Saturday, July 30, 2011

Debt Ceiling - Saturday Update

It's a gorgeous day here in Winnetka, Illinois. I am sitting in front of my iMac, with the screen opened to CNN Live, where Minority Leader McConnell and Speaker Boehner are to hold a presser, in theory "any minute now". The Boehner bill has been passed in the House, then tabled in the Senate. The Reid bill will be voted on for cloture late tonight in the Senate and was just voted down in the House. It might be time at last for the real talks to begin, but I can't be sure.

The short presser was just held. They have been in touch with the President. They are confident a deal will get done in time. When asked why the holdup, the Speaker said he and Senator Reid had an agreement last Sunday and the President nixed it, so the week's delay is the President's fault. Implication is that Reid agreed to Boehner's bill and the President said no. I had heard that Reid had agreed to the two stage concept, but not the full deal, but we shall see.

In any case, think there will be a deal outline some time tomorrow, perhaps sooner. We're going to get there. Will Boehner have trouble in the House? He'll need lots of Democrats and I think he'll get them. It remains to be seen how mad his caucus will be, when he brings in a bill without the Balanced Budget Amenment and without the Stage Two trigger. The Tea Party Freshmen will be furious: Boehner convinced them to vote for his bill by adding the BBA and telling them this bill would improve his leverage with Reid. They will look at what he is likely to bring them, and the Young Turks will feel betrayed.

As an admittedly biased observer, I think the Freshmen will have a point. Boehner should have told them a good time ago that a compromise was coming, that no one in the caucus was going to like it very much, but that he/they had responsibilities for governing that occasionally would supersede their ideological preferences.

Looks to me like the President is stepping in at just the right time: the Republicans needed to pass their bill and let the Democrats hammer it, and vice versa. Once each side had taken their best shot and lost, it was the right time for an adult conversation.

A further update tomorrow.

Friday, July 29, 2011

DebtCeiling - Friday Update

It is 3:00 pm Friday afternoon here in Winnetka, Illinois, and 4:00pm in our capitol. The House is just back in session to debate Version 3.0 of the Boehner bill, after it was pulled from the floor last night, when it was clear the Speaker did not have the votes. He has added a requirement in his bill that requires Congress to vote on, approve, and send out to the states a Balanced Budget Amendment, before the second increase in the debt ceiling can be approved, presumably in the Spring of next year. Boehner's bill will probably pass, and will quickly be tabled in the Senate. The Republicans seemed to have wasted 24 precious hours with the only accomplishable objective being to save Boehner's job. Version 3.0 is more partisan than Version 2.0 which was pulled last night. What's up?

Mostly Boehner's pride, I think. Although some Republican advisers have continued saying that getting this bill passed will give Boehner a chance to use it as the basis of the final bill. Reid has said: "No way." But Republicans are not listening.

What's next? Senator Reid will file cloture on his bill tonight, which means it can come to a final vote Monday morning (if he uses the Boehner bill as the "vehicle"), and Tuesday morning, August 2, if he uses his own bill as the transmission vehicle. Reid has invited Senator McConnell to join him to work out a bipartisan agreement, but McConnell won't budge until action on the Speaker's bill is completed (fails in the House or tabled in the Senate).

My conclusion: a bill representing the key points I covered in yesterday's post will make it to the President's desk late Tuesday afternoon, or early evening, August 2 - the day before our money runs out. My odds? Down from  90% to 70%. In my mind, there is a significant chance that no bill will get through the House, based on the fractious nature of the Republican caucus.

Thursday, July 28, 2011

Debt Ceiling - Thursday Update

So here we are, almost at the end of the "debt ceiling crisis". The House will vote soon on Speaker Boehner's bill. So what's going to happen?

