Libertarian Leanings

S&P Payback

Shortly after S&P downgraded the nations debt rating from Triple-A to Double-A Plus, John Bellows, Acting Assistant Secretary for Economic Policy at the U.S. Department of the Treasury, responded with a scathing critique.

In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one.

...

Independent of this error, there is no justifiable rationale for downgrading the debt of the United States. There are millions of investors around the globe that trade Treasury securities. They assess our creditworthiness every minute of every day, and their collective judgment is that the U.S. has the means and political will to make good on its obligations. The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.

Today S&P retaliated.

WASHINGTON—Standard & Poor's on Monday downgraded the credit ratings of Fannie Mae, Freddie Mac and several other U.S. government entities, reflecting their dependence on federal support.

Included in S&P's latest downgrade were the senior issue ratings on debt issued by Fannie and Freddie, the giant mortgage-finance firms. Ten of the 12 Federal Home Loan Banks, which also provide funding for home loans, also received downgrades. Two of the Federal Home Loan Banks--of Chicago and Seattle--already had the lower AA-plus credit rating.

The downgrades of Fannie and Freddie reflect the mortgage firms' "direct reliance" on the U.S. government, S&P said.

Fannie and Freddie depend on the U.S. government's support to stay afloat, and therefore would be on a shaky footing if the U.S. ever defaulted on its debt.

Is there anybody, anywhere that thinks the U.S. is going default on it's debt?

Sad Reality

Roger Kimball knows what Obama ought to do, but also what he will do.

What should the president do Monday? I think Amilya Antonetti, chairman & CEO of AMA Productions, has it right. In a not-to-be-missed interview with Neil Cavuto (h/t Instapundit), she boiled it down to one word: “Apologize.” He should say he’s sorry for his failure of leadership. Sorry for his utopian economic illiteracy. Sorry for putting ideology above political wisdom.

That would be the manly, the honorable thing to do. Admit he was wrong about what needed to be done to fix the U.S. economy.

What will he do? He will blame Standard & Poor’s. Or George W. Bush. Or the Tea Party. Or all three.

 

A Big-Government Disaster

According to Nile Gardiner of UK Telegraph, the decision by Standard and Poor’s to downgrade America’s AAA credit rating is an indictment of the Obama administration's handling of the economy.

No doubt the White House will pathetically try to blame the Bush Administration, Republicans in Congress, and of course its favourite target, the Tea Party, for the move by S&P. But without a shadow of a doubt, responsibility for the country’s financial mess and staggering levels of debt lie with the current US president and his administration. They have been in charge of running the economy for over 30 months, during which time the United States has witnessed an unprecedented increase in government spending and borrowing.

S&P Playing Politics

Lefty political and economic commentator Kevin Drum notices that S&P is playing politics with its downgrade, even though he doesn't say it straight out.

In what sounded at first like something from the Onion, Standard & Poor's postponed its planned downgrade of U.S. debt for a few hours today after the White House pointed out that it had made a $2 trillion arithmetic error in its calculation of future deficits. Seriously. These guys are supposed to have the most sophisticated stable of financial analysts on the planet, but apparently they can't come within $2 trillion of figuring out something that's a simple matter of looking through OMB tables and CBO reports. But set that aside for the moment...

But in the end — and no one who has even a nodding acquaintance with political history should be surprised that it took until the 11th hour — a deal was cut. What's more, even if a deal hadn't been cut by August 2nd, we wouldn't have defaulted on our debt. A bunch of government services would have been temporarily put on hold, but bondholders would have been completely unaffected. This is a really important point. It's true that a temporary government shutdown would have been bad, but this has happened before. It's ugly and stupid and unnecessary, but it's politics. America's debt, however, was never at any risk.

On a similar note, here's Ezra Klein:

S&P is downgrading their estimation of our political system, not our actual ability to pay our debts....Of course S&P is downgrading our political system. Did you see the nonsense we pulled over the past few months?....Why shouldn’t S&P downgrade our debt?

Answer: because S&P shouldn't be in the business of commenting on a country's political spats unless they've been going on so long that they're likely to have a real, concrete impact on the safety of a country's bonds. And that hasn't happened yet. There's no serious macroeconomic reason to think America can't service its debt and there's no serious political reason to think the Tea Party has anything close to the power to provoke a political meltdown in which we won't pay our debt.

And then we have lefty political ranter Karoli at Crooks and Liars who smells corruption.

The first question I have is which hedge fund managers stand to profit. That's an answer I want right now. Not ten months from now. NOW. On July 25th, someone placed a ONE BILLION dollar bet that our credit rating would drop. It's time for them to be identified.

It's time for us to name those profiting from the tea party hostage takers, and know they are us. I am tired of the manipulation. The tea party is rejoicing over this. They believe they will break Medicare and Social Security by breaking the country. If ever there was a time to stand in the streets, in our communities, in our towns and call for them to be held to account.

