Pew Research finds that 68% of the people support a compromise on the debt ceiling even if they don’t agree with the deal, while only 23% support standing on principle even if it results in default. My question is this. What percent of that 23% are voters that the president has a chance of winning to his side in November 2012? I believe the answer is pretty close to zero percent. So, the president has won the political battle here, which it was very important for him to do. However, that doesn’t get him out of the woods.
The Tea Party Republicans, now joined by the Club for Growth and the National Taxpayers Union, are rejecting John Boehner’s proposal. If he can’t pass his own bill, he’s going to have to try to pass something with the help of most Democrats and about 60 Republican reps who haven’t bought into the Tea Party nonsense. This is an outcome Boehner has tried to avoid with all his might because it could very possibly cost him his gavel. People forget, but Speaker Boehner lost his leadership position in the 1990’s, and it’s not something he’s forgotten. Perhaps this is why he’s been in denial about what needs to be done.
My sense is that the White House thinks there is support among Republicans in the Senate for the Reid plan, but no one wants to step on Boehner’s shoes. They’re waiting to see if he can pull a rabbit out of a hat and pass his proposal. I think Boehner has criminally mismanaged this situation. I recognize that he had no good options, but he chose the wrong one. Even if his bill passes, it won’t become law because the Democrats are not even considering caving. Passing it will just make it much harder for Senate Republicans to come in and save the day, making default a much more real possibility.
In any case, I don’t know why the Tea Partiers would betray their promises and principles by caving into Boehner. What would the Tea Party be if it compromised?
What would the Tea Party be if it compromised?
Back to what they were before 2008, a bunch of angry white people who always vote Republican anyway.
What would the Tea Party be if it compromised?
Is this a Zen koan, like the sound of one hand clapping?
It’s really hard to form a political movement around the principle of “no compromise” in a democracy. Well it isn’t necessarily hard, but it is hard for that political movement to actually deliver results.
And Jeebus – Club For Growth and NTU are both throwing Boehner anvils here. Club For Growth’s complaint is that it doesn’t make as many cuts as other things that the House has already passed (and I’m assuming didn’t pass the Senate – unless they’re REALLY throwing him an anvil and they’re complaining that they’re not getting exponential cuts. Like every time the House passes a package of cuts it needs to be bigger than the last or something). And NTU’s complaint is that it does nothing to advance the ball on a Balanced Budget Amendment to the Constitution – which is hilariously ridiculous.
The only conclusion that I can draw is that CFG and NTU really hate Boehner and are throwing him anvils. He’s even trying a strategy here – obvious to some of us – where he’s putting through something that will be completely unacceptable to Senate Dems and Obama and then daring them to veto it. And no one has his back.
If I were Boehner I’d just retire. He’s got to have some fallback plans and no matter how many great golf courses and schmoozing you get to do as Speaker it can’t be worth this level of grief from his own supposed allies.
Everybody but Boehner wants another Speaker. Whatever problems dealing with Cantor entail, at some point, dealing with a hopeless drunk is worse.
Don’t be so sure.
It appears the White House, while not trodding on Boehner’s toes, isn’t above pinching them.
That’s not a clear veto threat, but it’s about as direct as Obama usually is.
http://tpmdc.talkingpointsmemo.com/2011/07/the-obama-administration-is-making.php?ref=fpblg
You need to read this diary which explains why the debt ceiling battle is a false battle over a logical absurdity – Ron Paul is actually right on this one, but Chris Cook explains how there is actually no such thing as a National debt at all – it is National Equity.
And if the Republican’s don’t get it, there is always the 14th Amendment. The President can order the Fed to simply create reserves to cover and cancel the debt. Much of the debt is simply a paper transaction between the Fed and the Treasury in any case. The Fed produces money/credit on behalf of the Treasury which it then lends to the Treasury for interest which it then gives back to the Treasury as profit.
What matters is actually the real wealth or GNP which backs all this money/credit and what the Government must do is enable growth in GNP to ensure the money/credit created has real value or backing. The problem in the USA is not some mythical debt ceiling, but the lack of real economic activity.