My forecast for now:

The almost revolt from Republican freshmen will be quelled, and Speaker Boehner's bill will pass. Before the ink is dry, this evening, in fact, it will be tabled by the Senate, where all 53 Democrats have vowed to vote against it. Then what? Compromise time for the leaders. Reid, McConnell, Pelosi and Boehner will get together and craft a bipartisan bill that can get through both House and Senate: $1 - $1.2 trillion in cuts; $1 trillion in debt ceiling increase; further increases using the McConnell-Reid model (Congress disapproves, President vetoes, Congress cannot override); debt commission (probably 6 Democrats and 6 Republicans) with no fixed target for cuts and a fast legislative track for cuts getting 7 votes; some kind of spending category trigger to cut spending if commission isn't progressing; and probably a vote on the Balanced Budget Amendment.

The big item not in the list is the "two stage" approach in the Boehner plan, requiring a second debt ceiling vote before the 2012 elections.

So who wins? Republicans will claim victory, based on securing big spending cuts with no new revenues/taxes. Democrats will say they have prevented a disaster by being reasonable on spending cuts, not adamantly sticking to the call for new revenues (particularly since they will get a ton of new tax revenues at the end of 2012 when the Bush tax cuts expire) and insisting on no second stage vote. The President will probably say that he had hoped for a larger, "grander bargain", but it was not to be.

Conservatives, the Tea Party and Freshmen House members will be deeply disappointed and angry. They will feel they came close to a moment of transformational change and leadership chickened out. Lots of conservative groups are/will be very angry at what they will consider perfidy by the Speaker (Freedom Works, Heritage, Club for Growth, Republican Study Group). We can expect this anger to surface during the 2012 budget fight coming in the Fall. It will affect the developing presidential campaign in ways we cannot yet see (Bachmann opposed Boehner, as did Pawlenty; Romney just today came out in favor of the Speaker's plan).

How will the President feel (whether or not he expresses it)? I think he truly hoped for a Grand Bargain combining cuts in discretionary spending, including defense; a reshaping of entitlements; and new revenues from a completely reworked tax code. Progressives are truly angry at Obama for putting Medicare, Medicaid and Social Security into the mix. Some pundits argue he was doing it as a negotiating strategy, knowing it would never make it through the labyrinth of approval processing. But most are now coming to see that he really intended a reworking of some elements of entitlement policy, and that constitutes betrayal.

Conservatives don't believe he is serious about spending or entitlement cuts. In fact, it doesn't even rise to the level of a possibility in any conservative commentary I have seen. So he is accused of betraying core progressive principles from the left and gets no recognition of his move's significance from the right. Boehner Monday night, after the President: "The President just wants a blank check...etc."

So what's up? Is this move to fiscal discipline real, or just tactical posturing? I think it's real. I think Obama understands that the Republicans' 2012 call will be to fiscal discipline, smaller government and less spending. So claiming a position in the sound fiscal discipline camp could help in his reelection. But I also think Obama senses, and senses deeply that America is concerned about the economy, about the future, and that neither the political process nor the American people will allow new investments in America's future, until there is a sense of fiscal stability and soundness running through the discourse and our awareness. Obama does not think we can move forward as a nation until the economic platform is stabilized in terms of spending and debt.

Later, in other posts, I will make the argument for more spending to boost demand and present evidence how the entire debt level crisis, from a real economics perspective, is a figment of myth and imagination. What is important now though is to recognize that Americans believe the national economy is like an individual household, where it is possible to run out of money. The President (and many others) make this case. Economically, it is not true. But philosophically and politically, the President needed to embrace this current, not oppose it. He has done this successfully, and will, I believe, continue to do so. And by next summer and fall, he should have effective counters for what will be the central Republican attack.

Here is my key question: Has this crisis succeeded in showing the radical nature of the Republican Party to the American public? Do a significant number of voters now understand the risks of turning the country over to Republican ideology? My answer: we have made progress, but there is still a long way to go. And I must be honest: part of me hopes the radical House will not vote for a compromise deal, leaving the President no option this coming Monday afternoon but to invoke the 14th Amendment. If this were to happen, which I do not predict, the true face of Republicanism, in its current form, would become visible. And I do not think people would be pleased with what they see.

