MAYBE WASHINGTON ISN’T SO BYZANTINE AFTER ALL

7/30/11

While I may not have a great deal new or especially insightful to say about the debt ceiling, spending reduction, default avoidance, balanced budget or whatever the pols and the punditocracy prefer to call them talks on a given day or at a given hour, I feel compelled to talk about the burning issue du jour that will be forgotten in about three weeks. Further, I may not say anything that you haven’t heard elsewhere, but I can almost guarantee my readers that I will say it better than most anyone else. As I sometimes do in these disjointed commentaries on disjointed topics, I will resort to bullet points of a sort:

--Will there be a default?

While I hate being in the middle of anything other than a great trade, a stimulating conversation, a nice long drive, or a good meal, I find myself in the middle of this ideological struggle, as I do increasingly on any number of issues. On one hand, we have the “right’s” current talking point (I can always tell when we are dealing with the “right’s” talking points when I hear nearly identical words, expressing the exact same sentiment, from a number of acquaintances whose only common attribute is their nearly religious tuning in to the likes of Rush Limbaugh and Sean Hannity, but I digress.) that there won’t be a default because the government takes in roughly $3 trillion a year and pays about $400 billion in interest and hence can easily service its debt. Since debt service takes first priority, there is no way, this logic goes, that the government will default.

On the other hand, we are given seemingly credible numbers that show that if nothing is done on a debt deal, we will default come Wednesday, August 3, given the government’s cash balances and a big social security payment that goes out that day. This is a cash management problem that cannot be addressed by the “right’s,” and my, preferred method of cutting some program; cutting or eliminating a program has no immediate cash management ramifications if “immediate” is defined as three days. If these numbers are to be believed, somebody will not get paid on Wednesday. If the government decides to pay its creditors, it will have to stiff somebody else. So, whether the government defaults on its debt or not, it will default on some kind of obligation, and probably a contractual obligation. This is not a good thing and would call the government’s credibility (Hah!) into further question even if the creditors get their dough.

Note the words “If these numbers are to be believed” in the last paragraph; as I have said on numerous occasions, politicians, as a class, reflexively lie because lying comes at least as naturally to them as telling the truth, so perhaps those numbers are part of the effort to get the old credit card limit bumped up without having to do much of anything to restore the confidence of those issuing the card. I NEVER discount the possibility that the pols are prevaricating.

All of this will probably be moot because, if I had to make a prediction, the pols will come up with some half-hindquartered scheme to increase the debt limit sometime in the next few days, but there is always the possibility that these charlatans won’t even be able to put on a temporary patch.

--What will be the consequences of a default?

Here I find myself again uncomfortably in the middle. The “right’s” take seems to be something along the lines of “So what if we default? Who cares if the Chinese don’t get paid?” The “mainstream” view seems to be that default will be some sort of cataclysmic event that will leave us gathered around campfires outside our caves ruminating on the good old days before 8/3/11.

While defaulting won’t be, as Andy Sipowicz once put it in a completely different context, “tea with the friggin’ queen,” it won’t be any kind of cataclysm. Nor would a virtually certain, even without a default, downgrade of the U.S. from AAA to AA, even if anybody other than the financially illiterate paid attention to the rating agencies any more. Yes, there might be problems in the repo market, with bank reserves, and even with banks’ capital bases if a downgrade, the last two if a default forced write-downs. But the market will recognize a default as very temporary and institutions that must eschew defaulted debt will be able to take advantage of existing or quickly improvised grace periods to continue to hold onto their treasuries. Our foreign creditors’ reaction, if anything, will be similar; default, and a downgrade, will confirm what they already know about our government but will do nothing to provide alternatives. So the long run consequences for the desire of creditors to hold our debt will be modified, if at all, only slightly by either a downgrade or a default.

