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Monday, January 14, 2013 5:31 PM

Obama "No Ransom For Crashing Economy"; Republicans Threaten Default; Things Progressing Right on Cue

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I am pleased to report the debt-limit charade is progressing in order, right on cue, perhaps slightly ahead of schedule.

In Trillion Dollar Coin Idea Dies Sudden Death; Treasury, Fed Oppose Using Platinum Coin; Republican Strategy I proposed this seven-stage sequence of events.

Politics of the Debate

  1. Obama will chastise Congress with talk of financial Armageddon if Congress does not raise the debt ceiling.
  2. Congress will pretend to hold the president hostage
  3. The secretary of the Treasury will get into the act with its own version of the default debate
  4. Perhaps a few payments on non-critical budget items will be temporarily skipped
  5. Wall Street will feign panic
  6. Constituents will pressure Congress to approve a new debt ceiling
  7. Congress will raise the ceiling with another useless warning about next time

Obama Chastises Congress With Talk of Financial Armageddon

Exhibit 1A: Bloomberg reports Obama: No `Ransom’ for Debt Ceiling
“The issue here is whether or not America pays its bills,” Obama said. “We are not a deadbeat nation.”

He also issued a warning about the potential tactics that House Republicans in particular are discussing, including demanding a new round of spending cuts attached to each incremental increase in the debt ceiling.

“They will not collect a ransom for not crashing the American economy,” Obama said.
Increase the Debt Ceiling or Else

Exhibit 1B: CNBC reports Obama: Congress Must Increase Debt Ceiling or Else
President Barack Obama warned Congress on Monday that it must raise the debt ceiling or risk a "self-inflicted wound on the economy." Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner also delivered ominous calls for action.

"We've got to stop lurching from crisis to crisis to crisis," Obama told reporters at the White House in the last news conference of his first term.

Hours later, Geithner said in a letter to Congress that even a brief default would be "terribly damaging." And Bernanke said "we're not out of the woods yet," despite the deal to avoid the "fiscal cliff."
Congress Pretends to Hold the President Hostage

Exhibit 2: Politico reports House GOP 'Seriously Entertaining' Debt Default Idea
House Republicans are seriously entertaining dramatic steps, including default or shutting down the government, to force President Barack Obama to finally cut spending by the end of March.

The idea of allowing the country to default by refusing to increase the debt limit is getting more widespread and serious traction among House Republicans than people realize, though GOP leaders think shutting down the government is the much more likely outcome of the spending fights this winter.

“I think it is possible that we would shut down the government to make sure President Obama understands that we’re serious,” House Republican Conference Chairwoman Cathy McMorris Rodgers of Washington state told us. “We always talk about whether or not we’re going to kick the can down the road. I think the mood is that we’ve come to the end of the road.”

GOP officials said more than half of their members are prepared to allow default unless Obama agrees to dramatic cuts he has repeatedly said he opposes. Many more members, including some party leaders, are prepared to shut down the government to make their point. House Speaker John Boehner “may need a shutdown just to get it out of their system,” said a top GOP leadership adviser. “We might need to do that for member-management purposes — so they have an endgame and can show their constituents they’re fighting.”
Secretary of Treasury Gets Into the Act

Exhibit 3A: Bloomberg reports Geithner Says Debt Limit Measures May Run Out by Mid-February
U.S. Treasury Secretary Timothy F. Geithner said so-called extraordinary measures the Obama administration is taking to avoid breaching the federal debt ceiling would work only until mid-February to early March and warned that a failure by Congress to raise the limit could “impose severe economic hardship” on the country.

“Congress should act as early as possible to extend normal borrowing authority in order to avoid the risk of default and any interruption in payments,” Geithner said in a letter today to House Speaker John Boehner and other congressional leaders. The letter was released by the Treasury Department.
Fed Gets Into the Act

Apologies offered for not explicitly naming the Fed as point 4 of an 8-point scenario. Instead I offer the Fed as exhibit 3B, lumping the Fed and Treasury together.

Exhibit 3B: Bernanke Says 'We're Not Out of the Woods' Despite 'Fiscal Cliff' Deal
Although the "fiscal cliff" deal made "some progress" in resolving the nation's debt problem, "we're not out of the woods yet," Federal Reserve Chairman Ben Bernanke said Monday.

"We are approaching a number of other fiscal critical watersheds," Bernanke told the University of Michigan's Gerald R. Ford School of Public Policy. "We have the funding of the government, we have the so called sequester…and we have the infamous debt ceiling which will come into play."

Echoing comments made earlier in the day by President Barack Obama, Bernanke said raising the debt ceiling merely gives the government the ability to pay its existing bills.

"It doesn't create new deficits, it doesn't create new spending," he said. He said it was like a family deciding that to save money, it won't pay its credit card bill.
Progress or Lies?

Bernanke states that "some progress" has been made. While technically true, it's rather like removing one grain of sand from the Sahara Desert on a mission to remove all the sand, calling the effort "progress".

Clearly we are proceeding along the lines of my 7-point scenario. However, things are a bit ahead of schedule.

What to Expect Next

Allegedly, money will not run out until mid-February. So there is plenty of time for Obama to get back into the act, Republicans to reiterate "we really mean it" when they don't, and for the Treasury, the Fed, and Obama to preach more financial Armageddon talk.

Somewhere along the line, Wall Street will feign panic over the mess. You can also put into the bank another Obama Twitter campaign, with Obama telling everyone to "Tweet" about irresponsible Republicans. Also expect an Obama initiated Email campaign telling constituents to call or Email Congress demanding action.

I do expect Republicans to hold out until pressure from constituents comes in and Wall Street has a hissy fit (which could be as little as 50 points on the S&P).

Eventually, Republicans will cave in with some announced "compromise" to cut some trivial amount from the budget, with promises to negotiate harder next time.

Both sides will declare victory.

Why bother?

Mike "Mish" Shedlock

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