This one lost me:
It depends on whose books you are looking at. One man’s credit is the counterparty’s debit.
The Fed’s relationship to the Treasury is indeed an agency relationship, not a counterparty relationship. The Fed is an agency of the federal government, whose board is made up of public and private (national bankers, community bankers, other appointees) governors at each of the regional banks. And those banks collectively govern the Fed through the Board of Governors that Ben Bernanke chairs.
The discussion of Tax and Spend (Myth #1) is way off. Taxing and spending do not enter into what the Fed does. The Fed functions as a permanent line of credit for banks and loans money to banks at a interest rate just for banks (the Fed funds rate). That loan increases the assets of the Fed and lowers the assets of the bank; the double entries on various accounts to record this transaction will balance out to zero.
Fractional Reserve System (Myth #2) is better but still sorta bass-ackwards. The money that the Fed loans the banks becomes a liability to the banks, but so do the savings accounts and other investments deposited by the banks customers. The assets that the bank holds are its loans. The fractional reserve system allows the banking system as a network (not individual banks) to create money in the money supply greater than the reserves held by all of the banks in total. Those loans in turn provide more money than the face value of the loan in purchases of goods and services, depending on how many transactions occur before that unit of money goes back to pay off a loan. It is a very complex network interaction that produces enough money to service the purchases of goods and services in the economy.
What the fractional reserve system does is keeps the banking system from running away creating more money than the production of goods and services can support, creating a bubble and a panic.
And the way that the Fed controls this is to require banks to keep a certain percentage of its cash as reserves. Now the cash combines cash that the Fed provided as a credit and the cash retained from the operation of the bank. Total both of those, take a regulated percent out, say 10%, and loan the rest. So the bank is not loaning out multiples of the money it has, it is retaining 10% and loaning out 90%. And charging interest on the loans, some of which goes to pay back the Federal Reserve.
That’s the operation of the Fed with regard to the money supply. It can control the money supply by raising or lowering reserve requirements or by raising or lowering the Fed Funds rate.
This is what Bernanke means by creating reserves in the banking system. It loans what banks ask for, subject to reserve requirements and the Fed funds rate. Because the Fed reserves assigned to a bank are a liability for that bank, the incentive for the bank is not to overborrow.
The Treasury issues debt in the form of many different instruments, but use the term T-bill to describe a bunch of what are essentially US government bonds sold for large (for ordinary folks) aggregate sums of cash. The Treasury auctions T-bills which sets the original interest rate. There is an aftermarket in which owners of T-bills sell to other private individuals, which has a different interest rate. The T-bill in this secondary market is discounted (up or down) for the changes in the risk that that T-bill might not have the same value later. But let’s leave that aside.
Through its loans to banks, the Fed makes a profit in terms of its cash account. That cash is available to be loaned. It is also available to purchase government T-bills to finance government debt. The Fed is a creditor just like private individuals or corporations or the Social Security Trust Fund. But it is a special sort of creditor in that it is an agent for managing US Treasury interactions with the banking system so as to manage the money supply.
The Fed can also buy T-bills from the private aftermarket or from original holders to be able to essentially retire that debt before the T-bill maturity date.
Now lets look at coinage, which is the government taking a material and creating a face value that is greater than its material value. In fact it used to be coinage that established the value of the material. A pound of silver (Sterling) had the value of 1 pound. Dollars were different. Dollars were worth 1 dollar, no matter what the material they were made of. So there was a dollar-to-gold or dollar-to-silver price. When I was growing up, the price of an ounce of gold was $35 and Fort Knox was the repository of all of the US’s gold assets. Our boom during the 1950s and the wars of the 1960s caused an outflow of gold to other countries–essentially inflation for the US. So Richard Nixon took us off of that system. Goldbugs have been delighted ever since.
The government prints currency out, not of thin air, but paper and various alloys of metal. These essentially circulate for small transactions not worthy of keeping money in a bank. (Remember money in banks is not currency; that’s just used to make change; money in a bank is magnetic bits on a hard drive that gives the total in some account or another. With debit cards, the money in the money supply is much, much greater than the currency.
