As usual, the high-powered Wall Street attorney called in late afternoon – early evening back there. Everyone should have a good friend who knows all there is to know about Wall Street and the arcane ins-and-outs of securities law too, and who also knows all the key players. CNBC just won’t cut it – Larry Kudlow and Jim Cramer are useless, and over on the Fox Business Channel, Lou Dobbs is a joke – just an old crank. It’s best to have a friend on the inside. How are the people on Wall Street, in the trenches, or what passes for trenches there, reacting to the government shutdown, now in its fifteenth day, and the real possibility that the United States will default on its debts? What happens when no one will accept US Treasuries as collateral on any transaction, because the one sure thing isn’t so sure anymore? Are they worried?
It seems they’re not happy – somewhere between extremely depressed and apoplectic was the word from back east. Apparently they’ve been telling each other that Congress couldn’t be stupid enough to force the United States into default, assuring worldwide economic collapse. Obamacare, even if the Republicans think that it’s stupid and evil, isn’t worth it, and House Speaker John Boehner had been saying for weeks and weeks that there will be no default – he simply won’t let that happen. The folks on Wall Street are beginning to realize they’d been wrong. Congress is that stupid, or, to be charitable, that dysfunctional – there are worse things than being stupid. So, after the usual chit-chat about family and friends, the high-powered Wall Street attorney asked what was happening in the world – it’s impossible to follow the news when you’re tied up with Dodd Frank Act section 926 which has now become Rule 506(d), both of which deal with bad-actor disqualification from the use of Regulation D, promulgated under Section 4(2) which are preempted from state regulation under Section 18, both of the Securities Act of 1933, as amended.
What? Ah well, such things do keep you from following the back-and-forth down in Washington, so the high-powered Wall Street attorney did have to ask. He didn’t like what he heard, and he had a simple response. We’re screwed.
We are. He called on the day all hope died:
With the federal government on the brink of a default, a House Republican effort to end the shutdown and extend the Treasury’s borrowing authority collapsed Tuesday night as a major credit agency warned that the United States was on the verge of a costly ratings downgrade.
After the failure of the House Republican leadership to find enough support for its latest proposal to end the fiscal crisis, the Senate’s Democratic and Republican leaders immediately restarted negotiations to find a bipartisan path forward. A spokesman for Senator Harry Reid of Nevada, the majority leader, said Mr. Reid was “optimistic that an agreement is within reach” with Senator Mitch McConnell of Kentucky, the Republican leader.
With so little time left, chances rose that a resolution would not be approved by Congress and sent to President Obama before Thursday, when the government is left with only its cash on hand to pay the nation’s bills.
“It’s very, very serious,” warned Senator John McCain, Republican of Arizona. “Republicans have to understand we have lost this battle, as I predicted weeks ago, that we would not be able to win because we were demanding something that was not achievable.”
Well, yes, but the blow-by-blow was fascinating, as while the Senate deal to resolve everything was in the works, there was this early morning story:
Sen. Ted Cruz met with roughly 15 to 20 House Republicans for around two hours late Monday night at the Capitol Hill watering hole Tortilla Coast.
The group appeared to be talking strategy about how they should respond to a tentative Senate deal to reopen the government and raise the debt ceiling without addressing Obamacare in a substantive way, according to sources who witnessed the gathering. The Texas Republican senator and many of the House Republicans in attendance had insisted on including amendments aimed at dismantling Obamacare in the continuing resolution that was intended to avert the current shutdown.
Sources said the House Republicans, meeting in the basement of Tortilla Coast with Cruz, were some of the most conservative in the House: Reps. Louie Gohmert of Texas, Steve King of Iowa, Jim Jordan of Ohio, Tom Cotton of Arkansas, Raúl R. Labrador of Idaho, Steve Southerland II of Florida, Mark Meadows of North Carolina and Justin Amash of Michigan. The group is a collection of members who have often given leadership headaches in recent years by opposing both compromise measures as well as packages crafted by fellow Republicans. And, it seems, leadership unwittingly became aware of the meet-up.
Yep, the new Senator from Texas met secretly with the House Tea Party guys, to coach them on how to defy their own speaker, and keep the government shut down and force a default unless Obama caved and pretty much dismantled the Affordable Care Act. Cruz thinks Boehner is a fool, or a squish as he puts it. The Republican civil war continues. The rest of us can just watch.
