Since most news reporters have been stuck on the set of Ground Hog Day, not much attention has been given to the failure of the House and Senate to reauthorize the FAA. The Senate passed a bill, which the House refused to pass. The argument is over subsidies to rural airports and union worker’s rights.

Now this one should be interesting to Representative Tipton. No doubt he hates the rights of unions to organize and represent workers. No doubt he loves being able to fly into Durango, and Grand Junction, and other Western Slope communities in his district. Maybe he can vote for the proposal on Friday and against it on Monday, just like he did on the debt ceiling bill.

He’ll have a lot of time to think about how to proceed during the August recess announced yesterday by Cantor. Legislators are coming home for August. In the meanwhile, airlines are not collecting the taxes that support the FAA, and the nation will lose about $1.2 billion by the time Congress decides to go back to work. Who knows how much will be lost by the time Congress decides to actually work on this bill? I wonder if those losses will count toward the additional savings anticipated by November by the bill scheduled to be voted on in the Senate today.

Nah. I’m being too cynical. The extreme right wing of the right wing wouldn’t deliberately refuse to collect taxes on airline tickets, mostly used by businessmen and the wealthy. Would they?

FAA Shutdown

4,000 Employees Laid Off

Airport Construction Projects on Hold

The current congress reminds me of the Lord of the Flies. It is a bunch of schoolboys with incomplete educations trying to govern the nation. We are in the middle of just the latest conflict between civilization and anarchy.

For the life of me I can’t figure out why Boehner won’t just admit that he has no control over his Republican caucus and build a coalition with Democratic House members in order to keep the nation from falling off a cliff.  It wouldn’t be the first time that a leader did what he had to do in order to get something done. But Boehner is nobody’s leader.

My Free Press column today is about compromise. When I wrote it, I struggled with the topic because I truly expected that the debt ceiling would have been raised by the time it went to press. Instead it is timely. Compromise is not a dirty word. Compromise especially is not a dirty word if 72% of all Americans disagree with the 50 Republican hold outs in the House.

Homework

Mark Fiore Cartoon

Lord of the Flies from Wikipedia

A friend of mine in Texas wrote this letter to his Representatives yesterday. I asked his permission to post it at my blog.

The President has asked all Americans to contact Congress and ask for a balanced approach. 
As your constituent I ask that you find a compromise like the one the President suggested. 
A compromise means that Republicans and Democrats work *together*, each giving some and taking some, so we can find solutions to common problems.

COMPROMISE IS NOT HAPPENING.  As your constituent, I observe that the Republicans demand concession after concession from Democrats, and when given those concessions then demand even more concessions.  THERE IS NO COMPROMISE HAPPENING.

We are tired of the broken system in Washington. We want a balanced approach to this very important issue. I do not find the threat of default acceptable. I do not find acceptable the GOP approach to only cuts, resting on the backs of working and middle class Americans.  

So now I urge you to act like the adult we sent to Congress and find a compromise. 

If you refuse to compromise, then I request that you accept no pay while the government is in default and that your taxpayer-paid health insurance be allowed to lapse so that you can go purchase your own health insurance for you and your family on the open market, the same way we have to do; and furthermore, I request that you lay off all - and I DO mean ALL - your staff.  I further request that in the case of default, all doors of Congress be locked and barred; that the air conditioning be shut off; that the water to the Congressional restrooms be turned off; that all members of the House and Senate be barred from leaving for any reason whatsoever; and that all members of Congress and Senate be restricted to one meal a day and sequestered in their respective chambers until you do find a compromise.

As your constituent, I have frankly HAD IT with you.  

Thank you,

Mark Carpenter

Today I posted this note at Scott Tipton’s website, in response to Obama’s challenge last night to contact our representatives. I have little reason to believe that he will read it, or even think about it. I heard last night that within minutes of Obama’s call to action the websites of congress critters lit up. Do your part today…

Text of note to Tipton follows:

Representative Tipton, you do not represent me. There are lots of constituents in your district who do not happen to be Republicans. When will you take the time to understand what their issues are, and represent all of the people instead of the agenda of the Tea Party and Grover Norquist and ALEC? There is not one senior citizen in your district who would support the Ryan Plan, which you voted for--if they read it, as I have. It essentially does away with Medicare as it currently exists, replacing it with a coupon plan that places the cost on individual seniors. Sure it saves the government money, but it doesn't do a thing to cut costs. What it does is takes a program that is working well, and adds to it administrative costs and profits for drug and insurance companies. The net result will be that health care costs more for older Americans. It is a dumb plan.

