The clock is ticking. The US economy is tied to the railroad tracks, the train is due to arrive Tuesday 2nd August. The rescuers are dithering, arguing about tax hikes and entitlement cuts. An agreement was expected last week; now the unthinkable has become imaginable. A senate vote is scheduled for Sunday afternoon but the United States congress may well be too fractured and self-important to raise the debt ceiling in time. If they fail, how will this melodrama end?
With a whimper. The executive branch retains options should the legislature continue to be intransigent. If George W. Bush could find lawyers to legitimate torture and unprovoked war, it shouldn’t be too hard for Obama to find some that will allow him to save the economy from self-inflicted disaster. Lawyers have already constructed a variety of arguments allowing Obama to ignore Congress’s inability to raise the debt ceiling, ranging from his obligation to comply with the budget congress itself passed this year to an obscure clause in the constitution insisting that US government debts are inviolate and cannot be defaulted on by act of congress.
Other proposals include selling the Federal Reserve an option to buy government property for $2 trillion (which the Fed will allow to expire harmlessly), using that newly printed money to pay upcoming bills. The next US government bond matures on 15th August, plenty of time for a programme to be cobbled together that avoids default. So far, Obama has been timid about imposing unilateral solutions, but maybe the dangers of failure combined with the idiocy of Republican intransigence will give him courage. Let us hope.
But the debt ceiling is not America’s only self-inflicted wound. Much more likely is a downgrading of US government debt. The financial services company Standard and Poor’s, worried about budget deficits, is threatening to take away the government’s AAA rating, which many fear would raise interest rates on T-bills, thereby increasing the deficit, and slowing the economy further by raising borrowing costs throughout the economy.
Rating agencies were vital enablers during the bubble, certifying that securities constructed out of NINJA mortgages were almost risk-free. Proclaiming dubious debt as AAA, the rating agencies allowed pension fund managers and German bank executives to gain higher yield without seemingly raising their risk profile. Their bond…