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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for July 22nd, 2011

WSJ- Boehner pulls out of debt talks….

Posted by WARREN MOSLER on 22nd July 2011

As previously discussed, the President is no longer involved, and if Congress does get a bill to his desk he’ll sign it.

Grand Bargain Talks Collapse

By Carol E Lee and Janet Hook

July 22 (WSJ) — A high-stakes effort by President Barack Obama and House Speaker John Boehner to hatch a landmark deficit reduction deal collapsed in anger Friday, sending Washington into a weekend of negotiations over how the world’s top financial power can make good on its debt obligations.

In a letter to his colleagues, Mr. Boehner said he called off talks with the president. He informed Mr. Obama Friday night he planned to start negotiations with the Senate to seek what would likely be a smaller deal.

“In the end we couldn’t connect. Not because of different personalities, but because of different visions for our country,” Mr. Boehner wrote in the letter. Later, at a press conference, Mr. Boehner accused the president of “moving the goal post.”

Mr. Obama, visibly frustrated in his own news conference before Mr. Boehner’s, was critical of the GOP. He summoned Congressional leaders back to the White House Saturday morning where “they have to explain to me how it is we are going to avoid default.”

The president also sounded less optimistic than he has in recent weeks that congressional leaders could strike a deal that would avoid a government default. He said he has consulted with Treasury Secretary Tim Geithner about the consequences of default.

Mr. Boehner said talks broke down because Mr. Obama came back at the last minute and asked for $400 billion in additional revenues on top of the $800 billion he thought they had agreed to. “Dealing with this White House is like dealing with a bowl of Jell-O,” Mr. Boehner said.

Senior White House officials said Mr. Obama called Mr. Boehner Thursday and sought more revenues, saying they were needed to win Democratic votes. They said the president was willing to negotiate the matter. Mr. Obama followed up with two more phone calls to the speaker, the White House said, and they weren’t returned until Friday evening when Mr. Boehner called to say the talks were off.

The demise of the grand bargain, the latest twist in Washington’s months-long search for an agreement to raise the debt ceiling, left the next steps uncertain. Congressional aides say the outlines of a deal must be clear by Monday if Congress is to approve a deal that would prevent the U.S. government from defaulting Aug. 2.

Treasury Department officials say that without more borrowing authority by that date, the government will run out of cash to pay all its bills, including Social Security benefits, military pensions and payments to contractors.

Several smaller options have been discussed that would cut the deficit between $1 trillion and $2.5 trillion. Changes to big government programs and the tax code won’t likely be tackled. That could solve the debt-ceiling problem, but create a new one if credit-rating firms think the agreement doesn’t justify their triple-A ratings on U.S. debt.

A debt downgrade, while not as serious as a default, could send interests rates higher and cause investors to panic. Mr. Obama raised that prospect Friday night in making the case for a larger deal.

“If we can’t come up with a serious plan for actual deficit and debt reduction, and all we’re doing is extending the debt ceiling for another six, seven, eight months, then the probabilities of downgrading U.S. credit are increased, and that will be an additional cloud over the economy and make it more difficult for us and more difficult for businesses to create jobs that the American people so desperately need,” Mr. Obama said.

Mr. Obama also said as leaders work through the weekend, they should keep in mind that the stock markets will be opening Monday.

The debt ceiling whiplash, with lawmakers lurching from one proposal to the next, has put financial markets on edge. Bond investors still appear to believe a deal will be inked, but others are bracing for volatile markets if the weekend’s negotiations don’t produce results.

“If I were, particularly, a foreign holder of U.S. debt, I’d be asking myself, ‘Who is running that country,’” said John Fath, managing partner for BTG Pactual, a Brazil-based investment bank. “This is like riding on a motorcycle and going right in front of an 18-wheeler. Are they out of their minds?”

Messrs. Obama and Boehner had incentives to push for more. They were thinking in part about their legacies, while many of their followers were focused on sticking to what they saw as their parties’ basic principles. Mr. Obama may have been willing to accept changes to programs such as Medicare, and Mr. Boehner may have countenanced tax-revenue increases.

Liberal groups Friday called Mr. Obama’s re-election campaign and Democratic congressional offices attacking the grand bargain. Justin Ruben, executive director of, said it would “betray the core Democratic commitment to the middle class.”

