First Debt Ceiling Rumbles

With the Republican shutdown now into its third day, and with last night’s attempt at reconciliation a total and bitter failure, the odds that the shutdown and the debt ceiling fight are rising sharply. Whilst the former is a huge nuisance and could lop about 1.0% of GDP this quarter if its doesn’t end soon, the latter is far, far more threatening. It could dwarf 2008. The problem – as ever – is that there are enough extremists in the Republican ranks to cause us to blunder over the cliff.

And I mean blunder.

So far the sane analysis seems to be that the Republican leadership, as opposed to the extremists, calculated that they would be able to extract concessions from the White House and thus keep the shutdown short, or, perhaps, avoid it all together. They saw this shutdown in the same light as the last one. If this was their calculation, and it appears it was, then it was a major error in judgement.

The point being that what they are seeking to extract this time is the total annihilation of the Obama presidency and the end of his signature legislation. To say the least this is an extraordinary expectation. To expect total capitulation by the White House to GOP extortion is both naive and stupid. It was never likely. It is an impossible request. Negotiations based on such asymmetric outcomes are called ransom demands, or hostage taking. They are not negotiations.

But the Republican leadership thought they could succeed. Worse, they sold their very excitable and extreme base on the notion that they could succeed.

Now that they have failed – so far – they are thus stuck. If they retract their extreme demands and negotiate more reasonably they appear to have crumbled and deserted their base. If they persist they run the risk of driving us all over the cliff.

Damned if they do. Damned if they don’t. Their approach is a terrible example of rotten decision making It was an epic blunder, from which there is no way back without humiliation of some sort.

In simple terms we are being held hostage to protect the egos, and political prestige, of a few men like Boehner, Ryan, and Cantor. They are placing themselves above the rest of us. This, by the way, is thus no longer an argument about the merits or demerits of health care reform – if it ever was – but is now about the political survival of a few hapless and dumb politicians.

Which is why the impasse could take a while to resolve. It may need a crisis to provide cover for a retreat “for the good of the country”. No matter that the crisis was artificially created by the very men who are in retreat.

If you follow this logic, then you arrive at the conclusion that the shutdown and the debt ceiling fight will meld and that we will default – technically – on our debt sometime two weeks from now. Then all hell breaks loose.

Thus far the stock and credit markets have been remarkably calm about the prospect. The thinking seems to be that recent history is full of Republican hostage taking and each has been resolved at the last minute with relatively little economic damage. The savagery of the sequester didn’t rock Wall Street types too much so they can ignore that instance, and focus on all the other spats instead.

But this one would be different. A debt default would slam Wall Street and any other place used to seeing the US as a safe investment haven. So Wall Street is beginning to worry that the Republicans have no way back and that the debt ceiling fight might reach crisis proportions.

The first inkling of real worry is showing up in the cost of four week Treasury bills: interest rates have started to rise as the risk of default gets more concrete. This is no panic. It is the kind of minor shift that sometimes presages a future panic.

We have had our first debt ceiling rumble.