So how does this relate to the debt ceiling? It would be perfectly legal for the Treasury to issue currency too pay off its debts directly. Before the Federal Reserve, the government used to do just that. And the Secretary of the Treasury has the authority to do it.
So what’s the catch? Well issuing money directly to pay off debt at the rate that the government spends would increase the money in circulation without the restraints of interest rates or reserve requirements. The Secretary of the Treasury would have to issue what had come due, not what was needed to support all transactions in the economy. The means of measuring its impact and adjusting the release of funds would make it difficult to avoid inflation.
The financial whizzes have an idea for how to draw down the debt without killing the economy either through contraction of demand or through inflation. The idea is to use a coin designed to be transferred to the Treasury’s agent the Fed to hold as a reserve that the Fed could then retire that amount the T-bills that it held as assets for managing the money supply. The illustration is a platinum bar marked with the symbol “$1 Trillion” or whatever denomination. The platinum itself would be a hedge against hyperinflation. If the money supply got dramatically out of hand, the Fed could sell the platinum bar at its metallic value and draw money out of the money supply.
The Fed gets a platinum bar and continues to manage the money supply. The Treasury gets the amount of the face value of the bar and can pay creditors and vendors which puts government cash and hence resources in the hands of folks outside the banking system. Which stimulated demand, jumpstarting the economy and raising government revenues so that at some point the Treasury can buy back the platinum bar from the Fed and retire it.
As the economy improves, more debt can be repurchased and retired ahead of time, unwinding the compound interest. And allowing more investment in infrastructure and other government expenditures that lower the cost of doing business in the future (and are counter-inflationary).
What matters is the balancing the money supply equally with the real wealth or the GNP. The wealth in goods and services are provided in a network of transactions that ripple in one direction in the economy and money paid for those transactions ripples through the other way and informs suppliers of supply and demand conditions. People have gotten so obsessed with the stocks of money in their bank accounts (or lack of it) that the forget that the real wealth is in the value added flows of goods and services. Which is why I say that American elites are the most stupid in the world.
The debt ceiling is mythical because the accounting reality in the government is that Congress has appropriated funds to be spent and passed laws that determine the amount of revenue coming in. Those two facts override any debt ceiling. As one wag put it, the pizza was already ordered and you’re saying that you don’t want to pay the pizza-man at the door. And the “no new taxes” pledge is designed to cut off the flow of funds to government, which might in a functional Congress go to project that lower the cost of living.
Sorry to be so long, but Chris Cook does not understand the US banking system and the federal reserve. Something a few hours reading the Fed’s and Treasury’s web sites would have cleared up.
PLEASE WRITE A BLOG!
Feel free to plagiarize. You have been granted a Creative Commons public license.
You really need to direct your comment at Chris as from my reading of both, there really isn’t much of a difference between you except perhaps for nomenclature – but then, I am not a banking expert. In due course, this comment also deserves to be turned into a diary.
However the practical impact of both your analyses seems to be the same. The 14th. Amendment has to be invoked because the US is constitutionally prevented from defaulting and the debt ceiling is effectively a threat to default at some pre-determined arbitrary level – and is therefore unconstitutional.
If Congress doesn’t find a way to prevent that ceiling being breeched, then the President has to, and the most straight forward way is simply for the Fed to buy back its own bonds and cancel them by covering them with new reserves it can (and often does) create ex nihilo
If this results in excessive money supply – i.e. more money being created than there is additional value/activity being generated in the real economy, this will, in time, result in inflation. But what’s so bad about that? Inflation is effectively a tax on wealth. It reduces the value, in real terms, of the assets held by the rich and has much less impact on the poor as they have fewer assets.
It also reduces the real interest rate paid by the poor on the money they have to survive because a 5% interest rate at a time of 5% inflation is effectively a zero interest rate in real terms (of wealth transfer) and neutralises the wealth transfer that otherwise occurs from poor to rich.