Senior Republican aides said disagreements over taxes and changes to entitlement programs became too large to overcome.

Rep. Steve LaTourette (R., Ohio), a close friend of Mr. Boehner’s, said after an afternoon meeting of the GOP caucus: “The speaker was the most melancholy I’ve ever seen him. He’s always been a tremendous optimist. He feels he’s getting nowhere fast.”

Messrs. Obama and Boehner were discussing a deal that would set the stage for $2.7 trillion in spending cuts over 10 years and $800 billion in revenues generated through the tax code—a figure Mr. Obama suggested increasing to $1.2 billion, both sides agree. The plan would have included some of the spending cuts up front, while deferring other cuts and a tax overhaul until later.

Senior White House officials said the first part of the package, which would have immediately become law, also included an extension of unemployment insurance and the payroll tax break for employees.

A hurdle that emerged Thursday was the mechanism that would ensure Congress made good on its promise. Republicans wanted the so-called trigger to be elimination of the individual mandate in Mr. Obama’s health-care law, people familiar with the matter said. The White House refused to include that as a trigger, but said Mr. Obama would consider other options.

A smaller deal cut between congressional leaders would be a poor political outcome for both parties. The cuts likely wouldn’t be deep enough to satisfy conservatives, but would be big enough to irk liberals, and neither could claim credit for putting the U.S. on a path to long-term fiscal stability.

Senior Republican aides said they don’t know what shape a deal will ultimately take, but they said they need to present House members with an agreement by Monday to have time to pass legislation in both chambers by Aug. 2.

House Republicans will not back down from their demand for dollar–for–dollar spending cuts accompanying the debt limit increase. They have increasingly discussed a short-term debt increase, accompanied by the $1.5 trillion in spending cuts identified by budget negotiators. House Majority Leader Eric Cantor (R.,Va.) said the GOP would offer such a plan for avoiding default “in the coming days.”

“America will pay its bills and meet its obligations, and in coming days we will offer a path forward that meets the president’s request for a debt-limit increase, manages down the debt and achieves serious spending cuts,” Mr. Cantor said.

Getting a substantial deal matters as much for financial markets as the political fate of the nation’s leaders. Standard & Poor’s has said it could lower its AAA rating on U.S. government debt if it believes any deficit-reduction agreement is inadequate or the triggers put in place aren’t credible. A lower rating would boost borrowing costs for the government, businesses and households, possibly harming the recovery and roiling financial markets.

“What we mean by credible is something that we think people are actually going to do,” David T. Beers, managing director of sovereign and public finance ratings, said in a recent interview.

Posted in Congress, Government Spending, Obama, Political | 18 Comments »

Debt ceiling dynamics: President Obama now irrelevant

Posted by WARREN MOSLER on 22nd July 2011

It now seems to me the President will sign anything Congress sends to him for final approval.

So the question is whether the Senate and House can agree to anything they can both pass and send to the President.

And there is no point in further discussion with the President.

It’s all up to the Congress and it’s not looking promising.

Especially when deep down most probably think:

“It’s a good thing for the govt, like a drug addict, to get it’s credit card taken away and go cold turkey and be forced to limit spending to current tax revenue.

Yes, bad things might happen- stocks might go down, interest rates and unemployment might go up, and tens of thousands of businesses fail as GDP falls.

But with govt out of the way, the pain will pass and the private sector then flourish as never before.
Best to take that medicine now, suffer that pain now, and get by it to the promised land.

Not getting the debt under control will mean far worse consequences for all of us and especially for our posterity.”

So it’s the entire mindset that’s working against getting any bill to the President’s desk.

The last time I felt this was was during the Cuban Missile crisis.
Fortunately, back then, Russia blinked.


July 22 (Bloomberg) — House of Representatives Speaker John Boehner broke off talks with President Barack Obama on Friday and said he will begin negotiations with Senate leaders aimed at meeting an Aug. 2 deadline to avert an unprecedented U.S. debt default.

In a dramatic turn of events with the deadline to raise the U.S. debt ceiling just 11 days away, a stern-faced Obama expressed frustration at the Republican leader’s move, saying it was “hard to understand why Speaker Boehner would walk away from this kind of deal.”

In a letter to congressional colleagues, Boehner, the top U.S. Republican, said talks with the Democratic president had become futile, citing Obama’s demand to raise taxes.