Friday, July 22, 2011

The President is Left at the Altar

This just in from Andrew Sullivan at the Daily Dish - America's Cold Civil War:

"The Republican refusal to countenance any way to raise revenues to tackle the massive debt incurred largely on their watch and from a recession which started under Obama's predecessor makes one thing clear. They are not a political party in government; they are a radical faction that refuses to participate meaningfully in the give and take the Founders firmly believed should be at the center of American government. They are not conservatives in this sense. They are anarchists."

Just as I finished my blog this afternoon, I saw that the President was about to speak. In the above linked story, there is a short excerpt from his 30 minute, very impromptu press briefing. Riveting. Powerful. Very persuasive. And infuriating. Sullivan (above), following David Brooks (earlier) is right: The Republicans are no longer a  regular political party; they form a radical faction, and must be marginalized and defeated.
Negotiators simply don't walk out on the President when the country is approaching a possible crisis. And they return phone calls. The President tried to reach Boehner last night and again this afternoon with no response. At 5:30pm EDT today, Boehner called to say he was out, but only after speaking to the media. Astonishing. Outrageous. And we haven't even gotten to questions of substance yet. Boehner's own press conference was a 10-12 minute disaster, where he blamed Obama for "moving the goal posts," messed up a few questions, and abruptly left.
The Speaker better get his act together and very quickly. Congress needs to have a plan, in my opinion, before the markets open Monday morning.
More tomorrow.

11 Days and Counting

It's Friday afternoon, July 22. Move the clock forward 11 days, and we are Tuesday afternoon, August 2. What do we see? Calamity or Calm?

My prediction is Calm.  What support can I offer?

Not much. Intuition mostly. Watched a short clip of Obama talking to college students this morning. Seemed very relaxed. Joked lightly that it was great to get out of Washington, "...because you know how much fun it can be to sit hour after hour in meetings going through the budget..." For me, it's good stuff. He's not taking the problems casually, but he still has a sense of perspective and humor. This attitude can develop confidence in observers that there will be a positive resolution.

Here are some fairly random thoughts and observations.

The truly frightening Cut, Cap and Balance Bill was tabled in the Senate on a party line vote. As predicted, and thankfully, it was DOA. Yesterday, the Majority Leader was saying the Senate would stay in session through the weekend to work on the McConnell-Reid backup plan. Around midday, Reid sent the Senate home for the weekend, saying the Senate would wait for the House to act. Presumably, this means the Senate will wait to see if the President and Speaker Boehner can stitch together a Grand Bargain.

Yesterday afternoon, Democrats went ballistic when rumors of a New Grand Deal between the Speaker and the President surfaced - with the possibility that Obama was willing to punt on revenues. Budget Director Lew was almost attacked by angry Democratic Senators. Reid and Pelosi then  spent two hours last evening at the White House. Today, at 4:37pm EDT, the Wall Street Journal ran a story headlined "Obama Insists a Debt Deal Will Include Tax Revenues".

So what's up?

The House Republican Plan to a debt ceiling increase - Cut, Cap and Balance, is dead.

Reid is holding back action on the fallback McConnell-Reid plan, in part because House Republican freshmen hate it. I also think he was encouraged to do so by the President in their meeting last night at the White House. Obama wants to put maximum pressure on both sides to do a Big Deal, with no easy alternatives. This is why he took the fierce stand that he did with Eric Cantor, who kept asking for him to consider a short term increase. This morning, Charles Krauthammer called for $500 billion in spending cuts with a short term debt ceiling increase (Krauthammer - Investors' Business Daily). But Obama absolutely will not go this way, and Speaker Boehner and Eric Cantor know it.