After while the Republicans will get so pissed of with inflation eroding the real value of their dollar holdings they will beg Obama to reduce the money supply – which he can do by raising taxes or reducing expenditure, but only by means of specific bills passed by Congress, not in response to some catch-all attempt to over-ride all previous properly passed spending legislation by reference to a debt ceiling.
Obama is in a bind only because he chooses to be in a bind and agrees with the Republicans that spending should be reduced and economic activity should be curbed. If he was truly a progressive, he would be delighted that the Republicans are economically illiterate and simple direct the Fed to create new reserves to pay off the debt until such time as Congress actually produces spending/taxation measures which make sense in terms of generating increase economic activity within the country.
The longer the Republicans jerk everyone around, the more new reserves he directs the Fed to create, the greater the long term inflationary impact, and the more the extraction of wealth from the poor to the rich is impeded. Obama holds all the aces. For some reason he is (as yet) refusing to play them. Perhaps (as Booman argues) this is all Kabuki to make the Republicans fall on their own knives and Obama can act the innocent bystander.
My problem is that I am not convinced that Obama actually is a progressive and worry that he may not actually want the Republicans to shoot themselves in the head out of some misplaced lofty ideal that the rich deserve to be preserved in their richness and saved from their own stupidity. His bipartisanship may be a cover for what he is really saying: “hey, wait for me, I want to be rich like you”.
Here’s the part that is backwards, the Fed doesn’t create reserves when it buys back the bonds. It creates reserves when it loans the money to the Treasury. The multiple transactions throughout the economy are what increase the money supply. The buying back of the T-bills would be a reduction of the Fed’s reserves. And a reduction of the money supply that would be offset by the Treasury paying its bills. There is no free lunch or magic here. The magic is in the network effects of the total economy. Any inflationary effects would come from more money being in the economy than the production of goods and services needs.
The problem you need to get your mind around is that the accounting works sorta backwards for the parts of the economy that handle finance. The fact that your loan is the bank’s asset and your savings is its liability is counter-intuitive to the average bloke. That is because finance is about shifting the timing of transactions. Savings for the person depositing the money is about transactions in the future that will require the money. Loans for the person borrowing are about transactions now that get paid for in the future. For the bank your repayment is cash incoming in the future–an asset. And your savings is cash outgoing in the future–a liability.
Inflation is a problem in a time of unemployment. That’s what we had in the 1970s. It took 20% interest rates to wind that down.
Obama is in a bind politically because he is still negotiating right up until the August 2 date.
Obama holds the political aces in this, but not the fiscal aces. He is refusing to telegraph what his response to a failure of negotiations will be lest that divert the issue from the negotiations themselves.
Congress still on October 1 has to have the appropriations or a continuing resolution. A train wreck now might make that easier or make it harder; it depends on the public and Wall Street response.
Obama might not be a progressive, but he is titular head of the Democratic Party. He absolutely does not want the Republicans to prevail. Most likely his objective with the Republicans is to restore the process in which they are the loyal opposition and have a clue when they are hurting the country.
The 14th amendment does not give the President a blank check to incur additional debt. It is a requirement that he not allow default. And default is a failure to pay interest on debts or principal that has come due.
But all holders of debt are not equal and some will allow their payments to be deferred until the political crisis is over. Interest that goes into the Social Security Trust Fund can be deferred so long as Social Security benefit payments go out on time. Foreign governments might permit a two-month or three-month deferment of interest payments or cashing out of bonds. Indeed since T-bills are held primarily to earn interest on funds held for counterparty settlements in trade, foreign countries might choose to roll over any principal coming due into a new T-bill. Vendors typically allow up to 90 days for payment; that gives until November 1. So what is left is entitlement payments and any interest payments on which deferment cannot be negotiated. That is probably easy to do for August, harder to do for September. But not appropriations on October 1 means agencies operating on what little budget authority is left from previous fiscal years. Rearranging those fund to carry through another month (October) could be difficult.
