Playing Chicken with U.S. Financial Markets

You would think that being less than three years off from the biggest financial market collapse since the Great Depression would make beltway lawmakers tread lightly when it comes to upsetting financial markets here and around the world.  You would also think that after we’ve used the Fed for the most unusual transactions in its history, bailed out investment banks and insurance companies, and concentrated bank deposits and securities dealers from ‘too big to fail’ to ‘so huge they’d take the developed world down with them’ that District politicos would find a different outlet for their psuedo outrage. It’s not that they’re mad at financial institutions or what they basically did to the world’s major economies, it’s that their mad at what they did to the U.S. Federal deficit and since blaming teachers and park rangers didn’t work, they’re going to attack the U.S. Treasury Market.  That’s right, they are attacking the base risk free rate used by every asset pricing model from the CAPM forward. That’s like striking at the heart of what makes modern finance work.  Sounds kind’ve stupid doesn’t it?

Well, Tuesday’s Congressional vote on the debt ceiling was a danse macabre aimed directly at turning financial markets upside down whether they want to think so or not.  The equity markets have been dancing around a technical high most of spring and are heading downwards as we speak.  The economy has not healed.  The job market is dismal. Credit markets are still stuck on neutral. Household consumption and Consumer confidence have headed south.  What are these people trying to do our economy?  Tank it?  Finally, there’s a few media voices that are expressing concern instead of admiration for the “brave” insanity of people like Paul Ryan.  Is this coming a little too late? Is the Republican party trying to drive the cost of borrowing for every one in the world up to score a few political points with some block of voters?

Just ignore Tuesday’s vote against raising the debt ceiling, House Republican leaders whispered to Wall Street. We didn’t really vote against it, members suggested; we just sent another of our endless symbolic messages, pretending to take the nation’s credit to the brink of collapse in order to extract the maximum concessions from President Obama.

Once he caves, members said, the debt limit will be raised and the credit scare will end. And the business world apparently got the message. It’s just a “joke,” said a leader of the United States Chamber of Commerce, and Wall Street is in on it. Not everyone found it funny.

No matter how they tried to spin it, 318 House members actually voted against paying the country’s bills and keeping the promise made to federal bondholders. That’s an incredibly dangerous message to send in a softening global economy. Among the jokesters were 236 Republicans playing the politics of extortion, and 82 feckless Democrats who fret that Republicans could transform a courageous vote into a foul-smelling advertisement.

If I were the Chinese or Russian government or any other investor with the ability to transfer funds anywhere else, I would be doing so just to make a point.  Threatening to default on sovereign debt should not be considered political tool. It’s like threatening to use a weapon of mass destruction to score points.

Steven Benen of Washington Monthly calls it a “hostage strategy”. Frankly, it’s domestic terrorism with hostages.

Indeed, one of the more striking aspects of yesterday’s gathering was the increasingly-explicit nature of the Republican hostage strategy.

…Boehner’s let’s-get-a-deal-done stance masks a deeper belief within the House Republican Conference — that Obama will back down eventually and agree to its demands, forcing Capitol Hill Democrats to follow suit.

“Of course, it’s dangerous,” a House Republican close to Boehner said of the politics of a government default. “But it’s dangerous for everybody, especially the president. At the end of the day, [Obama] will have to give in.”

“Who has egg on their face if there is a sovereign debt crisis, House Republicans or the president?” asked another senior GOP lawmaker.

With a potential debt default by the U.S. government just two months off, and a continued standoff between the White House and GOP congressional leaders on how to move forward in boosting that limit, Republican lawmakers say publicly and privately that they believe Obama will be the one who has to cave.

To be sure, the hostage-strategy dynamic isn’t new, but it’s uncommon for Republican members of Congress to be this candid about their plan out loud. One leading GOP lawmaker acknowledged that the Republican plan is “dangerous,” but the party doesn’t care. Another conceded that the GOP is inviting a “sovereign debt crisis,” but figures Obama would get the blame, so Republicans don’t care about that, either.