So what will the Grand Deal look like? Overall: About $3 trillion in cuts and $400 billion - $1 trillion in revenues. Discretionary, defense and entitlement spending will all be included, some with specific numbers; others with policy directions to Committee Chairmen and policy intention guidelines. Revenues will be policy guideline estimates based on comprehensive tax reform. What allegedly is still at issue is what penalty triggers need to be in place to ensure both sides deliver. Democrats are saying: high end tax cuts. Republicans have countered with eliminate the personal mandate in the ACA bill.

We must wait to see how this plays out. The President has been fiercely hammered by progressives for seeming to "snatch defeat from the jaws of victory". Democrats were winning the PR battle, so why give any ground on revenues now? And the high end tax cuts expire at the end of 2012? This is not an effective trigger to get Republicans to perform: it's going to happen anyway.

Despite this strong pushback, it looks like the Democratic leadership team is standing with the President.

Will this play out this weekend? It might. I'm not sure. What happens if we get to mid-week with no agreement on a Grand Deal? I think the McConnell-Reid Bill will be rushed forward and voted on over next weekend. If it passes, we have calm waters.

And if it doesn't pass? I believe the President will exercise the 14th Amendment Defense, or simply tell Treasury to keep paying the bills without issuing new debt. Remember: we don't need debt to fund the government. That's a convention, not an economic necessity.

The good news is: the drama will be done in 11 days.

Tuesday, July 19, 2011

Debt Ceiling Update

Short post. Almost my bedtime.

Rupert and James Murdoch stole the media show today, so not much good analysis on CNN of today's events in the debt ceiling saga. Here's my take:

The currents are moving against House Republicans. Their vote today on Cut, Cap and Balance was an embarrassment. The media is laughing at them, since the bill is DOA in the Senate and Obama has said he will veto it, if it hits his desk. The public wants a balanced approach to a debt ceiling deal - spending cuts and new revenues, in poll after poll. A new CNN poll reported tonite showed 67% of the public wants a spending/revenue combination agreement.

And today in the Senate, Sen. Tom Coburn rejoined the once again Gang of Six, and they have published their plan outline (very similar to Bowles-Simpson Deficit Commission): $3.7 - $4.0 trillion with over $1.0 trillion in new revenues. Three Republican Senators (Coburn, Chambliss and Crapo) are in the Gang. Other Republican Senators signed on today, including Kyl, the #3 Republican in the Senate. Obama called the plan a "very significant step", stepping into the White House briefing room to say that now the Senate, the White House and the American people are together in seeking a balanced deal.

What does this change? In the battle plan shaping up on the field - probably not too much. The immediate way forward is still some version of the McConnell-Reid deal. But Republicans in the House are now isolated: on the one hand, the Senate, the White House and the people want a balanced, grand bargain; on the other side House Republicans  are dead set against revenue increases and where many members seem to welcome the idea of a default. And it is not impossible that the House will not approve McConnell-Reid, and we will get to August 2 without a deal.

What then? The 14th Amendment defense, which President Clinton came out in support of today. Obama will probably have to give the markets some lead time, so my guess is that if we don't have legislation by next Friday, July 29, the President will announce that he will continue to order Treasury to issue new debt as required, in line with his duties to defend the Public Debt, as laid out in the 14th Amendment. If he does this, Republicans will have a short weekend to decide if they are going down the impeachment trail, or if they will fully cave and give him the legislation he needs to be able to raise the debt ceiling without the 14th Amendment defense, and without having to chart brand new constitutional waters.

I think Republicans have lost this one decisively, no matter what the outcome:

If McConnell-Reid passes, Republicans will be endlessly harassed about putting the John Kerry flip-flop into formal legislation, so they can be for debt ceiling increases, before they are allowed to vote against it. It is a chicken-hearted arrangement that will not give them the cover they think they are getting.

If McConnell-Reid is voted down in the House, the Republicans will be telling the American people that they don't care about default for the US, and that, as David Brooks said, they are no longer fit to govern. If they scramble and vote it in after the President announces he will not let the US default, they will show up as chickens as well as idiots. If they try to impeach Obama, they will be laughed out of Dodge.

