far as keeping the caucus in line. The Times also reported that 26 House Democrats would attend an event Thursday sponsored by the group No Labels, an organization helmed by former Utah governor Jon Huntsman and former Indiana senator Evan Bayh, a Republican and Democrat, respectively. No Labels is calling for immediate negotiations between the two parties. (via)

No.

The Most Jaw-Dropping Line About Default Yet

by evanmcmurry

So this is terrifying:

“We always have enough money to pay our debt service,” said Mr. Burr, who pointed to a stream of tax revenue flowing into the Treasury as he shrugged off fears of a cascading financial crisis. “You’ve had the federal government out of work for close to two weeks; that’s about $24 billion a month. Every month, you have enough saved in salaries alone that you’re covering three-fifths, four-fifths of the total debt service, about $35 billion a month. That’s manageable for some time.” (via)

Unless I’m misreading that, Senator Burr is suggesting that we avoid default by keeping the government closed, thereby freeing up money to plug our debt by using funds that would otherwise pay the salaries of 800,000 government employees. The phrases “every month” and “some time” suggest he does not consider this a short term solution.

Bill Kristol made the extraordinarily cynical point the other day that the GOP might as well ride out the shutdown, as the party had already absorbed the negative effects and couldn’t get any more unpopular. I guess that sounded like a wager to Burr.

For more Burr, click here.

Today in Legislating as a Pointless Beckettian Exercise

by evanmcmurry

Hey, who missed the debate over whether Obama can/should invoke the Fourteenth Amendment to unilaterally raise the debt ceiling? It’s rock-and-hard-place politics, as it gets Obama out of the jam while handing his critics, who believe him to be a sinister usurper to begin with, a blaring example of the president snatching power of the purse for the executive, and all to continue Bush’s his reckless spending. The other option is default.

But to add to the frustrating waste of the shutdown—Republicans don’t even know what they want from it anymore, and ObamaCare rolled out on Tuesday even as the effort to defund it shuttered unrelated portions of the federal government—the debt ceiling is an especially pointless little twig of a law: “The debt ceiling is the fiscal equivalent of the human appendix—a law with no discoverable purpose,” writes Henry J. Aaron of the Brookings Institution. (Except that appendices ultimately get removed…)

We’re going through all this for literally nothing.

Black swans, the debt ceiling and Obama’s refusal to #MintTheCoin (June redux)

by pdxblake

The GOP has officially caved in on the debt ceiling debate, supporting a 3-month extension that would require the senate to pass a budget.  Paul Krugman says, “Obama was right” in a blog post:

I’m happy to concede that the president and team called this one right.  And it’s a big deal. Yes, the GOP could come back on the debt ceiling, but that seems unlikely. It could try to make a big deal of the sequester, but that’s a lot more like the fiscal cliff than it is like the debt ceiling: not good, but not potentially catastrophic, and therefore poor terrain for the “we’re crazier than you are” strategy. And while Republicans could shut down the government, my guess is that Democrats would actually be gleeful at that prospect: the PR would be overwhelmingly favorable for Obama, and again, not much risk of blowing up the world.

I think he is being a bit too positive on the outcome because, yes, while the other options to create havoc by the Republicans would not be nearly as catastrophic, they are still terrible, and it doesn’t necessarily provide vindication to Obama that he was right in this case, as the economist Andy Harless notes on Twitter:

– Krugman says Obama “called it right” (i.e. GOP was bluffing on debt limit). Not sure an ex post right call constitutes responsible policy.
– If there was a 20% chance they weren’t bluffing, was it worth taking off the table all options for dealing with that 20% outcome?
– Calling the GOP’s bluff is like owning an asset with a positive median return but a long left tail. Yes, it usually pays off.