There is no magic wand that the President can wave to make the debt go away. There are ways of insulating middle class and the poor from the major adverse effects for a couple of months. Hopefully, by then the public will understand the reality of what is going on and who really is benefiting from government spending. And cause a backlash against the Republicans. Of course, the media will switch to blaming it on Obama unless their corporate overlords pull on their leashes.
A second or more parties are necessary to hold the ruling party accountable and prevent corruption in a healthily functioning democracy. But that party has to be loyal to the country and its people–and not to some cult’s ideology or some corporate or foreign master. The third party that progressives need is one to take the role that the Republican party has deserted. Not one to weaken the Democratic party and allow more craziness. I think that we would have learned that after 43 years in the wilderness.
If progressives really want to build a third party instead of just tear down the Democratic Party, the would be fielding candidate to duplicate the career path that Bernie Sanders took to the Senate. So that there is enough of a bloc in Congress to be a swing vote. In Congress. If however, the purpose is merely to bring down Obama, the easy way to do it is run a strong third party candidate in Florida (or California). I don’t think California can be a spoiler, but Florida could repeat the 2000 election if we are not careful.
I think you also need to copy your comment above across to bring the discussion there up to date. I think you misunderstood my meaning of progressive – it was meant in the policy rather than party political sense. I am not advocating a Bernie Saunders led third force or even primarying Obama. My question relates to Obnama’s ultimate policy objective here. Does he want to slow and then reverse the transfer of wealth from the poor to the rich, or is he prepared just to keep the current expropriation system in place perhaps with some fig leaf amelioration. After all almost any cut to “entitlements” is at the expense of the poor (bar some marginal administrative or procurement savings).
My suggestion is that Obama can hod the inflation gun to the Republican’s heads. Give m a better deal or I will just instruct the Fed to create more reserves to pay down the notional level of National debt, and if and when that creates inflation on your heads be it – you are damaging the real wealth of your supported, not mine (as much).
I’m not convinced inflation leads to unemployment – the policy response to inflation may. The key issue is whether any new reserves created are channelled to increase real economic activity rather than just asset price bubbles. There is so much spare capacity in the US at the moment, inflation is some way away even with a large increase in the money supply.
I don’t know what Obama’s intentions are, but here’s my WAG. He intends to restore a political process in which we can debate honestly as a nation what we need to do about issues. Eliminating dishonest debate and rigged processes would do a lot to legitimize progressive solutions. The problem is he cannot pursue this directly. He has to maneuver it into play. That means that he has to bewilder the Republicans, but in the process it means that he bewilders us as well. This isn’t 11-dimension chess because the risk of failure is still high no matter how carefully he maneuvers.
You are right on target with this concern. To my mind, that is the central contradiction in the current economy. Businesses have shut off any government action to restart the economy, which is hurting the value of all of their assets. But they have not realized that investment in producing jobs is now the least risky and highest-return investment they can make. So their funds sit in T-bills. If every banks would provide every business in the country will operating capital and enough time, companies could bring the unemployed back and pay them for training so as to handle a boom economy. That in itself would stimulate the economy and become a self-fulfilling prophecy. So the policy problem in the current political climate is how to get that going with no government incentives, no government investment, no government taxation, and no government regulation. Hopefully, this crisis changes that climate in the next three months.
The easiest way to move investors out of the paper economy would be to have a financial transaction tax on paper transactions. But you know how that would fly right at the moment.
So Obama is muddling through what is either the Antietam or the Gettysburg of this political civil war.
I’ve copied the comment as a diary.
Who are those 60 safe Republicans? There’s Boehner, and pro forma Cantor. Who else?
In North Carolina, maybe Howard Coble and definitely former Democrat Walter Jones (any remorse Walter?). McHenry, Foxx, Myrick, Elmers are the others, and they are all legendary on the blogs for “crazy”.
In Michigan, Fred Upton (R-Whirlpool) likely would.
What about folks from the suburbs that house Wall Street executives and traders? Who represents them? Would Pete King come down from his looney perch to support the local industry?
