WSJ- Boehner pulls out of debt talks….

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 MoveOn.org, 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.

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18 Responses to WSJ- Boehner pulls out of debt talks….

  1. brian says:

    Warren,

    Random question. Do you think it is fair to say that “net-financial-assets” are the same thing as capital? From the wikipedia definition of capital (economics)

    Some thinkers, such as Werner Sombart and Max Weber, locate the concept of capital as originating in double-entry bookkeeping, which is thus a foundational innovation in capitalism, Sombart writing in “Medieval and Modern Commercial Enterprise” that:[4]

    The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping. Capital can be defined as that amount of wealth which is used in making profits and which enters into the accounts.”

    This seems to me consistent with “net-financial-assets” which are just the accumulation of all prior govt budget deficits.

    If this works then we can turn the conversation around. Instead of saying “the government should run a deficit and increase its debt” we can say, private capital levels need to be increased (to accomodate increased productivity and spur ongoing investment).

    Reply

    Clonal Antibody Reply:

    @brian,

    I believe that is what Pete Stark was referring to in the video I linked to above, when he was explaining that National Debt really equates to a accumulated national wealth — which of course, the interviewer immediately mad fun of, and that is when Pete threw him out of his office.

    Reply

    WARREN MOSLER Reply:

    i’ve looked at nfa as ‘the equity that supports the credit structure’ at the macro level

    as, for example, with bank capital, it’s the net financial assets of the bank but not necessarily the private sector as a whole

    Reply

    brian Reply:

    @WARREN MOSLER,

    Then can we just call them PSA’s (Private Sector Assets) instead of NFA’s? I think people would respond better to the idea of debt as “private sector assets” rather than “net financial assets”. The idea of reducing private sector assets seems like it should be out right repugnant to current conservatives. But that is precisely what they are out to do!

    brian

    Reply

  2. Winslow R. says:

    Why settle and let all that ammunition purchased after the election go to waste?

    http://www.huffingtonpost.com/2008/11/07/gun-sales-soar-on-obama-v_n_142071.html

    Reply

  3. Unforgiven says:

    I really got some insight re: horizontal vs vertical in this post over on New Economic Perspectives:

    http://neweconomicperspectives.blogspot.com/2011/07/qe3-treasury-stylego-around-not-over.html

    From Craig Austin:

    So it looks like barry didn’t post my comment and then blocked me from commenting. i asked warren to answer DeDudes comments about the velocity of money. Warren’s emailed me the response below which i’ll post here since no more bigpicture.com for me. [warrens comments are in brackets]

    http://www.ritholtz.com/blog/2011/07/wapo-column-happy-birthday-america-time-to-grow-up/

    DeDude Says:
    July 10th, 2011 at 10:08 am
    DollarMonopoly @ 6:37

    “When a currency user, like China, saves the government must spend to replace those dollars to maintain a given output”

    [and/or cut taxes. but not to 'replace' but to sustain aggregate demand if China's accumulation of dollar financial assets or anything else is causing a lack of demand, as evidenced by unemployment. ]

    Yes it is true that if a country like China saves $1 trillion it has basically taken those dollars out of our economy and our economy would slow if nothing is done. Same goes for the other trillions that are basically just parked somewhere.

    [right.]

    But the Kansas model is a little to simplistic because it is not the amount of dollars that drives the economy it is the momentum of dollars (= amount x speed). So you can fix the problem by either increasing the amount of dollars or by increasing the speed of existing (remaining) dollars.

    [increasing the 'speed' in this context means private sector credit expansion. Velocity per se- more transactions- can increase gdp as we measure it but not unemployment as we define it. unemployment comes from the govt, for a given level of taxation, not spending enough to provide the funds needed to pay taxes and net save. 'Speed' can't create net financial assets. But private sector 'borrowing to spend' is a drop in savings desires per se, which can reduce unemployment, as in the late 1990's.]

    So the problem is that China brought the speed of a trillion of our dollars down to zero, so the remaining dollars have to circulate faster in order to keep the same monetary momentum going (or else the economy will slow).

    [Not true, as above.]

    [Current monetary expansion is trying to compensate for slowing of the speed of money (as people are breaking money speed by putting it into savings rather than spending it).Correct, with 'monetary expansion' meaning 'borrowing to spend' with that borrowing 'creating' bank deposits and other lender liabilities often defined as 'money.' Going into debt to spend reduces one's net savings. So willingness to go into debt to spend (house payments, car payments) means reduced savings desires. And that way the same nominal dollar savings coincides with less unemployment ]

    They need to also have a policy to increase the speed of money. If they want to reduce the deficit (take money out of the system) the have to have a plan for how to get the remaining money to move faster -or total money momentum (the economy) will slow further and we will be dumped into a double dip recession.