In spite of her absurd hyperventilation about the Tea Party trying to "break Medicare and Social Security by breaking the country," Karoli isn't thoroughly unrealistic with her insider trading suspicions.  A billion dollars is a big bet, but there are other potential culprits besides the usual Republican/Tea Party villains that Karoli seems to suspect.

Default And Disaster Averted

Doubts remained right up to the last minute.  Could the House of Representatives with its Tea Party Caucus pass a bill that would increase the debt ceiling in time to avert a US default on its debt obligations?  In the end it passed pretty easily.

With the government running on fumes, Congress and the White House moved quickly Monday toward expanding the Treasury’s borrowing authority and putting in motion an ambitious plan promising between $2.1 trillion to $2.4 trillion in deficit reduction over the next 10 years.

The hastily written 74-page bill — never reviewed by a legislative committee and rushed to the floor — cleared the House on a 269-161 vote late Monday, with 95 Democrats joining 174 Republicans in support.

Today the bill goes to the Senate where passage is a foregone conclusion, and then it's on to the White House and the president for his signature.  The House vote was considered a make or break test for Speaker John Boehner.  As William McGurn opines in the Wall Street Journal, Boehner comes out of it stronger than ever.

We began the debt-ceiling debate on Democratic terms, with President Obama and Treasury Secretary Timothy Geithner insisting on a "clean bill" that had no conditions attached. Then came threats about grandma not getting her Social Security check if Republicans didn't do as the president demanded, and folks likening Republicans and tea partiers to terrorists.

At the Economic Club of New York in May, Mr. Boehner calmly laid down his marker about what he called "the arrogant habits of Washington":

"[L]et me be as clear as I can be. Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase. And the cuts should be greater than the accompanying increase in debt authority the president is given. . . .

"And with the exception of tax hikes—which will destroy jobs—everything is on the table."

By this measure, Mr. Boehner comes away with most of what he wanted.

Perhaps a better gauge of Speaker Boehner's debt ceiling accomplishment can be found in the reaction from the left.  Progressives, in large number, are distraught.

The New York Times appears to be reeling. Maureen Dowd quotes a Democrat as saying we're watching President Obama "turn into Jimmy Carter right before our eyes." The headline over Paul Krugman's column declares, "The President Surrenders." Equally gloomy is the editorial: "To Escape Chaos, a Terrible Deal."

Over at the New Republic, Jonathan Chait asks, "Did Obama Get Rolled?" Peter Beinhart at the Daily Beast answers the question with a piece headlined "How the Tea Party Won the Deal." Most argue that the president should have stood his liberal ground.

An apoplectic Joe Nocera writes in the New York Times,

You know what they say: Never negotiate with terrorists. It only encourages them.

These last few months, much of the country has watched in horror as the Tea Party Republicans have waged jihad on the American people.

But most of the country has not been watching in horror, and in fact neither has the rest of the world.  Here is Toby Young writing in the Telegraph (UK),

Most pundits are crediting this U-turn to the political muscle of the Tea Party and it’s true that President Obama would never have agreed to this deal if the Tea Party Republicans in the House of Representatives hadn’t engaged in the brinkmanship of the past few weeks. But to focus on the Tea Party is to ignore the tectonic political shift that’s taken place, not just in America but across Europe. The majority of citizens in nearly all the world’s most developed countries simply aren’t prepared to tolerate the degree of borrowing required to sustain generous welfare programmes any longer.

Although not all in the Tea Party see this deal as a great victory, it is a signal of things to come.  As DaTechGuy says, we've only turned the ship around.  But that's a good start.

The Boehner Plan

Commenting on an editorial in Investor's Business Daily, Ed Morrissey notes that by passing the Boehner Plan for raising the debt ceiling Republican House members would put the onus squarely on Senate Democrats to pass a plan of their own right on the eve of the deadline.

Passing Boehner 1.1 puts the onus back on the Democrats in the Senate to produce an alternative, which would be their very first vote on any plan in this crisis.  If they pass a Reid plan, then the entire issue goes to a conference committee and we end up with a compromise on the principles of the GOP.  If the Senate refuses to act at all, then it’s not the fault of Republicans when the deadline arrives.

Senate Democrats are inexplicably eager to take the fall.

Fifty-three Democratic senators have signed a letter to House Speaker John A. Boehner saying they intend to vote against his plan for an increase in the debt ceiling, virtually assuring its defeat in the Senate even as the speaker lines up Republican votes to pass it in the House on Thursday.

Votes are not final until they are cast. But if the Democrats hold to their promise in the letter, Mr. Boehner’s plan for a six-month increase in borrowing authority will not make it to President Obama’s desk.

“We heard that in your caucus you said the Senate will support your bill,” the senators say in the letter. “We are writing to tell you that we will not support it, and give you the reasons why.”