Then there is the insistence of the 50 newly elected Republicans, of which you are one, that there be no revenue included in any fix to the long term debt problem. Yes, the level of debt is unsustainable over the long term. Yes, there needs to be a fix. But to do all of the fixing at the expense of people on Social Security, Medicare, and Medicaid without touching the tax breaks that Bush gave to millionaires and billionaires is dumb, and in your case is a guarantee of one term.

Elections are one thing, and governing are another. So far you have proven that you can win one election in a year where Republicans were favored. You have done nothing to show me that you deserve a second term in office. You have voted to gut Medicare, attacked women's rights, and you are unwilling to entertain any compromise on raising the debt ceiling, which is what governance is all about. Your actions are about to cause economic upheaval world wide. I'm scared to death to think of what you might cause in your second year in office, let alone a second term.

FYI, I'm posting this at my blog, and considering writing a scathing op-ed for my Free Press column to be published this Friday. Yes I'm a Democrat, and normally would not be voting for you. But you should know that I didn't work hard to get Salazar reelected, but I will leave no stone unturned in getting you replaced with someone with some common sense, including supporting a primary challenger for you, should one emerge.

All of the reports coming out of Washington are about how talks at the White House are not going well. That’s probably an understatement. Cantor says that Obama walked out. Peolsi says that Cantor exaggerates.  The quotes suggest that both are right.

Obama: "don't call my bluff; I am going to the American people." "Enough is enough, I'll see you tomorrow."

This is getting ridiculous. The debt ceiling has been raised over 70 times in my lifetime. It was raised seven times under George W. Bush. The Republicans didn’t mutter a peep about raising the debt ceiling when Bush was president.

This is about the Tea Party sending people to Washington who have no understanding that the debt ceiling is related to appropriations. Both houses passed a budget. Implementing that budget requires that the government borrow money. The time to decide how much money to spend was before the budget was passed and signed by the President, not after.

I keep writing about how the impact of not raising the debt ceiling will have consequences. Nobody knows for sure what those consequences will be, but they will all play out in the financial markets, where U.S. Treasuries are traded and are the benchmark for lots of other interest rates—like rates on commercial loans and consumer loans and credit cards, and borrowing by cities, counties, and states. Moody’s announced yesterday that they are considering downgrading the credit rating of the U.S. Government. Standard and Poors announced back in April that they were considering a downgrade. The Chinese are considering downgrading their rating of U.S. debt.

Surely you realize that, as a consumer, if your credit score is high you get a lower interest rate on your mortgage than you do if your credit score is low. The same is true for government borrowings. To have the credit score of the U.S. downgraded is a really, really big deal. The U.S. Government has never had its credit questioned in the history of the United States. (Okay, I exaggerate: Markets were jittery in 1995. But it is rare that anybody questions the credit of the U.S.) If Moody’s downgrades the credit score of the U.S. every interest rate in the world will be questioned, including rates on municipal bonds. This isn’t just about the U.S. This could plunge the entire world into a new downturn, from which recovery will be long and tedious.

Homework

Moodys Worried About US Credit Rating

I’m very worried about my country. The two-political-party system is serving us badly. Don’t get me wrong, I’m a died-in-the-wool Democrat, but what I see happening is ideology trumping common sense.

Yesterday Boehner walked away from negotiations that were scheduled to continue at the White House today. Both Boehner and Obama had been working to find $4-trillion to be applied to reducing U.S. debt over the next 10 years. Both Democrats and Republicans are on board with reducing national debt over the long term, but the voter has little understanding of how U.S. debt actually works.

Most economists are saying that the level of debt as a percentage of GDP is unsustainable in the long term. Most are also saying that during periods of high unemployment, government needs to spend money in order to get people back to work. If consumers aren’t spending because they don’t have an income, the economy needs government spending. We need economic stimulus to get back to “full employment”—which used to be defined as 4% unemployment. We’ve been hovering around 9% unemployment for the past two years.

Then there is the structure of U.S. debt. There is no collateral on debt issued by the U.S. Government. It is “backed” by the full faith and credit of the U.S. Government. Except that if the debt ceiling is not raised the full faith and credit of the U.S. Government becomes worthless. With no collateral as a fall back in the event of default, investors will begin to see U.S. Government bonds as junk bonds. Either they will refuse to buy them, or they will demand extremely high interest rates to compensate for the increased risk.

That might be good news for Social Security, which is one of the largest holders of U.S. Debt. Social Security has no choice in investments for the money paid in by working Americans. Regardless of the risk inherent in Treasuries, Social Security has one option for placement of funds they are accumulating to eventually pay seniors. If the interest rate goes up, they will face cash flow problems later than they would otherwise. (Right now Social Security is predicted to tank in 2036.)