    [Correct, private sector borrowing is private sector deficit spending, and that can do the trick and has done the trick in the past. The problem is both that it's unsustainable as has been repeatedly demonstrated in the past and that it can't be conjured up by 'monetary policy' such as rate cuts, qe, etc. etc. It gets conjured up by fiscal adjustments such as tax cuts and/or spending increases. That's what gives the acceleration once fiscal adjustments overcome current conditions and get things going]
    July 10, 2011 2:08 PM

    Reply

    Tom Hickey Reply:

    @Unforgiven,

    Velocity of money is reduced by saving desire. In a balance sheet recession, this is a good thing because private debt has become unsustainable and the economy cannot recover in a healthy way until deleveraging has run its course and savings replenished. Stimulating velocity through more lax credit is a recipe for disaster. I am reading that while private borrowing it increasing somewhat now, which some see as encouraging, others are warning that credit is being used to manage cash flow. This is more Ponzi finance. We are still in the Ponzi phase of the financial cycle and will be until private debt clears out. Velocity gained through liquidity rather than solvency adds to the existing debt bomb rather than defusing it.

    Reply

    beowulf Reply:

    @Tom Hickey,
    tax velocity, untax wages. :o)
    http://www.scribd.com/doc/25299549/Feige-APT-Presentation-to-Tax-Reform-Panel-2005

    In terms of operational steps, all Congress has to do is 1. Vote to abolish FICA payroll tax. 2. Use franking privilege to mail press release to every voter. 3. Go home, parade optional.

    Since the Fed already rebates its net earnings to Tsy, the FRB has the authority to tax velocity via its existing transaction fees, marking fee schedule up or down to adjust fiscal stance.
    http://www.federalreserve.gov/paymentsystems/pfs_feeschedules.htm

    Reply

    WARREN MOSLER Reply:

    transactions taxes tend to reduce those transactions.

    so the question is where reducing those transactions serves public purpose

    including whether it’s a regressive tax

    Tom Hickey Reply:

    @beowulf,

    “transactions taxes tend to reduce those transactions.”

    That’s what “reducing velocity” means. :)

  4. Unforgiven says:

    A lower rating would boost borrowing costs for the government….

    Yeah. It’s going to be more expensive to borrow money from ourselves.

    Gotta be a big market for clown shoes in D.C…

    Reply

  5. Danf says:

    I did that and the reply scared the shit out of me.

    Reply

    Ryan Harris Reply:

    @Danf, What did your congressmen reply? My Senator, John Cornyn, sends out tea-party canned propaganda when you send his constituent office messages about the budget. These guys are so out of touch with reality, its a real shame for the country that they don’t learn about our monetary system and provide some leadership for the droves of people that just want a better life but don’t understand that the tea party is just plain wrong.

    Reply

    Danf Reply:

    @Ryan Harris,

    This guy is a democrat and is uncontested in 2012.

    ——————————————————-

    Thank you for taking the time to contact me with your thoughts and concerns about the national debt. I appreciate hearing from you about this issue.

    I understand you are concerned about the health of the American economy and our national debt. I share these concerns. Despite a balanced budget as recently as 2001, the budget deficit for the 2010 Fiscal Year was $1.3 trillion. Two wars, unpaid-for tax cuts for the rich and other policies put us on a path that is unsustainable. Just as significant has been the recent recession, which put further strain on the federal budget while leaving millions unemployed.

    Economists agree the most significant factor in any Nation’s budget outlook is the strength of its economy. Unfortunately, nearly 15 million people in the United States are unemployed, including 477,000 in Pennsylvania. Therefore, we must pursue efforts at job creation at the same time that we begin to exercise greater fiscal responsibility. It is critical that the 112th Congress works in a bipartisan fashion to reduce the deficit in a manner that does not hamper the economic recovery or place undue burdens on hard-working Pennsylvania families.

    A variety of proposals have been put forth on deficit reduction, including one by the National Commission on Fiscal Responsibility and Reform, which was created by President Obama through Executive Order. The co-chairmen of this bipartisan 18-member Commission produced a comprehensive plan to reduce the national debt over the coming decades. In order to trigger a vote in Congress, the plan needed the support of at least 14 members of the Commission. Ultimately, the plan fell short of this benchmark and did not come before either the House of Representatives or Senate for consideration. Reducing the deficit and making government more efficient are important priorities that must be addressed, but it should not be accomplished on the backs of senior citizens or the most vulnerable in our population. Whether or not Congress ultimately takes up pieces of this proposal to reduce the deficit, a comprehensive strategy must be developed to return to fiscal responsibility in the long-term.

    Moving forward, we must promote fiscal policies that are responsible both in terms of spending and paying down our national debt. To that end, I voted in favor of an amendment that would reinstate a law used in previous Congresses to control spending and revenue changes referred to as statutory “pay-as-you-go”. This commonsense rule requires Congress to pay for the laws that it passes and has led to record surpluses in the past. In addition, I voted earlier this year in favor of the bipartisan amendment to curb the growth in spending by capping increases in discretionary spending to an average of one percent and defense discretionary spending to an average of 1.7 percent per year. This is one of many steps that will have to be taken.

    Again, thank you for sharing your thoughts with me. Please do not hesitate to contact me in the future about this or any other matter of importance to you.

    If you have access to the Internet, I encourage you to visit my web site, http://casey.senate.gov. I invite you to use this online office as a comprehensive resource to stay up-to-date on my work in Washington, request assistance from my office or share with me your thoughts on the issues that matter most to you and to Pennsylvania.

