The debt ceiling vote in the House has been postponed because too many Republicans said they would not vote for it for one reason or another. Very few Democrats would have voted for it, so Boehner & Co. decided to hold off to try for more support.
Whatever the result of that vote, the legislation remains very likely to be either voted down or simply shelved in the Senate. This is in addition to a threatened Presidential veto.
At this point, things are looking pretty bleak. Boehner and Obama were pretty close to a deal last week, but that got scuttled due to disagreements over new taxes, either immediately as a result of the legislation, or triggered at some later point.
I don’t know what the current sticking point(s) is(are). One is the size of the increase in debt authorization. Obama and Reid are demanding a big one to avoid having the issue reappear during the runup to next year’s elections. Boehner wants a smaller one to both force the discussion to return during the election cycle and to ensure that any cuts in the legislation actually happen.
Megan McArdle makes a point that I have not seen elsewhere. Bondholders are not that concerned about the internal machinations of how the debt ceiling is established or what different stakeholders are willing to do in return for the agreement of others. They are concerned with getting paid what is due them.
Wall Street sees the current fiscal impasse as prima facie evidence that our political system is broken and that we will continue to lurch back and forth between extremes until we develop a concensus that will work long-term.
Our AAA is not at risk because our current fiscal path is unsustainable, but because ratings agencies know what many GOP freshman and party activistsm [on both sides – wb] apparently do not: that doing the unpopular things required to get the budget in balance is going to require both parties to hold hands and jump together. Otherwise, whoever forces through their unpopular plan (huge tax increases/massive spending cuts) is going to get trounced at the next elections by an opposition party promising to undo whatever it is the party in charge has just done.
My reading of what the ratings agencies have said is that if the GOP somehow manages to force the Democrats to do everything their way, this will not secure our AAA; it will guarantee that we lose it, because it will show that we are currently unable to make the ugly bipartisan compromises that long-term budget balance requires, and raises the risk that sometime in the not-very-distant future, the other party will retaliate by threatening default.
In a related column she makes another very good point that most have overlooked. A few nuts are talking about invoking a clause in the 14th Amendment that could be interpreted, given a tortured enough reading, that the debt ceiling is unconstitutional. It may or may not, in fact, be. What matters is that there will be very few, if any, buyers.
I heard an analyst made a point about proposed 14th Amendment bypass of the debt limit, which was so obvious that I couldn’t believe I hadn’t thought of it: to wit, even if the Treasury simply went ahead and issued more debt, who was going to buy these instruments of dubious legality? And at what price? Yet all the DC people I’d seen writing about the “14th Amendment Solution” had focused on the legality of the move, or the political fallout; no one had thought about, like, finding customers for the debt.
Washington almost never really thinks about the customers for our debt. They’re useful bogeymen who can be deployed against policies you don’t like. You see liberals claiming that bondholders will be horrified if we cut Social Security benefits (they won’t, though they might be horrified if this becomes necessary because we don’t lift the debt ceiling–but that worry will be a fear that Congress is crazy, not a fear that this means we’re defaulting on our “obligations” to seniors)
Washington’s grandiose plans about raising the debt limit and using it to finance future expenditures will work – until it doesn’t. At some point, nobody knows when, a Treasury auction will fail; that is there will not be enough buyers for a new issue of bonds. One or both of two things will happen at that point: the auction will end and the bonds will be offered again at a later date, with a similar risk of failure; or the bonds will be sold, but at a deeper discount (equivalent to a higher yield), raising the cost of borrowing.
Tying all this up, we arrive at the point purists on both sides loathe – the need for compromise to one degree or another. This is not a compromise of principles; it is a compromise of tactics and means to achieve the desired goals. We see people all over the internet, including this very blog, who demand that their side not give in one iota and that such a move would be tantamount to abandoning any shred of honor.
This is hogwash. Given the makeup of the Federal government, there are precious few options for either party to move their agendas forward. Both sides are holding firm, almost to the point of intransigence. At some point, some give and take must occur in order to avoid very dire consequences.
I know this is heresy to some of you. So be it. As Keith Hennessey points out:
“Fight harder” and “Communicate your message better” are cheers rather than strategies. Cut, Cap, and Balance is a good policy, it is not a strategy. If you disagree with what Speaker Boehner is doing, present another strategic option, which is more than just a policy or a cheer.
Currently, what we hear most from Republicans is “Just say no” and “Don’t give an inch”.
The problem in this case is the implementation. The “just say no” strategy is predicated on the assumption that, if no agreement is reached, the policy and political consequences of passing the President’s August 2nd deadline will place greater relative pressure on Democrats than on Republicans, and that this pressure difference will be so great that it causes the President and Senate Democrats to accede to policies they had previously rejected.
If anyone thinks this is the case, they are very likely deluding themselves.
I think the “just say no until they cave” strategy cannot provide so much greater relative pressure on the President and Senate Democrats that they would suddenly accept a bill they hate. In addition, the strategy poses significant downside policy risk as well as political risk for Republicans. Nobody really knows what August would look like in the scenario in which Congress fails to act, and tiny-probability-really-bad outcomes become moderate-probability-really-bad outcomes. I would be willing to weigh that cost against the strategic benefit of getting a huge policy victory, but only if there were a strategy I thought could work. Without it, you are just taking unnecessary and dangerous risks with no benefit.
Put another way, this is rapidly approaching the point where a Republican victory may just be a pyrrhic one.