How The Fiscal Cliff Talks Collapsed
The collapse of the Fiscal Cliff talks should come as no surprise to anyone (except, of course, for all those "expert" political commentators virtually all of whom saw a deal by December 31: a full list of names is forthcoming). The reason: a simple one - a House torn, polarized to a record extreme, and a political environment in which the two parties, in the aftermath of a presidential election humiliating to the GOP, reached unseen before antagonism toward each other. In this context, it was absolutely inevitable that America would see a replica of last summer's debt ceiling collapse, which mandated a market intervention, in the form of a crash, and the wipeout of hundreds of billions in wealth - sadly the only catalyst that both parties and their electorate, understand. We had prefaced this explicitly in early November when we said that "the lame duck congress will posture, prance and pout. And it is a certainty that in the [time] remaining it will get nothing done. Which means, that once again, it will be up to the market, just like last August, just like October of 2008, to implode and to shock Congress into awakening and coming up with a compromise of sorts." Which of course brought us to Thursday night's mini-TARP moment.
If you missed Thursday's ES flash crash, fear not: there will be more "TARP moments" as first the Fed is brought into action (as we reminded yesterday), and then, as the final deadline - that of the expiration of various debt ceiling extension gimmicks which takes place in March, and which is the real deadline for a deal. Nonetheless, there are those forensic detectives who are addicted to every single political twist and turn, and who are curious just where and when the Fiscal Cliff talks broke down in the past week. In this regard, the WSJ provides a useful timeline.
From the WSJ:
Mr. Obama repeatedly lost patience with the speaker as negotiations faltered. In an Oval Office meeting last week, he told Mr. Boehner that if the sides didn't reach agreement, he would use his inaugural address and his State of the Union speech to tell the country the Republicans were at fault.
At one point, according to notes taken by a participant, Mr. Boehner told the president, "I put $800 billion [in tax revenue] on the table. What do I get for that?"
"You get nothing," the president said. "I get that for free."
Well, you can't fault the man at not demonstrating "leadership" at crucial junctions: after all it's only fair he gets something for free.
The White House's first formal offer, presented Nov. 29 left Mr. Boehner incredulous. It included a request for $1.6 trillion in additional tax revenue over 10 years, a permanent increase in the debt ceiling and money for road projects and other year-end priorities. In return it offered spending cuts of $400 billion—25 cents for each dollar in new revenue.
Taking a drag on his cigarette, Mr. Boehner asked Treasury Secretary Timothy Geithner, who had presented the plan, a number of questions but didn't fully engage him. Across the Capitol, Senate Minority Leader Mitch McConnell (R., Ky) said he laughed at the offer.
The same sticking points kept rearing up—the White House insisting on more tax revenue than Republicans could stomach, and the Republicans demanding deeper cuts than the White House would accept.
During one session in the Capitol with White House's legislative liaison Rob Nabors, Mr. Loper from the Boehner camp asked, referring to a near-deal during last year's debt-ceiling fight: "Can you get back into the zone of where you were in July 2011?"
"No," Mr. Nabors replied. "We were probably overextended then, and there's no way we would do it now."
Mr. Nabors said if they couldn't reach a deal, they should keep lines of communication alive. The typically serious Mr. Loper asked, "So, you're breaking up with us?"
On Dec. 13, Mr. Boehner went to the White House at the president's request, joking he was going to the woodshed.
The president told him he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession.
Mr. Boehner said he wanted a deal along the lines of what the two men had negotiated in the summer of 2011 in a fight over raising the debt ceiling. "You missed your opportunity on that," the president told him.
That night, the speaker and Majority Leader Eric Cantor (R., Va.) decided to make the biggest concession so far.
As the country the next day digested news of a brutal school shooting in Connecticut, Mr. Boehner called the president and for the first time offered to let tax rates rise—on income above $1 million. The president acknowledged the concession but said Mr. Boehner's plan wasn't raising enough revenue.
News broke the next night both about the concession and that the speaker was willing to extend the borrowing limit. On Sunday, the White House sent a plane to fly Mr. Boehner back to Washington for a morning appointment with the president on Monday, the day it now appears the deal fell apart.
In that session, the president held firm for $1.2 trillion in additional tax revenue, a second step down from his original offer. Mr. Boehner asked for another $100 billion in spending cuts but couldn't get a commitment.
Finally, the speaker said, "Well, you and I can sit here and stare at each other," or he could leave and they would talk later.
Eventually, Boehner managed to turn the tables on a president who was convinced he would get all the concession he demanded. Or so Boehner thought:
Back in the Capitol, Mr. Boehner told Mr. Cantor the president wasn't moving. They agreed to call him. On the call, Mr. Boehner restated he needed $1 in spending cuts for every $1 in revenue raised. He dropped a prior demand to increase the Medicare eligibility age.
The president told Mr. Boehner that he was willing to make some concessions on taxes and spending, but cautioned that they needed to retain Democratic votes for the bill to pass.
The speaker raised the prospect of moving a backup bill. White House officials said Mr. Boehner didn't reveal what Plan B comprised. Administration officials expected a few more days of back-and-forth, but the speaker thought the prospects were dim for a big deal.
Meeting with his leadership team in the afternoon, Mr. Boehner read from a script prepared by his staff, telling lawmakers he still wanted a big deal but the rank and file needed to know the plan by a 9 a.m. conference meeting the next morning, Tuesday. He encouraged his colleagues to accept the backup plan.
"I'm going to keep the proposal on the table," he said of the broader deal. "As I told the president, I'm not making an ultimatum. The offer stays on the table, even if we move on Plan B."
His lieutenants made clear they preferred Plan B to the one Mr. Boehner was trying to broker.
The speaker called the president with news the House would move ahead with the backup bill, which would preserve Bush-era rates for all income below $1 million. The president was incensed.
Everyone knows what happened what Boehner was finally unable to get even the votes needed for "Plan B." And what happened after that too:
On Friday afternoon, the president spoke to both Mr. Boehner and Senate Democratic leader Harry Reid in a bid to resurrect a deal. Soon afterward he left the White House for his annual family vacation in Hawaii.
And from Reuters:
The president is expected to indulge in some of his favorite pastimes on the island where he was born and raised: golf, an expedition for the local treat "shave ice," and an evening out with family and friends. He hit the links at the nearby Marine Corps base under sunny skies on Saturday afternoon.
Needless to say no deal will be "resurrected", and the US economy, like the Coyote, will go right off the cliff, with hopes for a prompt fix in the early days of January, at which point, the thinking supposedly goes, all those managers who fired tens of thousands of workers due to the new "post-Cliff" reality will miraculously rehire them back. After all the market said so: the same "efficient" market which continued to plow higher for three days after it is now clear the deal had fallen apart.
Next steps: nothing out of Washington for three months, even as Obama crucifies the GOP at every possible public opportunity, and another credit downgrade of the US, which initiates the early 2013 risk off phase, and the scramble into the "safety" of US bonds once more as was the case in 2011. In doing so it will provide a cover to all those sell side "strategists" (all of them) who once again, erroneously, predicted a recovery for the US in the coming year. After all who could have possibly anticipated the most perfectly logical political outcome... Because the one thing that is most important to both parties is to maintain demand for US paper, as that, and not taxes, in both the coming year and decade, will consistently be primary source of 'funding' for the US government.
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