Which of the folks left in the GOP House caucus are pre-Newt 1994?
I’m having difficulty thinking of where to look for sixty of them because most of them will be normally quiet backbenchers most folks have never heard of.
You have to watch the quiet ones. A lifetime of watching horror movies has convinced me of that.
It seems like somebody should be talking to Paul Ryan. He’s a lot more than one out of 60. He’s the hero of the budget balancers. If he says a deal is kosher, it’s gotta sail through.
Okay, now about the post itself. I wonder those 68% of people, what do they see as a compromise? Is it tax increases and cuts? Is it give the Republicans what they want rather than default?
The wording is lawmakers should “even if it means they strike a deal you disagree with.” At what point do the voters think “Dems have compromised enough” or do voters want Democrats to compromise until the point of surrender?
At some point you have to stand firm or surrender.
You may be right that the main reason we don’t have an actual bipartisan deal is that Boehner is afraid of losing his gavel if he passes something without a majority of his caucus.
Maybe its time for something radical like telling Boehner that the Dems will support him for speaker if he can get enough votes from his caucus to put him over the top….
If he did that He most likely would be primaried and thrown out of the house by the Ohio Republicans come the next election. This course is the only one that he has that lets him potentially both keep his gavel and his house seat.
http://tpmdc.talkingpointsmemo.com/2011/07/why-boehners-debt-limit-plan-will-have-to-fail-before-end
game-becomes-clear.php?ref=fpblg
One of the responses to that article posed a possible legislative outcome I hadn’t heard before, to wit:
In the event that Boehner’s bill does get through the House and goes to the Senate, instead of the Democrats dropkicking it into the trash can and being tarred as the ones who refused to compromise and save the world, what if Reid et al. were to take it up, gut out Boehner’s poison pills, and amend in something like the Reid-McConnell plan, maybe with added revenue-enhancers, then vote to accept that?
What then?
Here is the text of the comment I speak of, from one Lestatdelc:
Interesting idea, but wouldn’t it have to go back to the house for a reconciliation vote in that case? I SERIOUSLY doubt such a thing would pass the house if that’s the case. And the Republicans in the senate would be throwing holds on it like a wrestler
It would be tough, yes — but if every single Democrat voted for it, and enough more or less sane Republicans could be peeled off to put country over ideologically driven catastrophe, it might just work.
Yes, and yes. But…
If Senate Republicans are throwing holds like a wrestler, they are the ones who caused default when the clock runs out.
And if the Republicans in the House balk at reconciliation, they are the ones who caused the default.
Just for spite, some Senate Democrat or Bernie Sanders should toss in an amendment setting the salaries of Congress at the median family income until the deficit is eliminated. That would be a real issue clarifier.
eh. It would be interesting if you could get all the Democrats on the same page, but it wouldn’t happen and it would just feed into the “both sides are hypocrites” idea. Or that Democrats are picking on non-millionaires, since that would mean that only the rich could afford to take the pay cut required to be a Senator.
Nice thought and it would open up some conversations, but we’d need better Democrats to make it work.
Every one in Congress can afford to take that pay cut. Especially because they are expecting sacrifices by the middle class and poor.
Any Democrat who didn’t jump at this opportunity to do his or her part should not be in Congress.
There is a thread at Balloon Juice that walks you through the process of sending a FREE fax – you can do two a day for free. The thread also includes the text of a letter that provides a great starting point for a letter. It took me less than 1 minute to customize the letter to make it appropriate for my situation.
If you haven’t already faxed your representatives today, please take a minute and do so EVERY DAY until this is resolved.
http://www.balloon-juice.com/2011/07/26/how-to-send-a-fax-for-free/
(I took the liberty of posting this on the two current threads, something I wouldn’t normally do, but if there is a time to make an exception, it seems like this would be it.)
can I just take a moment to remind everyone that the Reid plan totally sucks shit, and that we have been set up (again) for two needlessly bad choices?
Neither of these choices for solving this imaginary crisis are going to make things better.
Yes! 🙂