Thursday, July 14, 2011

The Increasingly Negative Outlook for Resolving the US Debt Limit Crisis

Here is a bit from a post by the Calculated Risk blog:
From MarketWatch: S&P warns on U.S. debt, 50% chance of downgrade
Standard & Poor's Ratings Services said late Thursday it has placed U.S. sovereign credit ratings on watch for possible downgrade, saying the action "signals our view that, owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days."
Ezra Klein has some details on The debt deal that’s taking shape, and its drawbacks

I still think something will be worked out, but this interview with Stan Collender is a little scary. First on a meeting he had with some new representatives back in February:
What I took from that was, first, that the debt ceiling was going to be a lot more trouble than anyone realized. They did not want a negotiation there. There was a religious-like fervor on that point: Voting for the debt ceiling was a sin, and you can’t just sin a little.
And later in the interview:
EK: What do you think the chance is we see a deal before Aug. 2?

SC: Less than 50-50.

EK: What’s the scenario for that? Is it something like the talks seem like they’re going somewhere, and then whatever the negotiators come up with unexpectedly fails on the floor after the Tea Party whips on it?

SC: Something like that. In the back of my mind I keep remembering something Peter Orszag said, which was you were going to need a combination of Democrats and Republicans in the House, and the only way that vote would be acceptable for Boehner to schedule is after negative market reaction that spooks people. It’s not unlike how TARP got through. The average member of Congress has got to be sitting there saying if I don’t vote for this, it’ll be a disaster, and if I do vote for it, it’ll be a disaster. So without the negative market effect, there’s not enough pressure. But remember Bachmann is running around saying there will be no negative effect.

EK: Which suggests to me that a market reaction could have a more significant effect on the psychology of some of these members of Congress than we give it credit for. They’re not prepared for it, and if it comes, it disproves some of the assumptions they’re working with.

SC: Right. And remember the general idea on Wall Street right now is that there will be a deal because there’s always a deal. But Wall Street works off of expectations. So if the market realizes they got this wrong, the reaction could be larger than expected
The debt ceiling is not a sin. I think there will be a deal, and I sure hope Collender is wrong.
I'm becoming more convinced that Stan Collender has it right. These fools will stumble into a disaster. It is going to be like the TARP vote back in late September 2008 which Congress flubbed and the economy crashed and then the voted again and finally passed the rescue package. But by then the damage was done. I think we will see a repeat of that disaster.

I don't think the economy will completely freeze up, but I do think it will be like the recession of 1937, i.e. the GDP will drop by several point and unemployment will go up by several points and a year or two will be added to the Little Depression because the political idiocy practiced by the Republicans.

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