The debt ceiling crisis continues and several things make the possibility of a default increasingly likely.
Reason #1: Time is getting short
If a deal on raising the debt limit is not reached by two weeks from Friday, there will not be enough time to get legislation passed and signed into law by the August 2nd deadline.
Reason #2: Tea Party fanatics control the Republican Party
As David Brooks has written, the Republican Party “is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred million dollars of revenue increases.” And yet, Republicans continue to refuse the deal and continue to ask for more. Now, they say they want a Balanced Budget Amendment to the Constitution or at least a vote on a Balanced Budget Amendment in addition to all of the concessions they have already been given on spending cuts, including cuts to Medicare and Medicaid.
Brooks says any normal Republican Party would take the deal but this one refuses. Why? He writes:
[B]ecause the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative.
The members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.
The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it.
The members of this movement have no sense of moral decency. A nation makes a sacred pledge to pay the money back when it borrows money. But the members of this movement talk blandly of default and are willing to stain their nation’s honor.
The members of this movement have no economic theory worthy of the name. Economists have identified many factors that contribute to economic growth, ranging from the productivity of the work force to the share of private savings that is available for private investment. Tax levels matter, but they are far from the only or even the most important factor.
But to members of this movement, tax levels are everything. Members of this tendency have taken a small piece of economic policy and turned it into a sacred fixation. They are willing to cut education and research to preserve tax expenditures. Manufacturing employment is cratering even as output rises, but members of this movement somehow believe such problems can be addressed so long as they continue to worship their idol.
Reason #3: John Boehner is Speaker of the House
John Boehner may be the weakest Speaker of the House in the nation's history. If Boehner really wanted a debt ceiling deal, he has the power as Speaker to push legislation through the House even over the objection of substantial number of members of his own caucus. Most people don’t know that, so let me explain.
The way the founders designed the government, the House was to have a leader, the Speaker. The Senate was to function as a leaderless body. The only leaders in the Senate are the Majority Leader and Minority Leader, but they are leaders of their parties, not leaders of the Senate and positions of Majority and Minority Leader did not exist until the early 1990s.
Under the Constitution, Senators are like ambassadors representing their respective sovereign states. Committee chairmen may exercise power over legislation that passes through their committee and party leaders and members of “policy committees” may exercise power over the flow of legislation to the floor. However, no official has formal authority over the Senate in any way close to the authority the Speaker exercises in the House. No one can tell a Senator what to do or not do, particularly how long a Senator can talk on the floor or what he can talk about or when he can express himself. Lyndon Johnson once asked the Legislative Reference Service of the Library of Congress to provide him with a list of the powers of party floor leaders in the Senate. The Reference Service researched the question and responded with a list containing just one item: “priority in recognition.” Dissatisfied, Johnson had a member of his staff research the question. The answer he got was the same. The reality is that leaders in the Senate have no formal authority over other Senators.
The contrast between the powers of the House Speaker vs the lack of power of Senate leaders is stark. Sam Rayburn was one of the most the powerful Speakers and he exercised that power. For example, during the early 1950s, Rayburn was angered when a bill he favored was defeated. He responded by calling for a second vote and summoned twenty freshmen Congressmen for a chat during which he ordered them to vote for the bill. They did and the bill passed. Once just before a controversial resolution was scheduled for a vote, Rayburn announced that he did not want to hear one word of opposition. He did not. If a member of House rose to make a point of order Rayburn did not like, he would just announce that “the Chair does not desire to hear the gentleman on the point of order” and the gentleman would not be heard.
John Boehner has that kind of power over the House. He has chosen not to use it when it comes to control the Tea Party members, the true debt limit troublemakers.
Reason #4: Obama might use the 14th Amendment, nuclear option
As I reported in a recent post, some Democrats have proposed using section 4 of 14th Amendment to the Constitution to bypass the debt ceiling limit. Section 4 reads in part:
The validity of the public debt of the United States, authorized by law… shall not be questioned.
Some Constitutional lawyers and analysts have argued that Section 4 makes it possible for Obama to just ignore the debt ceiling. See my previous post Is 14th Amendment a way out of the debt crisis or constitutional train wreck? for more on this.
Democrats have been talking about the Section 4 option as have members of the White House. Now it seems some Republicans are considering Section 4 as a way out. They can hang tough with the White House and refuse to consider any tax increases or tax expenditure reductions without worrying about a possible default and the economic disaster a default might bring. Obama uses the Section 4 option. The government continues operating and meeting its obligations. Republicans can go home to their Tea Party constituents and say they stuck by their “no tax” pledge. Finally, should the Republican candidate for President lose in 2012, then they could try to impeach Obama over his use of Section 4.
Reason #5: Wall Street doesn’t seem particularly worried—yet.
In a recent USA Today article, John Waggoner noted that while a lot of people are worrying about the debt crisis and lack of a resolution so far, Wall Street hasn’t seemed very concerned. He wrote:
The biggest judge of the nation's debt problems is the bond market. Bond traders are lenders, and they're interested two things: collecting their interest payments, and getting their money back when the bond matures. Any hint of default sends interest rates soaring, just as your credit card rate would rise if you suddenly showed signs of financial distress.
A recent example: When bond investors began to suspect that Greece would be unable to pay its debt, investors drove up the yield on Greek government bonds. The Greek 10-year government bond now yields about 16.5%, vs. 2.9% for German 10-year government bonds.
Are bond investors worried about U.S. debt? Apparently not. The U.S. 10-year note yields 3.17%. Half the U.S. debt is due in about five years, according to the Treasury. A five-year T-note yields 1.5% — less than the current rate of inflation. Bond investors are not only not worried about default, they're not worried about losing the buying power of their money.
Of course, Wall Street may be just confident that some kind of deal will be reached or that Obama will use something like the Section 4 option (see above) to prevent a default. Additionally, some on Wall Street appear to be hedging their bets, literally. The New York Times and others have reported on a surge of interest in so-called “Black Swain” funds that offer investors some protection from downside in case of an economic disaster such as a default be Greece and/or, presumably, the U.S. See: http://dealbook.nytimes.com/2011/06/29/a-new-investment-strategy-preparing-for-end-times/
Reason #6: A default would fit in perfectly with Republican strategy
Republicans have made no secret about the fact that their number one strategy has been to deny Obama a second term. Senate Minority Leader Mitch McConnell has repeatedly said that was the Republican goal and has refused to deny that was their goal. See the video here: http://www.msnbc.msn.com/id/32545640
Most Republicans believe that the best way to deny Obama a second term is to insure that unemployment is high and the economy is in another recession at the time of the election. A default fits this strategy perfectly since most economists have warned that a second recession with increased unemployment will likely follow any default, and possible even a close call with default.
Of course, a deal may still be reached although it seems less likely with each passing day. We'll see.