In the letter, the senators argue that a short-term extension of the debt ceiling would “put America at risk” and “could be nearly as disastrous as a default.”

Democrats object because a short-term extension would force them to talk about raising the debt ceiling once again, right before the November 2012 elections.  That would be the real disaster.  From my perspective, the Boehner Plan is nearly perfect.

It's The Re-election, Stupid

Barack Obama is not winning the debt ceiling debate.  I think he knows it.

With financial markets warily watching the Capitol Hill drama, Obama used his 15-minute address from the White House to urge “shared sacrifice” in tackling the debt, calling for deep cuts in federal spending to be coupled with higher taxes on the wealthy and on large corporations.

He slammed Boehner for calling for another vote on the issue next year, saying: “We know what we have to do to reduce our deficits; there’s no point in putting the economy at risk by kicking the can further down the road.”

The economy has not been Obama's friend.  Of course, in order to have a friend you have to be one, and Obama has not been a friend to the U.S. economy.  As some of us have noticed, promising tax hikes can have the same effect as imposing them when it comes to stifling economic growth.  Here again, as our debt ceiling debate inches along towards its deadline, Obama simply can't resist his class warfare rhetoric, which translates into a promise of higher taxes and the predictably slower economic growth.

But it really doesn't matter if Obama talks the economy into an extended recession, since there's no way it can turn around in time to help his re-election effort.  That means the worst outcome for Obama is to have to revisit the debt ceiling debate during the 2012 campaign season.  He is not winning the debate now, and his prospects for winning it next year aren't any better.  He needs to speak other things if he's to have even the slenderest hope of a second term.

Obama is desperate to have the debt ceiling can kicked just past the 2012 election.

Obama Backs Plan That Does Not Raise Debt Limit

Dueling deficit reduction plans are working their way through the US Congress.  In the Senate the "Gang of Six" offered a proposal that quickly gained Obama's backing, even though it doesn't address the debt limit.  It has something Obama can call tax increases.

President Barack Obama, in a last-ditch bid for a bipartisan "grand bargain" on the budget, threw his weight Tuesday behind a $3.7 trillion deficit-reduction plan unveiled by six Republican and Democratic senators.

The plan, which would span a decade, has scant chance of passing intact as the solution to the current debate over raising the government's borrowing limit. Some Republicans were wary of the plan's changes in tax rules. Democrats said it would be near impossible to draft legislative language and pass it quickly.

Still, some elements from the so-called Gang of Six senators could be incorporated into a final deal to shrink the deficit and raise the government's $14.29 trillion debt cap by Aug. 2. That's when the Treasury Department says the government will run out of cash to pay all its bills without an increase in borrowing authority.

Meanwhile the House passed "Cut, Cap, and Balance" legislation that Obama has threatened to veto.  It includes a provision to raise the debt ceiling, but it contains no tax increases, which makes it unpalatable for Obama.

WASHINGTON — Defying a veto threat, the Republican-controlled House voted Tuesday night to slice federal spending by $6 trillion and require a constitutional balanced budget amendment to be sent to the states in exchange for averting a threatened Aug. 2 government default.

Debate in the House was along predictable lines, and only nine Republicans opposed the bill and five Democrats supported it on final passage in the 234-190 vote.

...

"Let me be clear. This is the compromise. This is the best plan out there," said Rep. Jim Jordan, R-Ohio, head of a conservative group inside the House known as the Republican Study Committee.

The legislation, dubbed "Cut, Cap and Balance" by supporters, would make an estimated $111 billion in immediate reductions and ensure that overall spending declined in the future in relation to the overall size of the economy.

It also would require both houses of Congress to approve a balanced budget amendment to the Constitution and send it to the states for ratification.

The House vote has been said to be largely symbolic with no chance of passage in the Senate and a veto guarantee from President Obama if it does.  But it is legislation that has passed the House, and it raises the debt limit. 

The Senate plan is a proposal that does not address the debt limit.  The tax revenue, so attractive to Obama, would come from the elimination of deductions.  The plan would lower marginal rates, but the elimination of deductions would presumably raise a trillion dollars over the course of 10 years. 

The newly released framework relies heavily on the fiscal commission’s work, calling for deep cuts at government agencies, including the Pentagon; significant reductions to Medicare and Medicaid; and a plan to make Social Security solvent.

It also calls for raising more than $1 trillion over the next decade by reducing a variety of popular tax breaks and deductions, including breaks for home mortgage interest and employer-provided health care. While some of those savings would be dedicated to debt reduction, the rest would go toward lowering tax rates for everyone, with top individual and corporate rates dropping to at least 29 percent, down from 35 percent.

What we are likely looking at is House legislation vs. Senate smoke and mirrors.

