Will Sunday Be 'Debt Deal Day' for Nation?

Analysis

 @JosephLazzaro on July 30 2011 10:53 PM

It may be the best news that institutional investors -- and typical Americans, for that matter -- have heard coming from Washington in months, perhaps years -- the debt deal talks appear to be advancing.

The White House said late Saturday that it now "strongly supports" a bill being considered in the U.S. House that incorporates both Democratic and Republican ideas and would raise the debt ceiling to early 2013. The bill would require two-thirds approval in the Republican-controlled House to pass.

"It is imperative that the United States not default on the nation's obligations," the Obama administration said in a policy statement, Reuters reported. "If the bill were presented to the president, his senior advisors would recommend that he sign it."

In addition, two other developments Saturday provided proof-positive that the tone is changing in Washington from acrimony, to "this can be done," and "we can bridge the divide."

Mild overtures like the above may not seem like much for those unfamilar with beltway-speak, but after two weeks of heated rhetoric from Democrats and Republicans that sparked concern from Paris, London, Moscow, Beijing, and Tokyo, it's an accomplishment.

A New Tone In Washington

The first development was totally unexpected: Senate Minority Leader Mitch McConnell, R-Ky., met Saturday afternoon with Vice President Joe Biden, D-Dele. -- the first conversation between the two since Wednesday, The New York Times reported Saturday night. Biden, who headed the earlier bipartisan debt talks that broke down in partisan recriminations, had four more conversations with McConnell later in the day.

The second development was more conventional, but still had to improve the spirits of every bond trader or investor who holds U.S. Government bonds. Top leaders in the Republican Party confirmed that after more than two weeks of acrimony and, arguably, the most heated rhetoric Washington has seen since the Watergate impeachment process that resulted in President Richard Nixon's resignation, they are now in serious talks with President Barack Obama to raise the debt ceiling and avoid what most Wall Street analysts and economists believe would be a credit market-contracting and economically-damaging U.S. Government default on its debt.

"We now have a level of seriousness with the right people at the table," Senate Republican leader Mitch McConnell, R-Ky., said at a news conference Saturday afternoon, where he was joined by House Speaker John Boehner, R-Ohio, Reuters reported.

Further, when asked whether the United States -- the largest and most technologically-advanced economy in the world -- would default on it debts and whether senior citizens, the U.S. Armed Forces, and federal contractors would receive their earned payments, Senate Minority Leader said a deal would occur.

"Our country is not going to default for the first time in our history -- that is not going to happen -- we now have a level of seriousness and the right people at the table that we needed and thought we had, as the Speaker indicated last week," McConnell said, thehill.com reported Saturday afternoon.

McConnell added that he is "confident and optimistic that we can get an agreement in the very near future and resolve this crisis."

Pelosi: End the 'Theatre of the Absurd'

In addition, House Minority Leader Nancy Pelosi's tone on the House floor also had the feel of part instruction, part pep rally.

In a speech broadcast by C-SPAN, Pelosi implored her fellow house members to end the "theatre of the absurd" and do what this important moment in the nation's history requires: find a compromise that avoids a tragic and damaging U.S. Government default.

At one point Pelosi appeared to be both apoplectic and inspirational.

"This is the United States of America," Pelosi said, making clear to all within her voice that the world probably would not look kindly on a nation with enormous wealth, scientific knowledge, and productive capacity defaulting, when default is totally avoidable.

Word of the first, substance, constructive development occurred after a series of political slap/slap-back that has characterized this impasse.

After the Democratic-led Senate, as expected, defeated Speaker Boehner's revised debt deal plan, in quick order, the Republican-led House, in a symbolic vote, voted down 243-173 Senate Majority Leader Harry Reid's, D-Nev., revised debt deal plan proposal, before the Senate even had a chance to vote on it.

That left Washington in a funk, and there's no mystery why: the polarized Democratic and Republican parties had spent two weeks deploying rhetoric and political postures -- achieving no substantive progress toward a bipartisan debt deal -- even as the calendar continued to wind-down toward the Aug. 2 default date.

The optimist would say 'it's always darkest before dawn.' Unfortunately, former China Leader Chairman Mao also said, "It's always darkest before it's really black."

Fortunately, for the nation, and for the electoral chances of incumbent Congressional Democrats and Republicans, and for Obama, it appears the two parties are finally ready to end the political posturing, negotiate, find common ground, and then deploy that deploy that time-honored American tradition -- compromise -- to forge a bipartisan budget deficit reduction and debt ceiling increase that will avoid the dreaded U.S. Government default.

Congress needs to raise the debt ceiling by Aug. 2, when the federal government both runs out of money and loses the authority to borrow more money.

Further a U.S.  Government default -- or even the hint of that fault -- would force institutional investors to 'price-in' the increased risk - i.e. increase the interest rate it asks to hold U.S. debt.

Further, because -- as U.S. Federal Reserve Chairman Ben Bernanke has underscored -- the U.S. Government is considered the lowest risk in the world -- those higher interest rate increases -- or increased risk -- would ripple through the financial system -- pushing up interest rates on everything from home mortgages, to car loans, to credit cards and student loans - among other destructive consequences. 

Economists also generally agree that although there's little doubt that the U.S. will one day pay its bills, a default would change the risk equation of financial instruments nearly everywhere -- something that certainly would slow global GDP growth.

Political/Public Policy Analysis: The debt deal talks' tone in Washington has improved, and it's high time, to say the least. Why did the tone improve? Two theories: 1) the two major parties finally sensed that the American people are about to say "a plague on both your houses" -- and that, historically, has led to bipartisan action;  or 2) the two major parties looked at the Tea Party and concluded, that while the Teas' can shout, condemn, obstruct, ignore, and distort, there's little in their philosophy that suggests they can govern a modern, complex society and nation.

That Obama, Reid, Pelosi, McConnell, and Boehner are now all fully-engaged, at the table, and talking substance is a "ray of light."

But let's not get ahead of ourselves: until the deal has been negotiated, passed by both chambers and signed by President Obama, nothing -- repeat nothing -- is achieved.

That said, due to the noticeable change in tone Saturday night and the substantive talks' start, we're lowering the risk barometer, on a scale of 0 to 100 percent, of the likelihood of a U.S. Government default, to 35 percent on Saturday night, 10 percentage points lower than Saturday afternoon.

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