Tools in the Kit Singing All The Way Over The Cliff

LemmingsThe Lyrics: Download your Tea Party Toolkit today! If you download the package you can keep score, for example, checking to see if your Congressional Representative is hewing to the T’Party line?  [full “kit” in PDF] Here’s a sample, check for conformance with the Toolkit Talking Points:

#1. Is your Representative or Senator parroting this talking point? “Our nation simply cannot afford Obamacare. The new law adds trillions to our nation’s debt.”   By the way… it doesn’t. It’s the repeal that would costs us about $109 billion. [CBO, cbs]

#2. Is your Representative saying, “Obamacare’s mandates and regulations are already driving up health insurance costs?” If so, he or she is marching to the Tea Party drummers.

#3. Heard this lately in some rephrased form?  “Obamacare gives bureaucrats and other unelected officials in Washington, DC too much power. The law creates more than 150 new agencies, boards, and commissions made up of unelected people who are not accountable to us! Furthermore, the law grants hundreds of new powers and authorities to the Secretary of Health and Human Services.”  This talking point has is the progeny of the Obamacare (ACA) is socialized medicine narrative.  [Debunked here]

And, the talking points continue, forming a jaunty marching song as we head toward the latest fiscal cliff.

The March:  … to the tune of “We have to defund Obamacare and We Don’t Care Who We Scare.”  The people who ought to be terrorized by the inanities coming from the radical right are people who work with money for a living.   The Financial Services Forum members are already alarmed:

“There’s a consensus that we shouldn’t do anything that hurts this recovery,” Blankfein said as he left the White House. “They shouldn’t use the threat of causing the U.S. to fail on its obligations to repay its debt as a cudgel.” [BloombergNews]

Undaunted, the Tea Party enthusiasts march on, creating an interesting collection of economic illiterates who have decided that launching the nation over the fiscal cliff isn’t all that perturbing.  Gee willikers, it’s not going to be any worse than a ride on the Big Twister Rush and Roll at the Six Flags Magic Kingdom Mountain.   Not. So. Fast.

The concoction used by the Default Deniers boils down to prioritization.  We can, they allege, use the money coming in to pay off the bonds, and keep the government rolling merrily along.  Matthew Yglesias makes quick work of this canard. Prioritization is illegal, impossible, ill timed, and doesn’t solve the problem.  [see also: Yglesias/Slate]  This is why the Financial Services Forum is upset, and why the American Banker was moved to post this article:

“Their concern primarily centers on a key fact: Treasury bonds do more than fund the government; they buttress the financial system. Bankers warn that a default on certain Treasuries could put market collateral at risk, harm overnight lending and drain key sources of liquidity from the market.

“All of the consequences of an actual default are just severe and unfathomable and unthinkable,” said Rob Nichols, the president and chief executive officer of the Financial Services Forum. “If we were to default on our debt, that would probably spook investors, which would dry up overnight lending. You would imagine that accompanying that sort of event, we would be downgraded, which probably would lead to a sharp spike in rates, which would have its own drag on the economy.” (emphasis added)

So, why would anyone deliberately spook investors, risk collateral, overnight lending, liquidity, ratings downgrades, and  spiking rates?

The Marchers:  Tea Party adherents include those who are not happy with banks and bankers.  Many come from the “No Bail Out” crowd, to whom Senator Dean “I Voted Against The Bailout” Heller (R-NV) has been known to pander while also voting to diminish the regulatory constraints of the Dodd Frank Act.   The “march” may be seen as a national rendition of what played out in the recent Nevada GOP convention wherein an ultra-conservative kept his chairmanship with the assistance of ultra-conservative rural delegates who were not enamored of the Money Men.

The good news for Democrats could be that the latest version of diving over the fiscal cliff illuminates and further separates the tenuous alliance of social conservatives and Wall Street finance supporters.  The bad news is that the social conservatives don’t care.  They seem perfectly pleased to continue uttering their downloaded talking points, (video) while the moneyed interests fret and fidget over the state of their positions.  Marching blindly also means overlooking the obvious.

