Fleeing the Pamplona Bulls

With real progress on the debt ceiling issue just not happening, and with time running out all sides appear to be focused on the McConnell plan as the escape hatch that will allow the U.S. Government to avoid default. The credit rating agencies, looking at the stalemate in Washington, have publicly indicated that a credit downgrade may be right around the corner. From the Wall Street Journal:

Moody’s Investors Service said it was reviewing the government’s top Aaa bond rating for a possible downgrade, citing the “rising possibility” that the government’s $14.29 trillion borrowing limit won’t be raised soon enough to prevent the U.S. from running out of money to pay its bills.

And on Friday, ratings agency Standard & Poor’s threatened to downgrade U.S. government debt from AAA, saying there is at least a 50-50 chance it will cut the top-notch rating on long-term Treasurys in the next three months. The risk of default is “small, though increasing,” S&P said Friday.

But despite warnings from the Chairman of the Federal Reserve, the Secretary of the Treasury, and most sane economists there are many Republicans in the House that just don’t want to believe it. Some have even said that a failure to act will lift our credit rating. From the Washington Post:

Rep. Mo Brooks (R-Ala.), another freshman, said that a much bigger fear was that raising the debt ceiling would enable Washington to spend itself into paralyzing debt in a few years.

“A debt-ceiling problem, as large as it is, is not anywhere near as a big or as bad as” that, Brooks said. If Aug. 2 arrives without a deal, Brooks said, the federal government could continue paying creditors. He said that a show of tough fiscal self-discipline could actually improve creditors’ confidence.

“There should be no default on August 2,” Brooks said. “In fact, our credit rating should be improved by not raising the debt ceiling.”

I am not sure what you can say to that, except WOW! Speaker Boehner certainly has his work cut out for him.

But I digress. Back to the McConnell plan, which has split Republicans badly. The Club for Growth has unleashed a new ad calling out Republicans, urging them to stand firm against raising the debt ceiling. The Club is clearly targeting the McConnell Plan. But over at the Wall Street Journal they have correctly assessed the situation, and are urging the more rabid Republicans to tone it down, and prepare for raising the ceiling.

Instead he and Mr. Geithner will gradually shut down government services, the more painful the better. The polls that now find that voters oppose a debt-limit increase will turn on a dime when Americans start learning that they won’t get Social Security checks. Republicans will then run like they’re fleeing the Pamplona bulls, and chaotic retreats are the ugliest kind. By then they might end up having to vote for a debt-limit increase and a tax increase.

The tea party/talk-radio expectations for what Republicans can accomplish over the debt-limit showdown have always been unrealistic. As former Senator Phil Gramm once told us, never take a hostage you’re not prepared to shoot. Republicans aren’t prepared to stop a debt-limit increase because the political costs are unbearable. Republicans might have played this game better, but the truth is that Mr. Obama has more cards to play.

Yup, that is about right. The Republicans who don’t know any better may have actually believed some of the rhetoric that led them to take the debt ceiling vote “as a hostage”. But McConnell and other Republican leaders understand the gravity of the situation, as well as the potential for the “destruction of the Republican brand” if Republicans force a sovereign debt default. McConnell is not quite as ready as the Club for Growth to “shoot the hostage”. We can only hope that the Republicans in the House come to their senses before they have to flee the “Pamplona Bulls”.

In terms of how the Republicans really feel about the deficit take a look at the Grover Norquist interview below. At 8:56 of that clip Norquist explains that the deficit is not an issue for Republicans, saying that borrowing $10 on a bill of $100 may be preferable to taxing for that imaginary ten-spot. For Norquist and most Republicans cutting taxes is where it is at, not cutting deficits. Norquist’s war with Republican budget hawk Tom Coburn over the issue of ending federal subsidies for ethanol illustrates that point exactly.

In the end the Republicans will raise the debt ceiling along the McConnell lines, whether the House Republicans like it or not. Lets hope they don’t do too much damage to the economy before they are forced to retreat.


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