But that’s a really stupid reason to wish for interest rates to go up on the national debt. One of the reasons we aren’t borrowing even more money is because interest rates have been at historic lows for a very long time—actually since before the official start of the recession. Right now the government is paying a coupon rate of between 0% and 4.375% on its debt. Imagine if that rate increased to 20%, or 30%, or 40%. At some point all tax revenue would be going to make interest payments, and there would be zero ability to make any payments on the debt, or to buy military hardware, or to pay seniors.

Another structural piece of U.S. debt that people rarely think about is the timing of U.S. Government cash flow. Unlike working Americans, who get the same paycheck every month, the U.S. Government’s revenue fluctuates with some people only paying annually when tax returns are due. Sure they pay a penalty, but to them it is worth it to keep their money working until the last possible minute.

The Government’s outflows are steady, but their revenues fluctuate. They borrow on a short term basis in order to even out the cash flow. Businesses do the same thing with short term lines of credit. It is good business practice. Some debt is responsible; debt that eats all GDP is irresponsible. Long-term the U.S. is approaching the irresponsible level of debt.

So, we have two problems. One is short term—unemployment. One is long term—an unsustainable level of national debt. We need a short term surge in government spending in order to get Americans back to work. We need a long term fix to reduce annual deficits and the overall level of debt as a percentage of GDP. The two goals need not be mutually exclusive.

The GOP will not talk about any kind of spending to encourage full employment. The GOP will not talk about ending blank checks for military operations. The GOP will not talk about ending the Bush tax cuts, which are the single largest contributor to increases in annual deficits—that and continued spending on war. (What happened to the “peace dividend” when the Cold War ended?)

And the DEMS are too chicken to stand up and tell the truth about debt and deficits and economic stimulants that work and the wasteful spending on war. Howard Dean was right when he said that Democrats needed to grow a spine.

Homework

Time Article About Failure of Debt Ceiling Negotiations

Bloomberg Bond Rates

CliffNotes Definition of Full Employment

Moody's Analysis of the Relationship Between Interest Rates and Credit Risk

Charts Tracking US Debt Relative to GDP

Everything You Never Wanted to Know About the Social Security Trust Fund

Definition of Peace Dividend

Everything You Never Wanted to Know About the Purpose of a Spine

When our nation was founded, the assumption was that citizens would become statesmen and that the government would be of, for, and by the people. The founding fathers assumed that all Americans would be informed enough about current affairs to manage the affairs of state.

I don’t’ know how we got so far off that track, but it seems that we have people in government who know nothing about how things work, unless the thing is raising money and campaigning for office. I don’t think that the original concept of America was dependent upon a two party system, either.

After spending 40 years in the financial sector, it is impossible to give you the exact number of times I’ve heard the phrase, “the full faith and credit of the United States Treasury.” The message of that phrase was that any debt issued by the government was as sound as sound could be. The definition in the credit markets of low risk was Treasury offerings.

Once upon a time, the best interest rate that a company could get on an operating line of credit was based on a spread over the going rate for Treasuries—low risk deals had a smaller spread than high risk deals. That evolved into a spread over LIBOR—which is just a fancy way of saying U.S. dollar deposits in foreign banks that could be traded among banks in London. That rate was usually a little lower than the actual Treasury rate. Nobody ever doubted that the U.S. Government would honor its obligations. Even LIBOR was based on a belief in the “full faith and credit” of the U.S. Eventually that rate evolved into something based on credit default swaps, which played a big role in the economic melt-down of 2008.

And now because of party bickering, in a two party system, that was accidental as opposed to planned, we have citizen legislators, new to the role of governing, and poorly informed about financial sectors, who are about to topple the whole notion of “full faith and credit.” If you think that 2008 was bad, wait until you see what happens to interest rates and credit if markets can no longer trust the U.S. Government in financial matters.

Stop holding the U.S. Economy hostage. Pass the debt ceiling. Get serious about the budgeting process, and actually put EVERYTHING on the table, including revenue increases, decreases in military spending, and a robust jobs program. Why do we need almost 1,000 over-seas military bases more than we need Americans working in jobs that pay enough to support a family, afford good health care, and send the kids to college?

Homework

Denver Post Story About Debt Ceiling

Everything You Never Wanted to Know About LIBOR

Something You Never Wanted to Know About Credit Default Swaps

Full Faith And Credit Defined

Useless Information About Risk Based Pricing

Wall Street only represents part of the American economy--it registers the skittishness of investors in large corporations, not what is happening in mom and pop stores on Main Street. The market crash of 2007 was all about skittishness about investment in mortgage backed securities that had been sliced and diced into vehicles with increasing levels of risk. The net result was that credit stopped flowing, as banks and other large corporations started hoarding cash instead of investing it into the economy.