There have been a slew of negative articles from Progressives on Obama as a leader. I will be talking more about this soon, so will only ask rhetorically now: do you really think the Gang of Six would have broken the "Republican blockade" against any deal including revenues if the President had been berating them, and drawing lines in the sand, and calling all his troops to fight against the never-ending evil of Republican hypocrisy, etc.?

No bloody way! He waited. He was patient. He signaled what he wanted. Almost got it with Boehner, and then Cantor made his move and Boehner retreated. Now Senate Republicans are saying "Screw you!" to the House Republicans, and in the interest of serving the greater country, are agreeing that we need to take a balanced approach.

Why didn't he do this sooner Progressive pundits are wailing? Why didn't he firmly embrace Bowles-Simpson? Do you really think it would have worked if he had been out there with a Grand Bargain to begin with? He would just have given his opponents a better target to shoot at. He needed to wait for Republicans to commit themselves: first the Ryan budget, and then the absolutely no new revenues approach on the debt ceiling. He needed to be patient, reasonable and optimistic - until something broke his way.

It just did. Today. Senate Republicans favor new revenues as well as spending cuts. Hooray!!!

Saturday, July 16, 2011

Modern Monetary Theory

I need to step back, for a minute, from the current debt ceiling argument, and say a bit about MMT - Modern Monetary Theory. I am a new student of this subject and have read quite broadly in it for the last six weeks. A significant part of my "economic worldview" has changed as a result. The way I thought some things worked turned out to be wrong. Not everything, but quite a lot.

Turns out deficits are not so awful. The US has had them for about 200 of her 230 year history.We have had six depressions: 1819, 1837, 1857, 1873, 1893, and 1929. Each one followed a period of serious deficit reduction and budget surplus. How could this be? Turns out net government flows must equal net private flows (including the trade balance) in the national accounts. If the government sector is in surplus, the private sector will be in deficit: the sum of private saving and the trade balance must be negative. When government runs a surplus, and you are importing more than you are exporting, you have private credit expansion (negative private savings) which eventually blows everything up. On the other hand government deficits allow the private sector to save, even with a negative trade balance. This is not opinion, or political philosophy. This is fact by virtue of accounting identity.

Take a look at the following chart showing sectoral balances for the US from 1950 to the present. The data above the x axis is uses of funds. What is below the line are the sources of funds. Sources and uses, as always, must equal; so the area above the line is a perfect reflection of what is below the line. Government sector consists of government spending less taxes (G - T). Foreign sector equals exports minus imports (X - M). Private sector equals private savings minus business investment (S - I). Notice how up until the mid-1990s', the pattern was government deficits supporting private savings, with the trade balance (here called Capital Account) moving from positive (below the line as a source) to negative (above the line as a use).

Notice also that the Clinton surplus was only made possible by a private borrowing binge, interrupted briefly in the early Bush years, then blowing out until the Crisis, when the Private sector retrenched aggressively and Government deficits mushroomed. If we want and expect the private sector to keep shoring up their personal balance sheets, and we forecast a 2-3% ongoing trade deficit, we must, therefore, expect and welcome Government deficits in the range of 5-7% of GDP:

Understanding the absolute interconnectedness of government and private flows changes a great deal. The whole conservative, supply-side argument that private investment is superior to public spending, that government spending cannot create jobs, and that demand is not the issue, it's government regulation and interference - all of this, for me, becomes recognized as nonsense. In the Sector Financial Balances, what matters are Sources of Demand/Income and  Uses of Demand/Income. The Sources are: government spending (G), Exports (X) and Private Investment (I); the Uses are Taxes (T), Imports (I), and Private Savings (S). Sources must and always do equal Uses. I (Private Investment) is not better than G (Government Spending). And as in the past, we will almost always have, and need to have, government deficits.

