President Barack Obama's best hope of
re-election lies in provoking Republicans to force
the United States into technical default,
engineering a brief but severe financial crisis in
order to appear as crisis-manager-in-chief. The
Tea Party movement may be marching into a
political ambush, in which Obama will be able to
portray the born-again budget-cutters as
irresponsible fanatics who threaten to tip America
into a new depression. The now unpopular president
then would assume the role of national savior in
time of crisis.
What would happen if
August arrives without an increase in the US debt
ceiling? There is no good reason for a new
financial crisis to erupt. But there are bad
reasons. The standard scenario was
rehearsed July 15 on the
Financial Times' Alphaville blog, [1] which notes
that "the United States runs a monthly fiscal
deficit totaling $124bn, and that there are almost
$60bn of T-bills maturing in the two weeks after
August 2, all requiring redemption payments. (Plus
a $20bn coupon payment on August 15 - Fitch has
said this would be the trigger for restricted
default, if missed.)" Technical default is likely,
and so perhaps, as the rating agencies have
threatened, is permanent loss of America's AAA
rating.
The bigger danger lies in the
"vast role Treasuries serve as collateral - a role
which usually sees them safely locked up in the
day to day operation of the money markets, but
which we already know is vulnerable to a sell-off
- a Lehman, 2008-style margin spiral - in the
event of the debt ceiling remaining in place.
You'd hardly wait for ratings agency downgrades."
The market for repurchase agreements
(short-term loans against bonds) amounts to $4
trillion globally. If banks, hedge funds and
others who borrowed against bonds had to put up
more collateral because Treasuries were in
trouble, they would have to sell huge volumes of
securities into a falling market. That is what
happened after the Lehman failure in 2008.
Just how that might transpire is up to the
central banks. After 9/11 the central banks
offered unlimited amounts of short-term financing
against any dead cat that financial institutions
cared to offer as collateral. There are no
automatic triggers in such things: ultimately the
question of what collateral is good depends on the
say-so of the monetary authorities.
In
that event, the Obama administration would declare
an emergency, summon bankers to Washington for
crisis-management sessions, slash every form of
spending except for coupon payments on Treasuries,
and so forth. Markets would swoon over the
uncertainty. And the president would be on
television denouncing the lunatics who brought
things to this point. Congress would pass
emergency legislation, markets would snap back,
and Obama would declare himself a national savior.
Obama, meanwhile, would play the populist
against the banks, demanding tougher government
controls, consumer protection, and perhaps even
the right to dictate that banks make loans to the
Democrats' pet projects in the name of
job-creation (just as the Clinton administration
forced banks into the subprime market, supposedly
to help poor people buy homes).
No good
crisis should go to waste, Rahm Emanuel said. As
Stanley Kurtz documented in his 2011 book
Radical-in-Chief [2], Obama is a socialist
of pure pedigree, trained by socialists from his
university days and promoted by a nexus of
socialist foundations in Chicago throughout his
political career. He passed up an opportunity to
nationalize American banks in March 2009, when
Paul Krugman, Simon Johnson and other leftist
economists urged him to do so. Evidently he
thought that a compromise with Wall Street would
benefit the economy and improve his chances of
re-election. That did not pan out, and Obama has
nothing to lose by running against Wall Street. A
new financial crisis would give him the
opportunity to do so.
If I were an Obama
speechwriter, here's what I would put on the
teleprompter after a federal default, as stock
markets tanked and individuals cashed out their
money market funds:
My fellow Americans, the Republican
party has been in the pocket of the big banks
for too long. After the last Republican
administration led the country into the worst
economic crisis since the Great Depression, you
elected me to restore the balance in favor of
working people. Now the Republicans have pushed
America into yet another crisis, and again we
are faced with the danger of depression.
In consultation with the Federal Reserve
and world leaders, I have taken emergency
measures that ensure that the irresponsibility
of big financial institutions and their
Republican friends will not harm your job, your
pension or your bank account. And I am sending
Congress a set of emergency reform measures to
ensure that the banks put the needs of ordinary
people ahead of their own fat
bonuses.
The economy will continue to
bounce along the bottom, but Obama will have
someone to blame other than himself.
Senator Mitch McConnell (Republican,
Kentucky) has the right idea: put the onus on
Obama. The fact is that the American people
elected a president who occulted his leftist
proclivities, and then, with buyer's remorse,
returned a Republican House and a near-majority in
the Senate. The American political system does not
allow for a clean victory by either side: it can
produce either a crisis or a compromise. In a
crisis the executive authority holds all the aces,
because only the executive can act to alleviate
the crisis.
The Republicans, rather than
shutting down the government, should say something
like this:
President Obama has doubled the
national debt. If we do nothing, the national
debt will rise by another $3 trillion, even if
you elect a Republican president in 2012 on a
program of fiscal responsibility. You the people
elected a Republican majority in the House in
order to stop this from happening. We have
offered a workable plan to the President, but he
demands things that we know our constituents
don't want – tax increases to fund
white-elephant pet projects like high-speed
rail. He is threatening to shut down the
government in order to get a tax increase. The
trouble is that he's the president, and he can
do it. So we are offering him authority to
continue borrowing. The 2012 election will be a
referendum on this country's economic future.
It's tragic that we have to lose an opportunity
to staunch the bleeding right now, but that's
how our constitutional system works.
The Republicans would then have a
year and a half to run against Obama's
irresponsibility - his incompetent economic
management, his demands for tax increases, his
failure to address the deficit. The big problem is
restoring growth. Reducing the budget deficit
won't help much - not when the Treasury can borrow
10-year money at only 3%, and homebuyers as well
as blue-chip corporations can borrow for just a
percentage point more.
The old supply-side
magic (cutting capital gains and corporate tax
rates, for example) would help, but not in the
spectacular way that the Ronald Reagan tax cuts
helped in the early 1980s. Taking the top federal
tax rate on personal income down from 70% to 40%
made a huge difference. Back in 1984, the baby
boomers were in their 20s and 30s, not their 50s
and 60s. The US had a 10% personal savings rate
(compared to zero during most of the past 15
years), as well as a current account surplus. And
America was the world's only credible venue for
entrepreneurship, the main destination for the
world's financial as well as human capital. It's
harder to climb out of the hole today.
Obama has made things worse. His health
care program will impose heavy fines on businesses
with more than fifty-five employees that fail to
offer health care - an incentive to keep your
payroll below that number. The trillion-dollar
"fiscal stimulus" exposed the bankruptcy of the
academic Keynesians, and firing Larry Summers, the
former Harvard president who headed his economic
team for the first two years of his
administration, didn't win Obama any points.
The liberal punditeska heaps
contempt on the Tea Party as a bunch of dumb
yahoos. If they're so dumb, though, why are they
so powerful? The fact that a ragtag army of
political amateurs could overturn the status quo
in the 2010 elections shows that their unifying
issue has legs: people don't want to pay taxes to
cover budget deficits that pay outsized benefits
for other people. That's why Republicans are
crushing the public-employee unions in Wisconsin,
Minnesota, New Jersey, and other fiscal
battlefields, and why smart Democrats like New
York's Governor Andrew Cuomo have been born again
as fiscal conservatives.
But the Tea
Partiers remain amateurs, after all, and
vulnerable to sucker punch. They don't seem to
understand that the separation of powers is
designed to slow the pace of change. A Republican
administration, moreover, can't govern on the Tea
Party program. It is a protest movement, and a
valid one, but not a governing coalition. If the
Tea Party expends all its ammunition in the
debt-ceiling showdown with the President, it may
take the Republicans down with it. The winning
strategy is to keep the blame for failure on Obama
through November 2012.
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