The idea he is saying about the asset example can be demonstrated by this terrible thing I just made in MS Paint.  The median return (the size of the area to the right of the black line) is positive.  However, the left tail being much longer than the the right shows that there is a possibility (even if it is small) that a really bad outcome could happen (20% of the space under the curve is to the left of the red line).  This represents the probability that the GOP was not bluffing and was prepared to force a default, which would be really bad, much worse than the median outcome is a good outcome.  Everything else (like letting the sequester kick in, but preventing default lies somewhere between the black line and the red line).

Bad stuff

The principle behind his argument is that just because the expected value of his “call their bluff”  strategy was positive, it was not a good strategy for Obama to rule out his other options (like the platinum coin, or other options).  This question is an example of the difficulty in dealing with Black Swan events (of which the financial crisis is a notable example).   Since this is a blog and not something more formal, I can cheat and cite Wikipedia’s definition of why a Black Swan event is hard to manage:

  1. The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology
  2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
  3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

For (1), there has not been a US government default, or historical examples of the country coming close to default for the past 150 years, except for the fight in August 2011 over the debt ceiling, which is an awfully small sample to use to develop conclusions for future policy.  As a result of (1) and the limited amount of control that John Boehner has over the extremist elements of the GOP House makes predicting probabilities that the debt ceiling would not be raised very hard.  And for (3), because the US government has never defaulted on its debts on the Federal level, and because US Treasuries are considered a ‘risk-free’ asset in all the models used for pretty much the entire world, it is impossible for anyone to understand how important the ‘risk-free’ nature of US Treasuries is to the global financial system (and thus makes a ‘mistake’ by the House GOP more likely because it creates a psychological bias that blocks the comprehension of how damaging it would be to allow the US government to default).

Why rehash the theory behind whether Obama was playing with fire with the House GOP?  Why not move beyond banging ourselves in the head with a hammer and start thinking about more positive policies that could help the economy?  Well, because it’s not necessarily over.  Business Insider quotes a GOP aide in the House with three possible outcomes during the 3-month break from the current crisis:

1. Dems decide to make their stand here and refuse to pass anything that is short term or tied to the requirement for the Senate to pass a budget.  If this happens, things get ugly fast.  You get the same war all over again and Republicans will likely feel more righteous about their resistance given the Dems unwillingness to take on what (the GOP sees as) very moderate reforms.

2.  Dems agree to pass a budget and the three month extension kick the debt ceiling to around June.  That means the hard line anti-spending guys can make their stand on both the CR in March and all the FY14 appropriations bills between now and June.  That should function as a great pressure release valve for leadership to force through what will likely be a less-than-palatable long-term debt ceiling extension.

3. We get a short term, but without the budget reform or the Senate never actually passes a budget.  CR becomes extra contentious, approps bills turn into the same type of go around as HR 1 and then the debt ceiling arrives with a unified, very angry right wing of the party. Back to  things getting ugly, only worse.

The short-term increase is contingent upon the Senate passing a budget, upon threat of having their paychecks withheld, which might be unconstitutional (according to House member Daryll Issa earlier this afternoon before his party got to him and he changed his mind).  That’s not hard, the Democrats control the Senate, you say.  But wait, the Republicans filibuster everything they don’t like and the Senate still has not yet made any changes to the filibuster.

So, for as relieved as everyone is today that the era of crisis is over, it might not be. If everything falls apart, we’re back to square one with the debt ceiling in May or June instead of February or March and, if things move along the lines of Scenario 3, Obama may be wishing he had not said he won’t #MintTheCoin or use the 14th Amendment to bypass the debt ceiling (or may try to wiggle out of his pre-commitment not to use them.  Let’s hope it doesn’t come out this way.

Obama just caved on the debt ceiling, won’t #MintTheCoin

by pdxblake

Word out of the Treasury (ht Ezra Klein) is that the White House/Treasury have given up the platinum coin option to mitigate the damage that a default would cause.  The key part:

The White House seems to agree [that there is nothing they can do to sidestep the debt ceiling]. This is, in fact, the second time that the Obama administration has ruled out a possible end run on the debt ceiling. In December, Press Secretary Jay Carney said, “This administration does not believe the 14th Amendment gives the president the power to ignore the debt ceiling — period.”

