Washington Wants to Avoid Default, but It Can't Without a Plan

With time running out, lawmakers still haven't crafted any bill that can raise the debt limit. Will they manage to pass one by Aug. 2?

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The aspirations don't match the situation.

To hear them talk, the White House and every key player on Capitol Hill wants to avoid the first-ever default in American history. That's the aspiration.

The situation is no bill exists in the House or Senate that can raise the debt ceiling above its current $14.3 trillion limit. Forget whip counts. There's nothing to whip. Every indication is the House and Senate are moving separately and willfully ignoring the peculiar politics of each chamber. A House bill is likely to be posted Monday with debate beginning Wednesday. The Senate may have its own bill by Monday as well. The chances of them being compatible are worse than Treasury issuing dollar bills made of rubber.

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The 11th-hour arrival (deus ex machina comes to mind) of debt-ceiling proposals is meant to calm markets in Asia, Europe and America. What the political class seems to under-appreciate (or miss entirely) is that traders don't traffic in spin, talking points, frameworks, outlines or executive summaries. Traders live in a cold, bloodless world of data. When there isn't any data, they look for the next best thing -- a bill, actual legislation that underling traders and trading houses can translate into data. Absent that, traders move on their own and ride the market psychology, and with other tangible, countable forces and factors.

Washington can't calm markets with talk anymore. It can only stop volatility, panic, sell-offs, higher interest rates and other market-distorting consequences by legislating. Legislating with each other. Not against each other.

Everyone knows time is running out. Even with default and a much-desired summer recess looming, the legislative process -- which produces an actual bill -- remains at a standstill.

The pity of it all isn't that bleary-eyed negotiators simply need just a few more days to iron out historic changes to the tax code and entitlement formulas.


That work ended days ago and quite probably never got a specific or granular as would be necessary to turn vaguely defined conceptual agreement into actual legislation.
What's holding the nation and its economy hostage now is politics.

The long and the short of it is the short and the long of it.

Republicans want to play short. That means extending the debt ceiling seven to eight months, holding another vote then and locking in deeper spending cuts about the time the GOP primaries and caucuses are in full roar. The economics? Republicans argue the nation has extended the debt ceiling for six months or less numerous times and shouldn't fear it now. Republicans know they moved President Obama from a demand for a "clean" (meaning no strings attached) debt ceiling to a weeks-long debate about the magnitude of deficit-reduction. Phase two.

Democrats want to play long. They want to avoid a debt ceiling debate until after the 2012 election. Obama and House congressional leaders don't want to re-litigate the nation's debt load before facing voters. If they do, the ugly contours of this debate (debtor nation adrift in a stagnant economy) are unlikely to change for the better. Plus, a short-term fix intensifies the threat of a downgrade of America's AAA bond rating - a specter that would haunt Obama and congressional Democrats right as the GOP presidential race receives maximum media coverage.

These calculations and these alone will drive the size of spending cuts. Policy no longer drives politics -- as it did during the various negotiations -- Vice President Joseph Biden's or Obama's.

Back then, Democrats fretted over what might happen to Medicare and Medicaid and if inflation calculations to Social Security benefits would acceptably increase its solvency or impose unacceptable economic hardships on the elderly and the disabled. Similarly, Republicans gnashed their teeth over tax reform and eye-crossing spread-sheet calculations of  revenue trade-offs stemming from lower individual and corporate rates and simultaneous elimination or shrinkage of tax subsidies, credits or deductions. All of this designed was to achieve a nearly-impossible-to-calculate "revenue neutrality" and maintain faith with party orthodoxy against higher taxes.

Of course, interest groups had already begun to inject politics into these policy choices even before House Speaker John Boehner (R-Ohio) pulled the plug on talks with Obama on Friday (the AFL-CIO, AARP and AFSCME began pounding Democratic Senate offices after the Gang of Six proposal was released). And grassroots conservatives were lining up against the Gang of Six as well -- Grover Norquist, Club for Growth, and Americans for Prosperity were already sounding alarm bells.

But they can all stand down. Deep policy debates are over. Policy decisions will have to be made, of course, but only after timing choices have been reconciled.

That's the situation.

The aspiration to avoid default is just that. And it's not nearly enough.