Okay, so notice the theme here.  Obama is expected to cave and why not?  He’s drawn lines in the sand before.  Remember his promise to not extend tax cuts to the richest of the rich?  He caved.  Remember how he was going to offer a robust public option or at least an exchange with some kind of government-sponsored plan for health care reform?  He caved.  Remember all that posturing over closing Guantanamo or bringing troops home from Iraq and Afghanistan. He caved.

That’s what you get when you negotiate with terrorists and they know you’ll lead with the compromise position.  They’ll keep taking more important things hostage and wait you out.  They know this one is too big to fail but yet, they can’t resist just seeing how much they can get away with this time.  Problem is, this time it’s really having an impact.  The economy is looking as though it will double dip and requires a fiscal boost, for one.  This is like 1937 redux and I’m afraid that more mistakes will be made. I can’t believe that we have a political party that is so intent on damaging an administration that it’s going to frighten the global economy into a possibly game changing reshuffling of what the base of financial world’s ‘risk free’ rate and global safe haven currency may be in the future.  If there was ever any reason or an excuse to dump the dollar as a basis of your economy or start ridding your trade surplus savings of US Treasury holdings, this would be it. Symbolic my fat New Orleans ass!

A testy White House meeting between President Obama and House Republican leaders Wednesday failed to lower the partisan pitch in the capital, much less make progress toward a deal on the federal debt ceiling.

Instead, the two sides traded complaints, accusing each other of partisanship and posturing. Republicans demanded that the administration produce a budget-cutting plan, which the White House said it had already done.

Rep. Paul D. Ryan, architect of a Medicare overhaul aimed at slashing the cost of the popular entitlement program by reducing the government’s open-ended commitment to seniors, accused Obama of “mis-describing” his plan and implored the president to ease up on the “demagoguery.”

In reply, Obama said he was no stranger to cartoonish depictions, reeling off a list of conservatives’ favorite attack points: “I’m the death-panel-supporting, socialist, may-not-have-been-born-here president,” Obama said, according to people familiar with his remarks.

The meeting was meant to resolve pent-up grievances and move toward compromise on the deficit and the cost of healthcare for seniors. But after 75 minutes of talk in the East Room, the two sides parted company with little progress.

Johnathan Chait of The New Republic rightly accuses ‘economist’ John Taylor of the Hoover Institute of ignoring the “severe economic consequences of risking the full faith and credit of the Treasury”.  Just arguing spending cuts are good just doesn’t make sense.  This is especially true given the incredible fragile state of the U.S. economy and recovery.  Is extracting more concessions out of Obama worth global financial market turmoil?

The hack Republican answer is that spending cuts and the debt ceiling are linked, because the debt ceiling is Obama’s fault. But of course the debt ceiling has to get raised under every president, and it would have to be raised even if Obama signed the Paul Ryan budget. The debt ceiling has nothing to do with any particular policy choices — it’s just a routine vote that used to be an opportunity for the minority party to embarrass the president, which Republicans are turning into a hostage opportunity. People like Taylor are dressing this up in principle, but the only principle they can articulate is that spending cuts are good. But that same logic would allow the minority to use the debt ceiling to jack up the president over any policy disagreement at all.

So far, the markets and the world seem to think that American politicians will stop their posturing and settle down to business before the August drop dead date.  They’ve even quoted Churchill who used to say we eventually do the right thing it’s just that we don’t actually do it until the very last minute.  The deal is that not only is the brinkmanship a dangerous strategy but the further concessions–in a fragile recovery at best–are dangerous.  Obama and his cadre of lawyers have made it clear that they will concede any high ground.  Again, we have a history of Obama concessions on political promises.  The problem is that each time the concession comes, it comes at a greater cost.  Every one knew this drama would play out once Obama gave in on renewing the Bush Tax Cuts.  Every thing is negotiable and subject to concession now.  You can’t fake credibility once you’ve show yourself as having none.

Wall Street numbers look bad today.  They’ve been bad all week.  The primary concern is said to be the faltering economy. However, any one that thinks that some of this unease isn’t over the debt ceiling hostage situation kids themselves.