Prioritization is Currently Impossible

David Walker, former U.S. comptroller, and long time debt-hawk, explains why “prioritization” isn’t a solution:

In theory you could prioritize your payments.  And in theory, if your accounting system were adequate, you could use whatever cash you have to be able to pay interest on the debt as a top priority,” Walker says. “The problem is that the federal government’s accounting systems are so bad that they don’t have enough transparency to be able to differentiate the payments.” […]
“Unlike the continuing resolution, the debt ceiling is much more significant,” Walker warns. “You would have to suspend payments, you would have to do things that would be felt.” Among the things that would be felt, Walker says, are Social Security disability payments, scheduled for November 1, and retirees’ payments, which are scheduled for November 13. “Not having 35 to 40 million payments go out on time, believe me, that is not an acceptable outcome.” (emphasis added)

And, therein lies the problem — the rarefied theory clutched by the populist anti-bank crowd of talking point march participants doesn’t square with the realities of U.S. accounting processes and financial practice.   Well, just “fix the accounting?”  How fast would do you think we could do that, given that it has taken years to resolve rules regarding such topics as  financial services regulations? Commodity trading? Pay day lending?  Can we get that fixed before Gramma misses two years of Social Security checks?  And, is there the political will in the Congress to spend the kind of money it would take to overhaul the Treasury’s antiquated and often confusing accounting systems?

The Ah Shucks contingent in the march clings to the delusion that the government accounting systems can “turn on a dime,” and the Administration’s just talking scary to frighten people out of shutting down the government and breaking through the debt ceiling in order to “achieve” financial responsibility.   However, it’s not only the Administration and the Financial Services Forum which are “talking scary,” its the International Monetary Fund too:

“The assumption that the U.S. will honor all of its debts—and honor them on time—is the foundation for much of the global financial system, Bell argues. So the fundamental problem with the Republican position is that Treasury makes between 3 million and 5 million financial transactions a day, and if the federal government starts to pick and choose which it will honor, it will land the economy in chaos.

Many of the world’s leading financial experts, who are watching the slow pace of negotiations in Washington with dread, agree.

“The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy, but the entire global economy,” IMF Director Christine Lagarde said Thursday.

Indeed, while Republicans and the White House might disagree over how to define a default, the world’s markets are likely to see any missed payment as a signal of profound financial weakness in the United States, and react accordingly.”

We can translate “react accordingly” as “will tack on a risk (default) premium.”   But, but, but… We had a default in 1979 and nothing much happened?  Really?  Let’s look at that more closely, as described by Seeking Alpha:

“In fact, the U.S. Government first defaulted on its debt in 1979, when the U.S. Treasury, citing an unprecedented appetite for U.S. debt by small investors, the failure of Congress to act on April’s debt ceiling legislation, and a glitch in the Treasury Department’s word processing equipment resulted in a technical default on T-Bills maturing on April 26th, May 3rd and May 10th.

Moreover, the aftermath of this “momentary default”, in terms of the yield curve, is well known within academic cicles. Though the nominal amount was trivial (about $122 million, non-adjusted) in comparison to what was then the total U.S. Debt, the penalty was severe: A sharp increase of 0.6 percentage points (60 basis points) that triggered a persistent increase in T-bill rates that ultimately cost the American taxpayer an additional $12 billion in interest payments, as older debt was rolled over at higher rates.”

If a “momentary glitch” caused $12 billion in damages, imagine what we could do with a full on, Congressionally approved, default?  And, we haven’t even begun to speak of what could happen to money markets, OTC swaps, repos, and credit default swaps — yes, those are all still around — if we go into default.  All of those depend on Treasuries for Tier One collateral.

So, no we can’t “prioritize” in a couple of weeks, no matter how theoretically appealing that might be. Nor can we dismantle a government sponsored health insurance policy exchange already operational, even as it deals with the usual glitches and gremlins that infest large computerized systems.  Nor can we ignore what the IMF and the Financial Services Forum are trying to explain to us.

However, at the moment nothing appears to be impeding the March of Talking Point Tea Party members, blithely ignoring both the obvious features and the reality of U.S. financial markets, singing along to their lyrics carefully crafted and focus group tested,  and tramping enthusiastically toward the next fiscal cliff.

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