The Debt Ceiling Debate Goes Gossip Girl: Obama Tweets That Boehner Is Now His BFF

From Peter Tchir of TF Market Advisors

Teenage Girls

I am not sure when U.S. politicians changed from being elitist, self-serving, perk enjoying, hypocrites, to teenage girls, but it has happened.  Boehner sends a Dear John letter.  Obama complains that phone calls aren't being returned.  Reid is pulling petals from a flower repeating, 'he loves me', 'he loves me not'.  We have had to listen to stories about getting homework done on time and eating our peas.  I have seen this story before, actually multiple times a day, just turn on Disney network and you can watch the same story unfold over and over.  We all know how those shows end, everyone agrees that the other side wasn't totally wrong, there is an awkward group hug, and everyone is happy, until the next episode.

Happy Ending

This won't end any differently.  Some form of agreement will come out of this.  We will be told what a learning experience it has been, that we, the general public, are lucky that the fortitude of our leaders led them to a solution that 'although neither side got what they wanted' it is the best outcome for a bright and prosperous future.  We will be told that it was only by bringing it to the brink that politicians could lose their partisan shackles and do what is right for America, but now that they have worked together so closely once, and found common ground, they will use that newly found bond to create an even better future.  Never again will politicians cause unnecessary fear amongst the populace, as now they can all work together.  Well, at least until the first presidential election campaign commercials.

Some Simple Problems that should be addressed in any solution

If anyone was truly interested in fixing the problem in the long run, there are a couple of things they could focus on immediately.  First, let's remove the language that lets the Treasury, create IOU's of IOU's and not count it against the debt ceiling limit. It is curious that the government had the foresight to include such loopholes in various pension plans, but it is time to remove them.  That is not the sort of sleight of hand trick that a AAA country needs.  Let's just get rid of that language as that loophole should never be used again. 

Then let's address why the Fed has so many treasuries on its balance sheet.
The treasury pays interest to the Fed which then in turn pays it to the Treasury?  As far as I can tell, the Fed keeps the treasuries on their balance sheet because it allows them to pretend they aren't printing money.
Mr. Bernanke can mumble on about how he is creating electronic fractional reserves, but let's be honest and just admit that he is using the purchases and sales of treasuries as a way to create or remove money.  Ron Paul has suggested that cancelling the treasuries on the Fed balance sheet would provide breathing room under the ceiling, and I have to admit I agree with him.

Finally, we should address what to do with Freddie and Fannie.  Let's just nationalize them and assume their assets and their liabilities.  Would the debt count against the ceiling?  It should, but the assets should count against that.  With the size of the infusions the government has provided to these companies, we should stop pretending they don't have the full faith and guarantee of the U.S. government.  Just get it over with and assume all of their obligations and assets.  If we want to be a true AAA country going forward, then we stop playing accounting games.  The government should move all assets and liabilities on balance sheet.  History has clearly demonstrated that entities that employ off balance sheet tricks are not good counterparties to lend to. 

College Students

While U.S. politicians have regressed all the way back to their teenage years, European politicians have only gone back to their days in college.
Sitting around until the wee hours of the morning drinking, smoking, and discussing all the ways the world could be better.  How many college nights were spent going to bed a little fuzzy but so certain that you had discovered something wonderful.  Problems were solved and it all seemed so clear as you tucked yourself into bed.  Yet, somehow in the morning, you couldn't remember some things.  Other ideas, that had bordered on genius, in their simplicity the night before, now didn't stand up under closer inspection.  Then finally, you cringe at the thoughts that now just appear stupid in the light of day, wondering how so many smart people could have thought the plan made any sense the day before.  Maybe it is a co-incidence that Greece now likes to hold their votes well after the markets have closed (or maybe it is easier for the police to see the torches).  Maybe it is a co-incidence that the latest EU proposal came after an all-nighter between Merkel and Sarkozy.  Unlike teenage television shows, college students have to grow up and get a real job (or one on Wall Street).  The plans and hopes have to get put to the test in the real world.  Maybe Europe got it right this time, but I think the austerity Greece agreed to will continue to cause problems, and the latest EU bailout proposal may once again fail to live up to expectations as some things don't work as planned, some people don't react as expected, and some things just never made sense in the first place.


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