Putting the onus on Obama, Boehner said: “The president is emphatic that taxes have to be raised. As a former small businessman, I know tax increases destroy jobs.

In a press conference, Boehner said the White House “moved the goal posts” at the last minute. He said, “Dealing with the White House is like dealing with a bowl of Jell-O.”

“We put plan after plan on the table,” Boehner said, adding that the president never brought a plan to the table.

Still, he said he’ll attend the Saturday morning meeting President Obama called of all the congressional leaders, adding that he doesn’t believe the relationship with the White House is permanently damaged.

“I’m confident that Congress can act next week,” he told reporters.

Lawmakers will need to have a deal in place by early next week in order to make sure it can be passed by both houses by the Aug. 2 deadline.

President Obama held a press conference to announce the news. He said Boehner’s decision came after the president offered to cut discretionary spending by $1 trillion. He said he thought he was offering an “extraordinarily fair” deal.

The president said the talks broke down over tax revenue but that both sides had been only about $10 billion apart on spending cuts.

Obama told reporters “there does not seem to be a capacity” for Republicans to agree to a debt limit deal.

Obama said he has summoned Boehner and other congressional leaders—Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell and House Minority Leader Nancy Pelosi—to the White House for a meeting at 11 a.m. ET Saturday.

“We have run out of time and they are going to have to explain to me how it is that we are going to avoid default and ask them to do the tough thing but the right thing,” the president said.

Both the president and Rep. Boehner said they were confident that the U.S. wouldn’t default on its obligations.

“We have never defaulted on our debt and we’re not about to do it now,” Obama said.

Obama said he was confident the $14.3 trillion limit on U.S. borrowing would be raised by the Aug. 2 deadline.

Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion in assets, told Reuters: “If not reversed within the next few days through crisis negotiations, this breakdown will be highly detrimental to the already-fragile health of both the US and global economies.”

Obama has faced increasingly vocal complaints from his own Democrats on a deal-in-the-making that could mean painful curbs in popular health and retirement programs but no immediate increase in taxes.

“I’ve never seen frustration higher,” Democratic Senator Dianne Feinstein said after a week of sometimes chaotic efforts to sort through conflicting options and stave off a potentially devastating default on the nation’s financial obligations.

Republicans and many Democrats are refusing to raise the debt limit unless it is accompanied by steep spending cuts to tackle rising budget deficits.

Attention now turns to the Senate, where negotiations are likely to resume on a convoluted plan put forth by Republican Senate leader Mitch McConnell that intended as a fallback option if all else failed.

An unprecedented national default could push the United States back into recession and trigger global financial chaos.

Treasury Secretary Timothy Geithner met Friday with Federal Reserve Chairman Ben Bernanke and New York Fed President William Dudley to talk about the implications for the U.S. economy if Congress failed to raise the debt.

They remained confident Congress would act in time, they said in a joint statement.

The hope in Washington is that a wide-ranging, 10-year package of deficit cuts being worked out will be enough to save America’s triple-A credit rating.

Rating agencies have threatened a U.S. bond downgrade without a comprehensive deficit-cutting deal.

Seeking to ratchet up pressure on lawmakers, Obama said the consequences if they failed to act on the debt limit would include higher interest rates and greater reluctance by businesses to hire and invest.

“If we don’t solve it, every American will suffer,” he said.

Casting himself as a centrist in the bitter debate, Obama is trying to appeal to moderate independent voters he needs to win re-election in 2012.

Still the two sides remain far apart on the main issues.

Obama and Boehner took discussions on a so-called “grand bargain” behind closed doors this week.

Talks have whipsawed and stalled over raising tax revenue, which Democrats insist must be a part of any spending cut deal while Republicans reject tax increases.

Posted in Congress, Deficit, Government Spending, Obama | 10 Comments »

Edit: Quote from Scott Sumner

Posted by WARREN MOSLER on 22nd July 2011

I wasn’t able to fully grasp how MMTers (“modern monetary theorists”) think about monetary economics (despite a good-faith attempt), but a few things I read shed a bit of light on the subject. My theory is that they focus too much on the visible, the concrete, the accounting, the institutions, and not enough on the core of monetary economics, which I see as the “hot potato phenomenon.”

Note: this post initially falsely credited Lawrence Summers with the quote, apologies.

Posted in Deficit, Government Spending | 51 Comments »