But 10-12% deficits will surely kill us, everyone says.

First, the level is so high (more than double what could be considered normal), because private households have been slammed. As personal balance sheets are repaired, the deficits can come down. And doesn't this analysis almost scream at us to undertake a significant mortgage mod program, that would repair private balance sheets?

So let's say we get S down to 3-4%, and X-M stays about 3% negative, then we need 6-7% GDP deficits, or $800 billion plus. My God, people will cry, we will go broke!! We will drown in inflation!! The Chinese will dump all their Treasury bonds and we'll be up a creek!! We will saddle our kids with debt they cannot ever repay!!

And here's where we have to open our minds and let in new thinking. I will not try to explain the background support for the following statements, which all come from MMT, but will direct you to the same sources I have been studying:

     * The US, which has its own fiat currency (since 1971 not tied to the gold standard) cannot ever go broke. Our Central Bank, the Federal Reserve, creates money by fiat, whenever it wants to, essentially "by keystroke". We will never run out of money.
     * There is a relation between money and inflation, shown in the formula MV = PQ, where M is the monetary base, V is the velocity, or turnover of that money, P is the price level, and Q is the output of the economy. If the money supply is increased, and money turnover stays the same, then either Prices or Economic output must go up. When the economy is operating at full employment, and money supply is increased, you will have price rises, hence inflation risk. With high unemployment and huge excess/underutilized capacity, output will go up, not prices.
     * So could we have a Weimar hyperinflation (or Zimbabwe)? Hugely unlikely. In Weimar Germany, the Ruhr industrial basin had shut down, while the government kept printing money to pay the onerous war reparations - not a scenario much like our own. Nevertheless, when economic capacity utilization moves up, the Fed must always be wary of the inflation risk.
     *We had a bout of serious inflation in the 70s'. But that was due to the overheated economy (Vietnam) and the oil embargo supply shock, not government deficits.
     * There is no legislative or market constraint (other than inflation calculations) affecting the Fed's ability to issue currency/create new money. During the Crisis, with no legislative approval required or sought, the Fed created $2.5 trillion of new money to support the mortgage market, provide liquidity funding to primary dealers and foreign banks, to buy toxic assets from Bear and Lehman, to support the non-mortgage ABS market in a public-private partnership (TALF - Term Asset-Backed Lending Facility). Almost nobody even knew about this. It came out into public view with an FOIA court discovery order. Lots and lots of new money: zero inflation pressure. Take a look at the 10 year Treasury market.
     *So we can't go broke. And inflation is something to watch, but not an unmanageable problem. How about the Chinese - what if they decide to dump their US dollars and Treasuries? If they get tired of holding dollars and want to sell their $2 trillion of bonds, we will be the likely or possible buyer. Remember, the dollar is the reserve currency. So when they sell, they still get dollars, only this time, without an interest coupon. And if they then want to shift into another currency, which one will they pick? If they really don't like holding dollars in the future, they will slow down their export machine and not sell more to us than we sell to them. Given the critical nature of their export sector for their economy, how likely is this? Not very likely, in my book.
     * How about our kids? They'll be in the same boat we grew up in: 3 - 7% deficits, funded mostly by bond sales, with interest payments staying reasonably consistent with historical trends as a % of GDP.
     * What about the "entitlement crisis", and all the unfunded liabilities that will surely destroy our kids and grandkids? There is an often overlooked central economic law: long term trends that can't be sustained, won't. All these 50 - 100 year forecasts are simply nuts. We don't do anything in a straight line, or forever. We figured it out. And so will our kids!

Here are some MMT references:

Understanding the Modern Monetary System (Pragmatic Capitalism)
New Economic Perspectives
billy blog (Bill Mitchell, Australia)

MMT will be a continuing reference point for me as we go forward to review policy alternatives for the US.