    Reply

    WARREN MOSLER Reply:

    history will not be kind to any of these people

    Clonal Antibody Reply:

    @Danf,

    It is awfully hard for even congressmen who know what is going on, when the tea partiers and their ilk make fun of what we know to be correct. I am talking in particular of a video of a congressperson I greatly respect from a neighboring CD.

    Here is the video – eminently sensible – but used to make fun of Pete Stark

    Jerrit Erickson Reply:

    @Danf,

    “I did that and the reply scared the shit out of me.”

    Same here. For the record, what I sent my representative had nothing to do with the reply. I never mentioned a bill. Her staff probably skimmed my letter, had no idea what to make of it, and sent the canned reply that seemed the least unrelated.

    “””
    Dear Mr. Erickson,

    Because of your interest in H.R. 1, the Continuing Resolution to fund the government through Fiscal Year 2011, I want you to know how I voted on this legislation. I opposed it.

    H.R. 1 was advanced by the House leadership to cut $100 billion from the federal government’s budget for the remainder of this fiscal year which ends on September 30th. We voted on final passage in the wee hours of the morning of Saturday, February 19th.

    I have deep concerns about our deficit and national debt, and that’s why I voted for several amendments to cut spending, totaling over $55 billion. But at a time when we should be making strategic, forward-thinking investments for the future of our country, I believe this spending plan is more than cutting — it’s crippling. It takes a sledgehammer to the weakest in our society and to our collective future, including slashing border security and public safety, as well as the agencies charged with making sure investors are protected, as well as those who track down abusers of Medicare and Medicaid.

    The plan also sacrifices critical investments in order to hit an arbitrary number. According to an analysis by the nonpartisan Economic Policy Institute, this legislation will cost more than 800,000 private and public jobs. It will gut research and development at a time when other nations are investing heavily and rapidly. For example, cuts to the Department of Energy would inhibit our ability to be the world leader in clean energy technologies. Cuts to the Department of Education would slash the Pell Grant, leaving thousands of students unable to afford higher education. Over 200,000 children would be dropped from Head Start education, and the elimination of Title X means that over 5 million low-income women would be denied life-saving health services such as HIV testing and cancer screening.

    It’s disheartening to see Halliburton and BP Oil tax breaks left untouched and agricultural subsidies protected, while education and the Food and Drug Administration, which is charged with protecting our food supply, and the critical research done by the National Institutes of Health are not just cut, but slashed to the point that they will not be able to implement the laws Congress has passed.

    After several days of debate, H.R. 1 passed the House by a vote of 235 to 189. I will continue to oppose any legislation that makes dangerously reckless cuts to programs that are so vital to the lives of so many Americans.
    “””

    More recently, I got an email from her office with a multiple choice survey. It basically said, “since we all know we have to cut the budget, what things do YOU think we should cut first?”. I didn’t bother to reply, I’ve already decided that this is a dead end.

    “””
    Dear Jerrit,

    Each of us is justifiably concerned about our nation’s debt and deficit. It weighs heavily on our collective well-being, and if left unaddressed, it will dim the promise of America for future generations.

    When I first came to Congress in 1993, we passed legislation that eliminated the deficit and led to a decade of budget surpluses and economic prosperity. In partnership with President Clinton, we balanced the budget for the first time since 1969, and eventually produced surpluses for four years. And in 2000, our government ran a record $230 billion surplus. But on January 20, 2009, the deficit was $485 billion and the debt was $10.6 trillion, a record debt for any Administration. Any honest assessment will point to the elective policies of two massive tax cuts and two wars waged with borrowed money as the primary reasons.

    There are many proposals circulating in Washington to address this huge challenge. I want to hear from you and have your suggestions. I hope you’ll take a few minutes to fill out this survey.

    SURVEY: CUTTING OUR NATIONAL DEBT

    If you are experiencing difficulty viewing or completing the below survey,
    please click here to view this email in your browser.
    As we recover from the recession, what aspect of our economy should Congress focus on most?
    Eliminate the Bush tax cuts for the wealthiest Americans Cut military spending
    Reduce the size of government Cut agriculture subsidies for corporate farms and ethanol producers
    Reform mandatory spending programs, including Medicare and Social Security Improve the current tax code by eliminating loopholes
    Cut subsidies and tax breaks for oil and gas companies Identify new sources of revenue
    None of the above All of the above

    *I want to stay in touch with you and continue to hear your ideas and share news about our Congressional District.
    By responding to this survey, you agree to receive periodic Congressional email updates from my office.

    I’ve voted for billions of dollars in difficult but necessary cuts in order to preserve our country’s competitiveness, while still protecting the most vulnerable. Click here to see a list of cuts. I’m committed to sponsoring and voting for sensible legislation to help our country return to sound fiscal footing.

    Please take a moment to fill out the survey so I can hear your thoughts. I’m proud to represent a Congressional District where my constituents are informed and ask serious-minded, thoughtful questions, and provide valuable feedback.
    “””

    Reply

  6. Ryan Harris says:

    Send messages to your representatives in Washington letting them know what you really think

    Reply

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