Fifteen minutes later there was this:
The Senate’s Republican caucus is scheduled to meet at 11 a.m. Tuesday to consider an emerging deal to raise the federal debt limit and end the two-week-old government shutdown, just days before the Treasury Department exhausts its ability to borrow.
The agreement – which, if finalized, could be formally presented on the Senate floor as soon as Tuesday afternoon – would extend the Treasury Department’s borrowing authority until Feb. 7, reopen the government and fund federal agencies through mid-January, according to aides and lawmakers familiar with the negotiations.
In the meantime, policymakers would launch a new round of talks over broader budget issues in hopes of developing a plan to replace deep automatic spending cuts known as the sequester before Jan. 15. That is when the next round of sequester cuts is scheduled to slice an additional $20 billion out of agency budgets, primarily from the Pentagon.
The Senate, sensing something odd was going on in the House, went back to work on their own agreement, with the issue being sequestration, not Obamacare. The Senate and the House were on two different planets, and then it got complicated:
Initially, Mr. Boehner proposed a bill to reopen the government until Jan. 15, extend the debt ceiling until Feb. 7, delay a tax on medical devices two years and deny members of Congress, the president, the vice president and White House political appointees taxpayer subsidies to help buy insurance on President Obama’s health insurance exchanges.
“We’re trying to find a way forward in a bipartisan way that would continue to provide fairness to the American people under Obamacare,” Mr. Boehner said as he acknowledged “there are a lot of opinions” among his rambunctious members.
By Tuesday afternoon, House Republican leaders were back with a new proposal to fund the government through Dec. 15, extend the debt ceiling into February and deprive not only lawmakers but all their staff members of employer assistance to buy their health care. By extending that provision to staff members, Republican leaders hoped to appeal to its far-right flank, but it angered more moderate Republicans and was not enough for the conservative hard core.
Complicating the speaker’s task, Heritage Action, the conservative Heritage Foundation’s political arm, which wields great influence with the most conservative elements of the Republican Party, opposed the plan.
“I think there’s always hope there can be a final package I can vote on, but this is not the one,” said Representative Ted Yoho, Republican of Florida, as he and two other Tea Party conservatives left the speaker’s office.
In short, Boehner proposed a bill that would solve everything, and couldn’t find enough votes in his own party to pass it, so he withdrew it, and a few hours later came up with something different, and more severe, and Heritage Action announced that any Republican who voted for even that one would face the wrath of the Heritage Foundation – they’d fund someone with real principles to run against them and anyone who voted yes in the second bill would find themselves out of politics next time around, because they have very deep pockets. Boehner gave up. No one would vote on anything. They all went home for the night.
It’s clear they won’t vote for any forget-Obamacare Senate bill, and there was this mid-day report:
It sounds like the White House is not on-board with the House GOP’s proposed changes to the Senate package. In a statement, White House spokeswoman Amy Brundage labels the House’s proposal another “ransom.”
“The president has said repeatedly that members of Congress don’t get to demand ransom for fulfilling their basic responsibilities to pass a budget and pay the nation’s bills. Unfortunately, the latest proposal from House Republicans does just that in a partisan attempt to appease a small group of Tea Party Republicans who forced the government shutdown in the first place,” Brundage said. “Democrats and Republicans in the Senate have been working in a bipartisan, good-faith effort to end the manufactured crises that have already harmed American families and business owners. With only a couple days remaining until the United States exhausts its borrowing authority, it’s time for the House to do the same.”
They won’t. They can’t. We’re screwed. The emerging Senate deal looks fine – but Ted Cruz will find another restaurant basement for his secret meetings with his House acolytes, and the Heritage Foundation does have very deep pockets, although John Cole offers this:
Has anyone told the teatards we will never be able to cut taxes again for their sugar daddies once we lose our AAA rating and reserve currency status because our interest rates will explode and we will end up spending trillions servicing our debt and every single American will have higher interest rates on EVERYTHING they do?
Hell, that’s math shit. Someone tell them if they do this we won’t have the money to bomb brown people. They’ll understand that.