My favorite misguided reaction to a potential default was the contention by many in the financial and non-financial media that a default will result in “two extra percentage points on mortgages and other consumer loans as the interest the government must pay goes up.” This contention was made repeatedly yesterday (I spent much of yesterday listening to CBS news and the radio versions of CNBC, Bloomberg, and CNN while driving from New York to Chicago.), a day on which the ten year treasury’s yield fell to 2.80%, its lowest yield since last November. While some of that drop may have been attributable to the lousy GDP numbers released yesterday morning, the irony remains delicious, as does the concern that people who hawk such nonsense not only get to vote but influence the votes of others who badly need some prep work to vote intelligently, but that is another issue.

--It’s easy to sympathize with the Tea Party…

Jim Cramer spent the better part of a CNBC segment with a tea party Congressman (whose name I couldn’t write down because I was at the threshold of the George Washington bridge during Mr. Cramer’s rant), attempting to figuratively beat the hell out of the guy, arguing that (paraphrasing Mr. Cramer’s words for the same reason that I do not remember the congressman’s name)

average investors, many of whom are your constituents, will lose a lot of money today because of your intransigence.

The tea party guy was not sufficiently quick on his feet to say what instantly came to my mind, something like “The problem is not the solution; the problem is the problem. Debt is the problem and has to be addressed; rarely do we get a chance to focus the country on a problem that will prove to be its ruin if left unchecked. Yes, there might be some short term pain, akin to the pain an addict feels when he is forced to withdraw from heroin. But continuing his habit will surely kill him. We have passed the point at which this addiction to debt can be addressed painlessly, mostly because a series of half-measures have been applied due to our nation’s inability to deal with even the mildest of discomfort.” But I am not a congressman, nor do I write or advise a congressperson, much to the nation’s detriment, but I digress.

I don’t fault the tea partiers at all for seizing the day and being “obstructionist.” You have to play a decent hand when you are dealt a decent hand, and they are largely right, if a bit naïve, about what needs be done.

--…but there is a better way out of the larger problem.

It’s too late now to address the debt ceiling in this manner, but the best plan out there is the plan put forth by the Gang of Six, which is essentially what was formerly called the Rivlin Plan and differs only in detail from the very meritorious Simpson-Bowles plan. Despite what people who normally think like I do would say, we’re going to have to raise some revenue to address this problem because we’ve already spent the money (usually with only token resistance, and no resistance or active encouragement, from those now protesting most stentorially when they were the beneficiaries, direct or indirect, of that spending) and can’t grow our way out of this one. The beauty of the Gang of Six and similar plans is that they raise money not by raising marginal rates but by eliminating deductions, i.e., by cleaning up the tax code and getting the government out of the business of allocating capital. So these plans give us both deficit reduction and a flatter, simpler tax code with lower marginal rates. The latter used to be a dream of the small government crowd, and remains a recurring one for those of us who really believe in what we say we believe in, but ask many newcomers to the small government game if they would favor, say, eliminating or even reducing the mortgage deduction in exchange for a lower tax rate and they will scream either “tax increase!” or “bloody murder!” So it goes.

If by some miracle, Speaker Boehner gets his commission, the likely product will be something like Gang of Six or Bowles-Simpson (So why do we need another tiresome commission? Great question for normal people, silly question for a politicaster, but I digress.), so something good could possibly come out of these machinations. But I doubt it.

--What a great country!

In this case, I am speaking of Turkey. I raved about Turkey in my instantly seminal piece of 7/30/11, ODYSSEUS, AENEAS, AND ME, and this crisis has given me further reason to laud the birthplace of St. Paul. As quoted in today’s (i.e., Saturday, 7/30’s, page A5) Wall Street Journal, a “leading member of (Turkey’s) ruling Justice and Development Party recently warned Turks (in reaction to the debt problems in Washington and in Europe) to

“…hold on to what you’ve got. Don’t spend too much.”

If we had pols (or financial and economic “experts”) like that here, we wouldn’t be having this discussion today.