Monday, August 1, 2011

The Banker's Calling

I love that show "Deal or No Deal."  What's not to like - a game of chance, a bevy of attractive women holding briefcases, and of course, a malevolent financier hiding behind smoke glass up in the gallery who calls with his offers depending on how the contestant is doing on his/her selection of briefcases.  Watching the machinations of our Congress and our Dear Leader over this weekend really leaves me wondering what the offer from the banker will be when he calls in.  The banker in this case is going to be Wall Street and the bond market. 11:15AM CST, how is this deal being met?  Chart on the left says down about 130+.  Moody's is also saying that all the cuts that are being talked about are insufficient to stave off a downgrade of the credit rating of the United States.

Why?  My guess is two things: first, the numbers from the economy continue to float just below Moby Dick poo-poo.  Second, this "deal" really does NOTHING except extend the debt ceiling.  If you want to read the whole bill, you can click here.  James Pethokoukis has a very fine summary which I will borrow from directly:

Ø Debt Ceiling increase in three tranches for a $2.4T total:o Immediate $400B raiseo Second $500B raise, subject to congressional disapproval (the old McConnell-Reid Plan)
o Third and final $1.5T raise, subject to congressional disapproval
Ø $917B in cuts through the Boehner Plan’s spending capsØ Special Committee of 12 Members of Congress with mandate to recommend $1.5T in deficit reduction by November 23, 2011 and Congress is required to vote on recommendations by December 23, 2011o Simple majority to pass recommendations out of committee
o Fast Track process for votes on House and Senate Floors
o Trigger/Sequester modeled after Gramm-Rudman model
§ If Special Committee can’t agree to recommendations, triggers $1.2 trillion in across-the-board cuts, half would be Defense cuts and the other half would be non-Defense cuts. Non-defense cuts would exempt Social Security and Medicaid, and only impact providers in the Medicare cuts.
Ø Balanced Budget Amendment votes on House and Senate floors

What I can't figure out is why so many MSM sources are crowing that the Tea Party won....won big!  I tend to get suspicious when they start speaking in una voce.  What victory?  The Tea Party went to Washington to fundamentally change the way we do business.  The only "victory" I see in this deal for the Tea Party is that the discussion is actually focused on cutting spending.  But the overall trajectory is not good.  Take a look at the last section of the bill that slips in another $17 Billion for Pell Grants in "higher education:"

7 Section 401(b)(7)(A)(iv) of the Higher Education Act
8 of 1965 (20 U.S.C. 1070a(b)(7)(A)(iv)) is amended—
9 (1) in subclause (II), by striking
10 ‘‘$3,183,000,000’’ and inserting ‘‘$13,183,000,000’’
11 and
12 (2) in subclause (III), by striking ‘‘$0’’ and in-
13 serting ‘‘$7,000,000,000’’

But I digress. let's start at the beginning: the baseline.  We already have the stimulus money counting toward the overall Federal Budget baseline - i.e. that's the new starting point...reduce any money spent and you have a "cut."  So that's the starting point...going forward, there are automatic increases in the budget already built in.  In Washingtonspeak, if you reduce the percentage of increase from 7% to say 5%, that's a "draconian cut in spending."  Guess where they are finding some of their savings??

This issue was a big Tea Party deal - the zero based budget approach - the same way any business or family operates.  Score?  Politics-As-Usual: 1, Tea Party: 0.

Say, when do the cuts begin?  2013.  When does the debt ceiling rise? Now.   P-A-U: 2, TP: 0.

How about that Balanced Budget Amendment?  It gets a vote on the House floor and the Senate floor...sometime after September 30, 2011.  We already know that Reid and the boys will kill this in the Senate and it's already passed in the House.  I put this in the Pyrrhic Victory category.  P-A-U: 2, TP: 1/2.

Taxes?  The media is yelling that there are no taxes - a massive victory for the Tea Party and a humiliating loss for Obama.  But, when you consider that the Bush Tax Cuts will be deemed a "cost" of $5 Trillion by the Congressional Budget Office.  The Bush Tax Cuts expire at the end of 2012...their chance of survival in the face of hate-the-rich demagoguery and a growing maw of Federal debt?  Not good.  So, therefore, I would submit that taxes are very much part of this deal.  Further, there is no assurance that this "super committee" wouldn't suddenly show up with a "revenue enhancement" scheme that is nothing more than a tax increase.  P-A-U: 3, TP: 1/2

The biggest loser in all of this is the military.  They are already shouldering the burden of the cuts to date...BUT if there is no agreement in the super committee, automatic cuts kick in, 50% of them from the Defense Budget.    As Heritage is reporting, this gives the Democrats on the super committee enormous leverage - "vote for our tax hikes or we gut the Military."  Strong defense is a core value of the conservative movement - did I mention we are in two and a half wars already? P-A-U: 4, TP: 1/2

Defense represents 5.2% of GDP today - an historic low.  Entitlements are now over 10% of GDP.  This deal does NOTHING to entitlements.  In short, your humble Rumbler scores this as a serious loss.

In any negotiation, there are "deal points" that can be horse-traded.  As I have written on these pages several times before, "compromise" when the fate of the nation hangs in the balance is unconscionable.  Here are the basic deal points that I saw were on the table on Friday:

1. Timing - Obama and the Dems were frenetic to not have this debate again anytime soon.  Their objective was to get this out past the 2012 election.   If their spending is so wonderful, why would you not want to have this debate?

2. Debt Ceiling - O and the boys were scaring the hell out of everyone that if we didn't get an increase in the debt ceiling, the world as we know it would end.  A nominal increase of the debt ceiling could have been engineered, although I was in favor of calling the bluff.  After all, the debt ceiling really expired last May - as we have written on these pages, and the Treasury has been raiding civil servant pension funds to pay the bills.

3. Cuts - how many and when?  We now know the architecture of this deal.  I was in favor of a big compromise that said for every $1 increase in the debt ceiling there would have to be $1.50 in real cuts.

4. The Baseline - we've talked about this up above, but I felt that was a key deal point that should have been negotiating.

5. Tax reform - fundamental tax reform.  This was a chance to raise this issue...butkus.

6. Balanced Budget Amendment - we got a won't pass.

By the Rumbler standard, this deal, as it currently stands, is very bad and we need to pray that the thin red line in the House of Representatives can hold.

Rumble on!

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