Maybe they’d understand that, but it hardly matters, now, as Felix Salmon notes that the damage is already done:
The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive. These things aren’t as bad now as they would be if we actually got to a point of payment default. …
While debt default is undoubtedly the worst of all possible worlds, then, the bonkers-level of Washington dysfunction on display right now is nearly as bad. Every day that goes past is a day where trust and faith in the US government is evaporating – and once it has evaporated, it will never return. The Republicans in the House have already managed to inflict significant, lasting damage to the US and the global economy – even if they were to pass a completely clean bill tomorrow morning, which they won’t. The default has already started, and is already causing real harm. The only question is how much worse it’s going to get.
That’s a good question, so see this:
China has become shrill in its criticism of the fiscal train wreck in the United States, arguing that the answer to a potential government default is to begin creating a “de-Americanized world.” Beijing’s alarm is understandable, given that it is the world’s largest investor in American public debt, with at least $1.3 trillion in holdings.
But China does not have many options beyond wringing its hands. Despite its efforts to steer its economy away from exports and toward domestic demand, China generates billions of dollars of excess cash that it needs to park somewhere. And for all the chaos in Washington, Treasury bonds remain a safer investment than most of the alternatives.
That dependence may help explain the stridency of a recent commentary published by the official Xinhua news agency. It called for the replacement of the dollar as the world’s reserve currency “so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”
There’s this too:
Wall Street firms and their clients, for instance, borrow trillions of dollars through the so-called repo market. In this market, large investment banks borrow for very short periods from investors with spare cash, pledging assets like Treasuries as collateral for the loan. They use the market to finance the purchase of securities.
In 2008, the repo market froze. The Fed rushed in to support the market with enormous credit lines to banks. Since then, regulators have introduced measures to strengthen the repo market, but they say they want to do more.
Treasuries back one-third of all transactions done in the $2 trillion repo market that brokers use the most. A violent sell-off in Treasuries could reduce the value of the collateral that brokerage firms use in repo, making it difficult for them to do business.
If the repo system was impaired, it would be “very dangerous for the largest dealers because they might be unable to find financing for their securities,” said Darrell Duffie, a professor of finance at Stanford.
One often-identified flaw in the repo market is that it depends on cash provided by money market funds, the investment vehicles that individuals often think of as safe places to park their cash. The mutual fund industry has taken steps to gird the money funds. Even so, regulators continue to press for further measures.
The threat of small losses in the money market funds – perhaps from defaulted Treasuries – could prompt many investors to withdraw their money.
“Even if the funds do prepare themselves, they can’t control it if their customers are pulling money out of the funds,” said Scott Skyrm, a former Wall Street trader who writes a blog on the repo market.
Bank runs and bank failures are coming to a town near you! Brokerage firms will simply shut down too, and Andrew Sullivan is pretty exasperated:
What is being undermined is America’s central place in the global economy. To dislodge the US from that because the GOP lost the last election is so out of proportion with any conceivable gains even hostage-takers and blackmailers could get it is almost the definition of insanity. I once wrote an essay on the degeneracy of American conservatism – about 15 years ago – which I called “Going Down Screaming.” But what this rogue faction of fanatics is doing is bringing us all down screaming. They are not negotiating. They are sabotaging their own country – except it’s clear to me at least that this is not how they see it.
That’s the problem:
They are sabotaging what they regard as someone else’s country – the country that voted for Obama twice, that gave the popular vote majority in the House to Democrats, that gave the Senate to the Democrats, that has a majority for marriage equality, that desperately needs immigration reform, and that, in any long-term fiscal Grand Bargain, must have more revenues for any deal to work.
Sullivan appeals to history:
That’s why I come back to the analogy of a cold civil war – the reluctance of the South to pay the debts of the nation which led to the 14th Amendment’s guarantee of the national debt. It seems to me that if the House GOP really does intend to destroy the American and global economy, to throw millions out of work, to make our debt problem far worse in a new depression … just to make a point about Obamacare, then at some point, Obama, like Lincoln, must preserve the republic.
But no president should ever want to take that position – because it represents the collapse of the American polity.
But we are in collapse. If the House pushes the country into default this week, there is no workable American polity left. The most basic forms of collective responsibility will have been forsaken for almost pathological ideological purism and cultural revolt.
In short, we’re screwed, on a fundamental level, as Michael P. Lynch explains here:
Here’s the question we should be asking ourselves right now: What next?
Even if the immediate crises – the partial shutdown and the looming debt default – are resolved, we will still be living in a dangerous political moment. The danger in question is because of the recent emergence of a political philosophy – and I mean that in the loosest sense – which threatens to unravel our joint commitment to a common democratic enterprise.