Just when we thought that the markets were stabilizing and the recession was over, along comes an earthquake and tsunami in Japan to make all those investors jittery again. Reuters is reporting today that Wall Street is ready to “tumble.” General Electric, the designer of both the Japanese nuclear power plants and of many of those in the US, saw its stock tumble 5% yesterday. Insurance companies saw similar declines in stock prices. Texas Instruments is worried because they lost two semiconductor plants in Japan.

Like it or not the economies of the U.S. and Japan are intricately entwined. They have been for a very long time. We buy automobiles from Japanese auto manufacturers, as just one glaring example. Japan is one of the largest investors in U.S. Treasury bills and notes. Japan has invested in large real estate projects in the U.S.

And that begs the question, where will Japan be investing in the future? One has to expect that investment dollars that might have come to the U.S. will now be redirected toward rebuilding devastated northern Japan. As it should be. But there are consequences for the U.S. when that happens. Our Treasury offerings may now need to pay higher interest rates in order to replace the Japanese money that will be redirected. To increase investment jitters,  we are about to hit a debt ceiling that the GOP insists they will not raise.  

In my opinion, we are looking at another economic tsunami that will continue to hamper both recovery and jobs creation.

P.S. If you really want to understand what is happening with Japanese nuclear power plants, watch the Rachel Maddow show on MSNBC. She has been inviting nuclear experts to explain in mother goose language what is happening at these power plants.

Homework

Wall Street Set to Tumble

Japan Stocks Down

Everything You Ever Wanted to Know About Treasuries

Fox News Report About GOP's Attitude Regarding Debt Ceiling

Rachel Maddow Show

It seems there is a deal to avoid a government shutdown on March 4. The GOP has decided to take all of the budget cuts recommended by Obama, and forget about the budget gutting they were proposing. A cartoon that popped into my in-box this morning depicted the GOP plan as a bloated airplane in flight with the captain making an announcement that he was shutting the engines down since everyone was fighting over the peanuts.

There is a basic disconnect between the political ideology of the GOP and the reality of how economies work. In Mother Goose language, no economist thinks that the quickest way to create jobs is to cut taxes, or that cutting spending during a downturn is effective in creating jobs. In fact, study after study shows that it is the least effective policy tool.

One of the most lackluster decades in recent history has been the decade since the Bush tax cuts were enacted. Anybody remember the promise that wealth would trickle down? With unemployment still hovering around 10%, that didn’t work out so well, did it? One of the really nice things about beating your head against a wall is that it feels so good when you stop. It is time to stop beating our head against the wall in order to continue increasing the income gap between workers and greedy Wall Street bankers. See, economies need productive workers a lot more than they need King Midas in his castle counting his gold coins.

Now the DEMs will vote for a budget bill, and the GOP can claim they took $4-billion in spending out of the budget. The bloated airplane stays air-borne, but the engines are still sputtering, because America still isn’t back at full employment. And we’re still fighting over peanuts all the way into the 2012 budget.

There is another potential positive if a deal is cut--a fight over raising the $14 trillion debt limit may be avoided. When government spends more than it takes in, the result is increasing debt. We’ve been spending more than we’ve been taking in, not because of things like Social Security, which is paid for by employee and employer payroll taxes, but because of two wars being fought—off balance sheet during the Bush years. It was the first time in history that a nation went to war and decreased taxes at the same time. Stupid economic policy.  You don’t increase spending on things like a war, blast a hole in tax revenues and expect a balanced budget.

Failure to increase the debt limit could result in U.S. Bonds being downgraded, because the U.S. could default on its EXISTING debt. According to an Atlantic article, “US bonds have been the gold standard, with zero risk of default. You introduce even the tiniest little bit of doubt into the minds of ultraconservative investors, and that's potentially disastrous. It hurts our ability to raise money without a risk premium.” So the net result is that it is harder to sell U.S. bonds, and they no longer are issued at low cost to the U.S. Government. They cost more, so there is more pressure on the budget. Dumb. Not to mention, China might be irritated when all the U.S. debt they hold is downgraded.

There is plenty of drama left in the budgeting process. Stay tuned.

                                __________________________________________________________

P.S. Gasland was a nominee, but didn’t take home the Oscar. Evidently the oil and gas industry did a better lobbying job than director Fox did. Some things never change.

Homework

Economists Talking About How to Create Jobs

September 2010 CBS Story About Income Gap

Budget Fight

November 2010 Atlantic Story About Debt Ceilings

Oscar