The ticking clock is a major impediment to pursuing the Gang of Six strategy, which has yet to be drafted in legislative form or examined by congressional budget analysts. Opponents ripped into the sketchy details handed out at a morning briefing attended by about half the Senate, arguing that printed summaries identify nowhere near $3.7 trillion in savings.

The Senate plan gives Obama some cover.  He'll have a week's worth of posturing as he plays the part of the "adult in the room" guiding the unruly congressional children towards a sensible fiscal solution.  He might have some credibility if he had ever proposed a plan of his own plan, but neither he nor the congressional Democrats have come up with anything. 

I'd bet it's been Obama's plan all along to have this confrontation, hoping to ram through some massive last minute bill that no one will have time to read, and that will increase the reach of government.  The Senate plan could fill the bill with its unidentified spending cuts and its tax reform, all to be worked out under the pressure of another rapidly appoaching financial crisis. 

The House has called Obama's bluff.  Republicans have passed a measure that raises the debt limit.  Now let's see what Obama does with it.

Social Security and the Debt Limit

If, as Dick Durbin said, Social Security doesn't add one penny to the deficit — his words were,

It’s very hard, very difficult, when you get into the entitlements, but you can’t have a serious conversation about the future of our economy and our deficit without putting everything on the table. Social Security is a little different. It does not add a penny to the deficit.

Why would Barack Obama say,

"I cannot guarantee that those [Social Security] checks go out on August 3 if we haven't resolved this issue because there may simply not be the money in the coffers to do it."

if the debt limit isn't raised by August 2nd?

Obama: Eric, Don't Call My Bluff

And what was it that prompted Harry Reid to say that Republican House Majority Leader Eric Cantor "has shown that he shouldn't even be at the table" for the debt limit negotiations?

At Wednesday's White House meeting, Mr. Cantor, discouraged by what he said was the dwindling size of the spending cuts that had been agreed to by both parties, for the first time told the president he was willing to accept a smaller package of spending cuts and pass a shorter debt limit extension—not the full $2.4 trillion that was needed to extend the limit until after the 2012.

That's when Obama stalked from the room saying, "Eric, don't call my bluff." 

I think Cantor, and Congressional Republicans, should call Obama's bluff.  Congress and the White House can avert a crisis by passing a short term debt limit extension, and by doing so give themselves time to work out a real solution.  What we have here is Obama looking to score political points on the debt crisis, and throwing a tantrum because thing aren't going his way.

More:  Here's how Cantor told it.

At an impromptu news conference shortly after returning to the Capitol from a meeting at the White House, Cantor told reporters that Obama became angry when the No. 2 House Republican announced that he was willing to drop his insistence on only one vote on raising the country’s $14.3 trillion debt ceiling. Obama said at a news conference earlier this week that he would veto any short-term debt-limit proposal, a threat that the president renewed Wednesday, according to a Cantor spokesman.

“I asked the president, would that be something that he would consider,” Cantor told reporters. “Well, that’s when he got very agitated, seemingly, and said that he had sat here long enough and that no other president — Ronald Reagan wouldn’t sit here like this, and he’s reached the point where something’s got to give.”

“So he said, ‘You’ve either got to compromise on your dollar-for-dollar insistence, or you’ve got to compromise on the big deal,’ which means on raising taxes,” Cantor continued. “And he said to me, ‘Eric, don’t call my bluff.’ He said, ‘I’m going to the American people on this.’ Again, I was somewhat taken aback, because look, I was compromising.”

At that point, Cantor said, Obama “shoved back [from the table] and said, ‘I’ll see you tomorrow,’ and he walked out.”

A couple of anonymous Democratic aides laid the blame on Cantor, claiming he repeatedly interrupted Obama. 

Meanwhile the rest of the Democrats are taking aim at Cantor as if he has the authority, by himself, to approve the tax hikes they so dearly wish for.

Senate Democrats continued to train their rhetorical fire on Cantor at a news conference Thursday afternoon, arguing that the Virginia Republican has now become the main obstacle to a debt-limit agreement.

“It’s time for Leader Cantor to make some concessions,” Sen. Charles Schumer (D-N.Y.) said at a news conference with other Democratic leaders and Treasury Secretary Tim Geithner. “He’s the only one at the table who hasn’t yet. Speaker Boehner entertained the grand bargain President Obama offered. Even Leader McConnell has put a proposal on the table that at least recognizes the urgent need to avoid default.

“Leader Cantor has yet to make a constructive contribution to these discussions,” Schumer continued. “More than anything else, he is holding up an agreement at this point.”

Asked whether an agreement is possible with Cantor sitting at the negotiating table, Reid said the outlook was dim.

“Unless he changes and starts being someone who contributes to a solution, the answer is no,” Reid said. “He has not been constructive.”

Constructive must mean not suggesting anything that doesn't involve taxing people more heavily.