To make his point, Lynch cites John Tamny at Forbes.com with this – “It quite simply must be asked, what the point of the Republican Party is if it’s not regularly shutting down the federal government?” Tamny is fine with that, as “shutdown should be a part of the GOP’s readily unsheathed arsenal of weapons meant to always be shrinking the size and scope of our economy-asphyxiating federal government.”
Lynch isn’t fine with that:
It is tempting to call this “crazy talk” and unserious bluster. But it is serious, and it shows that some people are thinking about what happens next. It is a plan that represents the logical limit of the views now being entertained on the radical right, not just in the dark corners of the Internet, but in the sunlight of mainstream forums. After all, if the government is the problem, shutting it down is a logical solution. So rather than dismissing this idea, we should confront it. And we can begin to do so by asking a simple question: What are the consequences of this strategy – one that urges us to explicitly pull out of a shared contract of governance?
Lynch sees two consequences:
The first concerns the social contract itself. It was Thomas Hobbes who most famously argued that our political obligations to one another are based on an implicit agreement – a contract that develops out of the idea that if we act as a body, and put aside some of our personal interests in the interests of that body, we are all better off.
The contemporary philosopher Margaret Gilbert has argued that this is an extension of an even more basic idea that social groups – including political societies – exist as a result of what she calls “joint commitments” by those who constitute them. … Often we express our willingness to act together only implicitly… but however individuals express their readiness to jointly commit, their expression must be common knowledge to all: it must be something that is so taken for granted in the sense that everyone, or most everyone, knows that everyone else knows about it. Without that common knowledge, we won’t regard ourselves as being in this all together. That is – once I think that not everyone is committed – then I may stop feeling committed as well.
Now, you might doubt how many joint commitments we really make in the political sphere. Contracts involve consent and few of us consent – implicitly or otherwise – to most of what our government does. (David Hume dismissed the social contract view as akin to saying that if I was drugged and smuggled about a ship, I still “implicitly consent” to being under the authority of the captain – something Hume found ridiculous).
But even if the social contract idea is wrong as a theory of specific political obligations generally, it is helpful on one point at least. It is hard to imagine a functioning democratic institution most of whose members, at least, aren’t jointly committed to keeping the democracy running even when there is disagreement over which direction it should travel.
Yes, Lynch is a professor of philosophy at the University of Connecticut, but this is pretty simple stuff, and that’s the problem:
Now it is very possible – I think in fact, very likely – that many Tea Party conservatives don’t see themselves as being in the same boat with the rest of us. They don’t want to engage in a social contract with “those people” – people who might need the government’s help to procure health care, for example. And that can lead to the idea that Tamny seems to have embraced: regular shutdowns are the best way to limit not only the size of the federal government but also the scope of obligations we have to one another. Of course, it is also true that many conservatives don’t want to go this far. But if so, then they would be wise to realize that the “regular shutdown” strategy has a second consequence – one that follows on the heels of the first.
That second consequence is that the unraveling of our joint commitments isn’t going to end the federal government. What it threatens to do is to alter the remaining democratic fibers of that institution. Shutdowns are a failure of governance, and even short ones weaken the legislative branch, the branch that is most directly linked, as its members like to say, to the will of the people. But there are other branches of government, including of course, the executive branch, and the growing (and increasingly independent) apparatus of the security state. The National Security Agency doesn’t just disappear when the Congress grinds to a halt.
Should shutdowns, debt-ceiling fights, and the radical political legislative gridlock they represent, really become a fixture of American political life, it will be more tempting, more reasonable, to think that someone should “step in” to make the decisions.
That pretty much ends our democracy, and we’re getting there. The high-powered Wall Street attorney asked what happened down in Washington today, while he was busy with other matters. That’s what happened. The Republicans went to all-out war with each other and then Fitch put the United States on notice for a possible downgrade. We keep our AAA rating, the highest possible grade, but we’re now on “rating watch negative” with the real possibility of a downgrade:
Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a United States default.
They were being kind. They continue to believe that the debt ceiling will be raised soon. Why? We hardly have a working government anymore, and many, who call themselves the true patriots, are fine with that. They just sort of want to end America, so we’re all free, or something. The next time the high-powered Wall Street attorney calls and asks what’s been happening in the world a quick answer would be best. You really don’t want to know.