When we last saw our hero Captain America, he was explaining how even he couldn't help to solve the nation's debt crisis. We rejoin him here dealing with a caller to the debt-crisis hotline.
Caller: Are we going to default?
CA: Not yet.
Caller: Is that all you’ve got?
CA: I have a shield and a cool uniform, and that’s more than President Obama and Congress have on the debt ceiling.
Caller: A lot of good that does. Don’t you care about the stock market, interest rates, unemployment, and a weak economy that could get worse if they don’t solve this?
CA: Of course I do. But I explain. Politicians and voters who elect them solve.
Caller: Can you explain Republican Sen. Mitch McConnell’s plan? I just heard about it on the radio.
CA: It’s not the solution, but in a nutshell it gives Obama an immediate increase in the debt ceiling to avoid a default. All he has to do is agree, up front, that increases in the debt ceiling must be accompanied by spending cuts, not tax increases. And he’s got to put his spending cuts in writing—dollar for dollar—for each debt ceiling increase: $700 billion, then $900 billion, and then another $900 billion.
Caller: What good would that do?
CA: On policy, it would avoid default. On politics, Republicans could vote against raising the debt ceiling but not stop it from happening. Plus, a list of Obama spending cuts, McConnell senses, would open up divisions among Democrats.
Caller: Why do conservatives hate it?
CA: Three reasons. 1) It was a surprise, and conservatives hate surprises. 2) It reeks of capitulation and revives all the conservative trauma of the GOP buckling under to Clinton during the second government shutdown (see Bob Dole: trauma, conservatives). 3) It’s political when conservatives want a policy showdown on spending cuts now.
Caller: Does it have a chance in the House?
CA: Nope.
Caller: So, it’s too cute by half?
CA: Mostly, but not entirely. McConnell knew he would catch hell. The biggest takeaway is this: The August 2 deadline is real, and the business community is starting to get nervous about default.
Caller: But the bond markets remain calm. Treasury yields are still low.
CA: Look beneath the surface. Treasury is now getting blowback on bonds that mature in mid- to late August. Businesses and banks are reluctant to take collateral that matures right after August 2. It’s a subtle signal, but it matters.
Caller: I saw the White House said it can’t guarantee Social Security checks will go out. That has my parents a bit freaked, although they don’t use that word.
CA: Those checks will go out. The White House just can’t guarantee all checks will go out if there is a default. The bigger issue is $87 billion in bonds that mature on August 4. It might be hard to reissue or finance that debt in a default scenario. That could send real-time tremors through the bond markets.
Caller: What would that mean?
CA: Hard to know. But let’s remember how the downfall of Lehman Brothers changed market psychology. It introduced a new, unpredictable dimension of worry about volatility. Markets now operate, psychologically, more on the side of assume-the-worst than they did before.
Caller: This bond talk makes my head hurt. Can we get back to politics?
CA: Because that doesn’t cause headaches.
Caller: What choice do I have? What can pass right now?
CA: Nothing. House Republicans are dug in. They had a big meeting on Tuesday, and Obama’s “eat your peas” message about $4 trillion in spending cuts has made the rank and file demand more cuts.
Caller: I don’t understand. I thought House Republicans walked away from a $4 trillion deal?
CA: There was never a $4 trillion deal. There isn’t even a $2 trillion deal. And until somebody puts details on paper, there won’t be a $1 trillion deal.
Caller: I’ll get to that in a minute. Why did Obama’s talking about eating peas get House Republicans riled up?
CA: Because they don’t want to be to the left of Obama on spending cuts. If he’s for at least $3 trillion in cuts, they want to be for $4 trillion, with, of course, no tax increases.
Caller: Is Obama really for Social Security and Medicare cuts?
CA: He says he is. But he won’t disclose them, and the biggest defenders of both programs—House Minority Leader Nancy Pelosi and Senate Majority Leader Harry Reid—don’t appear the least bit alarmed.
Caller: Well, I am getting alarmed. Can I ask when the posturing and positioning will end and when the outlines of a deal will emerge?
CA: Every indication is the size and scope of the deal is shrinking by the day. It seems hardly coincidental that McConnell chose the figure $700 billion for the first tranche of debt-ceiling relief. A deal like that with mostly spending cuts and some user fees and closed loopholes would take a couple of days to write and about 10 to 12 days of working straight through to pass.
Caller: That means July 19.
CA: Yep.
Caller: Isn’t that the deadline for the NFL labor talks, too?
CA: Preserve an economy, preserve its favorite sport. Not bad for a day’s work.
This article appears in the July 13, 2011, edition of National Journal Daily.
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