The administration’s position is that raising the debt limit is Congress’s responsibility until the day that Congress votes to make it the White House’s responsibility, which is a resolution the Obama administration would happily accept. Until then, White House officials say, they will not negotiate over the debt ceiling, and if congressional Republicans attempt to use it as leverage, then the consequences will be theirs to bear.

The last paragraph is a farce, as Obama has shown multiple times that he  is unwilling or unable to use leverage and force the other side to really give up what they want.  In the debt ceiling, despite having the leverage of allowing all the Bush tax cuts to expire and then proposing a bill reinstating them for people earning under $250,000, Obama caved and raised the limit to $450,000 in order to get some Republican support.  Obama still apparently believes that there is value in pandering to a Republican party led by extremists, and eventually the party may split between the quasi-moderates and the fanatics, but it does not need any help from Obama for this to happen.  It either will or it won’t and any accommodation by Obama will only result in worse legislation.

Having refused to use the 14th Amendment option (which disallows the government questioning its obligation to repay creditors who are banking on the ‘full faith and credit’ of the US government) and the platinum coin option (which would circumvent the debt ceiling and allow already appropriated spending to continue until the technical legislation is passed to allow the issuance of new debt, Obama’s promise to not negotiate has zero credibility.

After all, the last time he had leverage and could allow to have the full Bush tax cuts ended if the Republicans didn’t pass a law along the lines that he wanted, Obama caved in to some of their demands.  The consequences of “going over the cliff” for several weeks or even a month were real, but relatively minor.  Certainly compared with the debt ceiling where not having an increase passed before “X” day (sometime between February 15 and March 1) will lead to the default by the US government, something with far worse consequences.  His threat to not negotiate is now just talk.  Unless…

There are still two options that would allow the country to pass the ‘X’ day without defaulting on its debt.  Obama shows no willingness to use these workarounds, but they haven’t been ruled out yet.  First, the Federal Reserve (which sends all its profits back to the US Treasury, since it is a quasi-governmental body) could make a ‘dividend’ payment to the Treasury in the form of some of the government bonds it holds.  If these bonds were returned to the Treasury, the Treasury could cancel the Treasuries (it would after all, just owe itself money) and then issue new bonds to investors in an equal amount.  The end result would be funds with which the government could make the payments it is legally obligated to make (interest payments on the debt, Social Security and Medicare payments and Congressionally authorized spening).

Or, it could issue what Paul Krugman calls “Moral Obligation Coupons”, which are essentially IOUs that the US government is not legally obligated to pay, but which it will say it will pay (and for now, that promise would probably be viewed as solid).  California did a similar thing in 2009, when it issued IOUs.  These IOUs (technically Registered Warrants) were issued in lieu of payment for tax refunds and for companies that did business for the State of California when the state government was unable to agree to a budget.  If you got one, you could take it to the bank and exchange it for cash (and the bank held it until the budget was passed and it could be exchanged with the state for cash).  However, some of the big banks started to not accept the IOUs, so it is only a stopgap solution.  Presumably IOUs from the US government would be accepted more broadly and for longer since the US government will most certainly get past the political issue with the debt ceiling and then redeem the IOUs.

There’s no indication that Obama would be open to either of these ideas, and history suggests that if he had a choice between giving into the Republican demands for some entitlement cuts and using unorthodox means to prevent a government default, he would choose the former.  He already, after all, offered to modify the calculation of social security benefits (switching to chained CPI), which would have amounted to a benefit cut in his negotiation to have the debt ceiling limit raised in the fiscal cliff bill (I thought he said he wasn’t going to negotiate over the debt ceiling).  So, we are now entering the territory where the GOP has seen success in holding the creditworthiness of the US hostage over their demands to cut entitlements (that’s right, cut your Social Security and Medicare) and there’s no reason why they are going to stop now.  It’s a sad day to see Democrats allow hostage-taking by the Republicans to become an effective political technique.