What the Stock Market Plunge Means for a Deficit Agreement

By :: August 8th, 2011

In some parallel universe, Congress and President Obama
would respond to the stock market tumble, the S&P ratings downgrade, and
growing public disgust at their toxic inaction on fiscal policy in a simple way:
They’d agree on the broad deficit reduction plan they could not settle on last
month.

The plan would include some short-term stimulus to get the
economy through its current rough patch and a mix of broad reforms in entitlements
and the tax code that would reduce future projected spending and boost
revenues.  Instead of sending reliably intransigent
mouthpieces to sit on the fiscal super committee that was created by the debt
limit agreement, the congressional leadership would use the panel as a
mechanism to reach a sensible agreement.

The odds of this happening remain, sadly, vanishingly small.

The details of such an agreement are hardly a mystery. It
would be, as Obama said in his remarks today, much like what was proposed by
his own deficit commission (the one whose recommendations he ignored for
months) and the Senate’s bipartisan gang of six. And it would be something like
what he and House Speaker John Boehner could not agree on as part of their
failed grand bargain. He might have added that it would also follow the
blueprint proposed by the Bipartisan Policy Center. We have no shortage of budget
frameworks-- all remarkably alike.

Wall Street, for all of its whining about Washington, is
hardly helping.  S&P’s downgrade, which
did little more than mix conventional political analysis with appallingly bad
math, may have embarrassed the rating agency as much as its blindness to last
decade’s mortgage mess.

In addition, the recent combination of plunging stocks
and rising Treasury bond prices is no cry for deficit reduction. Indeed,
it seems to be signaling greater fear of a double-dip recession than a government
default.

And don’t forget that Republicans refused to support a broad
fiscal deal in part because of the pressure they felt from many hedge fund partners.
Some of these heavy campaign contributors have been more interested in protecting their
own tax breaks than in fixing nation’s fiscal problems.

Still, the market’s ongoing nervousness would probably motivate Obama to come back to the table, if only he had someone to talk to.  He said today he felt a “renewed sense of  urgency” to confront the deficit. But it may take a few more days of Wall
Street ugliness before he has anybody to negotiate with.

9Comments

  1. dave  ::  10:07 pm on August 8th, 2011:

    It seems to me that conservatives and liberals at this time have no middle ground. Very much like 1860.

    My solution: fiscal secession for entitlement spending.

    Offload the Medicare, Medicaid, and Social Security programs to standalone administrations unguaranteed by the federal Treasury so that we may reclaim our credit rating.

    Then provide that each state (or perhaps certain conurbations) may elect whether to participate in a red (standalone) entitlements program or a blue one.

    The red one presumably has modest benefits, low entitlement payroll deductions, small deficits, low debt, and high credit rating (interest rate).

    The blue one, on the other hand, has high benefits and either high payroll deductions or high deficits/debt load, and poor credit.

    If democrats believe so fervently that they can outgrow their borrowings through high social spending, let them try. But be forewarned, neither the red district nor the Treausury will be permitted to bail you out. If you crash, you burn.

    But the beauty is, you give the people what they want (both parties) and require that they pay for it.

    This solution is substantially identical to saving a marriage by getting separate (and financially independent) credit cards.

  2. Vivian Darkbloom  ::  7:54 am on August 9th, 2011:

    From “The Hill.com” (May “, 2010):

    “The world’s top-earning hedge fund managers have bankrolled almost exclusively Democratic campaigns.

    The top 10 highest-paid hedge fund managers in 2009 have dished out campaign contributions almost only to Democrats.

    Over their lifetimes, those managers have given almost $33 million in campaign contributions to Democrats, according to research by the National Republican Congressional Committee (NRCC) and that is based on data maintained by the nonpartisan CQMoneyline.

    The same managers gave roughly $600,000 to Republicans, according to the research. The contributions went 98 percent to Democrats and two percent to Republicans.”

    From the Wall Street Journal (April 26, 2011)

    “Hedge-fund managers made a big bet on Barack Obama and other Democrats in 2008. Now, with the 2012 contest gearing up, some prominent fund managers have turned their backs on the party and are actively supporting Republicans.

    Overall in the 2008 congressional and presidential elections, Democrats outdrew Republicans, $1.9 billion to $1.3 billion, according to the Center for Responsive Politics….But 53% went to Republicans in the 2010 election cycle, when hedge-fund managers’ and employees’ donations totaled $11 million.”

    53 percent to Republicans seems hardly a heavy pressure bet to me. It rather sounds like those hedge funds are hedging their bets, Howard.

  3. DCLawyer68  ::  9:12 am on August 9th, 2011:

    Vivian beat me to the punch… it’s really sad that the people who write for this blog are so ignorant of politics. Perhaps another line of work is in order.

  4. Vivian Darkbloom  ::  9:57 am on August 9th, 2011:

    Yes, even though in the current cycle OpenSecrets.org reports a 59% share to Republicans (the 53 percent is for all contributions). Much of that appears to be for 2012 Republican presidential candidates most of whom don’t even have a current vote.

    It seems hedge fund managers are not the only crowd currently disappointed with the ruling party. Next thing you know, trial lawyers will be “pressuring” Republicans with large contributions in order to block tort reform.

  5. Ralph H  ::  11:56 am on August 9th, 2011:

    Cheers Vivian! In fact the most obstructionist people for keeping the Earned Interest break have been whoever the Senators from NY, NJ and Conn are. Have been and will be overwhelmingly democratic. They may mouth to contrary but their actions are to retain the break.

  6. AMTbuff  ::  4:40 pm on August 9th, 2011:

    >The plan would include some short-term stimulus to get the economy through its current rough patch and a mix of broad reforms in entitlements and the tax code that would reduce future projected spending and boost revenues.

    I agree that the parties need to negotiate a phase-down schedule for entitlement benefits, such as a timetable for increasing Medicare eligibility age, gradually tightening means testing, and of course repeal of the new unaffordable health care entitlement. This will happen when hell freezes over or after the government bond market crashes, whichever comes first.

  7. Michael Bindner  ::  6:03 pm on August 9th, 2011:

    Economic stimulus is not what is needed to fix the economy – which is being dragged down by a fourth of all mortgage borrowers owing more than the value of their homes. Bankruptcy reform or mortgage forgiveness are the only alternatives to the less pleasant options of massive foreclosure, protracted economic malaise or an inflationary solution. Obama should at least sell the GSEs to the Fed for the market value of the underlying assets and let them clean it up, which will stimulate the economy while decreasing M3.

    Any solution which involves chained CPI should be taken with a grain of salt, since that will only make Medicare Part B and D premiums lower than they otherwise should be. Instead, premiums should be increased to cover 50% of cost and should rise with medical inflation. Social Security COLA should then be increased to keep up, after a rise in the base benefit to cover the initial premium increase – all to be paid for by increasing or eliminating the income cap on payroll taxes and possibly by adding non-wage income as well.

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