"It Is Really Disheartening That This White House Did Not Have A Plan B" - A Preview Of The Next Debt Ceiling Crisis
As of Friday, total US debt subject to the limit was $16.006 trillion, or $387 billion below the latest and greatest official debt ceiling. In the past 3 months the US has been raising debt at a slower pace than usual precisely for this reason. Debt issuance will now pick up at far faster pace as the trendline mean reversion reasserts itself. It means that sometime over the next few months, and certainly before the end of the year, the US debt ceiling will be breached (with all the usual tactics employed to delay this event from happening as much as possible, including resuming the pillaging of various government retirement funds) as the Treasury itself warned. It also means that either just before or just after the presidential election, the topic of the debt ceiling will be once again upon us. As a reminder, the reason why the market plunged back in August of 2011 is because as the GOP proved unwilling to compromise, suddenly everyone, led by Tim Geithner, realized just how close to a failed auction, read endgame, the US was, and the dire need for a wake up call became paramount. Furthermore as is well-known, the only stimulus Pavlovian politicians react to is a market collapse, which not only instills the fear of the "401(k)" god falling to earth, but lights up the switchboards as concerned "voters" suddenly realize that all their mark-to-Bernanke's market "wealth" may disappear in a puff of smoke. It is now, courtesy of Bob Woodward, that we learn just how close we came. And since the polarity and discord in Congress after the election, already at record levels, will soar to new all time highs after November, it is safe to say that the debt ceiling debacle deja vu is coming, and this time it will make the first one seem like child's play.
From the WaPo's "Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis" - excerpts:
The president told his senior staff that the call with Boehner had led nowhere.
“So we’ve got to figure out Plan B. Which is, how do we get out of this thing?” he said.
The problem was that they did not have a Plan B.
It was increasingly clear that no one was running Washington. That was trouble for everyone, but especially for Obama. Although running things is a joint venture between the president and Congress, a president has to dominate Congress — or at least be seen as dominating Congress. The last president to fold was George H.W. Bush, who gave in to Democrats’ demands that income taxes be raised in a 1990 budget deal. And Bush had been a one-term president.
When Obama learned that the deal negotiated among the congressional leaders would require a two-step increase in the debt limit, he told Rob Nabors, the White House director of legislative affairs, “The one thing I said I actually needed, they didn’t get,” referring to Reid and Pelosi. “I needed this to go past the election, and they didn’t get it for me. This can’t work.”
Obama sent word that he wanted the two Democratic leaders at the White House at 6 p.m. that Sunday, July 24. No reason was given.
Reid arrived in the Oval Office with his chief of staff, David Krone.
“I don’t trust these guys,” the president said dismissively.
Krone either would not or could not conceal his anger.
“Wait a second,” Obama said, interrupting someone else who was about to speak. “I can tell David has something else to say.”
“Mr. President, I am sorry — with all due respect — that we are in this situation that we’re in, but we got handed this football on Friday night. And I didn’t create this situation. The first thing that baffles me is, from my private-sector experience, the first rule that I’ve always been taught is to have a Plan B. And it is really disheartening that you, that this White House did not have a Plan B.”
Several jaws dropped as the Hill staffer blasted the president to his face.
“So I don’t have a lot of options, in the past 36, 48 hours, to put together,” Krone continued. “We’re supposed to be the ones that fend off an economic catastrophe. And what we find ourselves is now, with no deal, we’re going to have to root for the worst possible things to happen in order to prove to the Republicans that you cannot be so callous and let the debt limit expire.
“That is a horrible position that we’re in,” Krone said. “And so this may not be the perfect deal, but it’s the only deal that we have on the table right now in the situation that we find ourselves.”
Obama replied: “I understand what you think you’re doing. I’m not doing that. The one thing that we need to bring stability to this economy is not throwing the debt limit increase back into the political arena. I’m not doing that under any circumstances. So if that means that I’m not signing this bill, I’m not signing the bill.”
Cue Tim Geithner:
“You can’t veto,” Treasury Secretary Timothy F. Geithner told the group. “You cannot be responsible for default.” Anything had to be done to prevent it. Anything to preserve the global economy.
Could I actually veto it? Obama asked, adopting his law professor manner. What would happen on the day of the veto? The day after?
“It would have massive effects,” Geithner said. Treasury had to conduct a bond auction in the open market in about five days, the regular Tuesday auction, with settlement on Thursday. That first auction could be a kind of tripwire, setting off a chain reaction. The federal government couldn’t pay its bills. “Why would anyone buy U.S. bonds if it’s an open question whether we are going to have the authority to pay for them?”
Another possible outcome, Geithner said, was perhaps worse. “Suppose we have an auction and no one shows up?”
The cascading impact would be unknowable. The world could decide to dump U.S. Treasuries. Prices would plummet, interest rates would skyrocket. The one pillar of stability, the United States, the rock in the global economy, could collapse.
“So,” the president said, “if we give $1.2 trillion now in spending cuts” — the amount in the House bill to get the first increase in the debt ceiling for about six to nine months — “what happens next time?” The Republicans would then come back next year, in the middle of the presidential campaign, and impose more conditions on the next debt ceiling increase. He could not give the Republicans that kind of leverage, that kind of weapon. It was hostage taking. It was blackmail. “This will forever change the relationship between the presidency and the Congress.
This is 100% wrong: the relationship did change forever, but not between the presidency and the Congress, which are simply two of the three branches of the US government purchased exclusively to do the bidding of Wall Street. It changed between Washington DC and Wall Street. And Wall Street won, as it always does. And all it took was a 20% drop in the S&P for EVERYONE to cave in.
As to what comes next:
Obama never had to confront the veto question. A few days later, House Republicans dropped their insistence on the two-step plan [ZH: after the market tumbled]. The final plan accepted a debt limit increase that would take the country through the 2012 presidential contest. It also postponed $2.4 trillion in spending cuts until early 2013.
The long-term deficit crisis had not been solved, but merely put off, leaving the United States at the edge of the fiscal cliff, where it remains today.
Fiscal cliff yes, but also new debt ceiling fight in a few short months. And the winner, contingent on a 20%, 30%, or 40%+ slide in the stock market, will once again be Wall Street, which will again take America's 300+ million population, and its preoccupation with various numbers indicating one's monthly fluctuating "wealth", hostage to achieve its goals.