Friday, July 15, 2011

There's a Battle Going On

From Erick Erickson at Red State in his letter to House Republicans:

"Now is a time for choosing. Now is your time for choosing.As I pointed out to John Boehner yesterday, despite what the pundits in Washington are telling you, it is you and not Obama who hold most of the cards. Obama has a legacy to worry about. Should the United States lose its bond rating, it will be called the “Obama Depression”. Congress does not get pinned with this stuff...

"Finally, and here is my big point — you have to win this fight. If you do not win this fight, there will be no more chances to turn back government. Why? Because President Obama is holding senior citizens hostage with their social security checks.If the President can force your hand by using entitlements as a lever to punish the American people if you don’t do as he wants, you will have established this as a precedent. From here on out, if you lose this fight, every time you balk at expanding government, social security checks will be withheld, medicare payments will be withheld, and in just a few short years, surgeries will be cancelled, vaccinations withheld, and hospitals shuttered...
"You must win this fight. You must show you are not afraid. When Ben Bernanke brings the Grim Reaper in on August 1st to tell you we are all going to die, you must mock death and choose life — not bipartisan compromises that will keep growing government and ever more rapidly turn this nation into a third class banana republic. In short, you must hold the freaking line!
"Now, some of you, if you have read this far, are saying, “But in 1995, the Republicans got blamed for shutting down the government.” They did. But that’s because Americans detest losers. And Newt Gingrich and Bob Dole threw in the towel instead of fighting. Their will broke. They did not break the President’s will. Of course, the next year the GOP still only lost 9 House seats and actually gained Senate seats. Imagine what would have happened had they broken the President’s will...
"House Republicans, this is a time for choosing: Do you choose to be more courageous than the Democrats who were willing to risk defeat to advance socialism? Is keeping your job more important to you than saving the country? If so, the odds are you will both lose your job and lose your country.
"This is a time for choosing. Choose wisely."
There are 435 House members: 243 Republicans and 192 Democrats. How many Republicans will follow Erickson's call to jihad and will vote against a Reid-McConnell debt ceiling bill, which looks like the most likely way to move the debt ceiling up by August 2? Could they defeat a bill? I don't think so, but the fact that it is conceivable says a lot about our politics and even more about Republicans.
I think Republicans realize they are in trouble: a just out Quinnipiac poll shows two thirds of Americans and almost half of Republicans want a balanced approach (spending cuts and revenue increases) in a debt ceiling deal; the same poll says Americans will blame Republicans over Obama 48%-34% if the debt ceiling is not raised; the Wall Street Republican contingent is hammering McConnell to corral the fanatics and raise the debt-ceiling post-haste; McConnell's plan has been opposed by conservative pundits and lawmakers, most recently Jim DeMint, who just vowed to defeat it; Speaker Boehner's power has been frontally challenged by Eric Cantor on the Big Deal with Revenue Increases question;and people think the infighting will just get worse.

Conservatives like Erickson see their big chance to really change the structure and priorities of the Government budget slipping away. And they may get fairly desperate.

Does it really matter? Is there a real chance they could get enough votes to stop a debt ceiling deal? I think it is possible. Not likely. But possible.

And if they do succeed in blocking legislation (I give this about a one in five chance), just imagine how mad they will be when Obama employs the 14th Amendment Defense.

As a Democrat, who is absolutely convinced Obama will not let us default (most likely by ordering Geithner to ignore the debt ceiling and issue bonds as required, which is the 14th Amendment Defense), part of me wants this to happen. I want the country to understand just how dangerous a significant portion of the Republican party has become. They are simply unfit to govern. And all of us must come to see this. Then, perhaps, the Grand Old Party can reclaim its true big tent, moderate and conservative roots. 

Wednesday, July 13, 2011

"I Will Not Yield"

"This may bring my Presidency down. But I will not yield on this." President Obama, speaking (mostly) to Eric Cantor, late Wednesday afternoon, as the budget negotiations (literally) broke up. "Don't call my bluff, Eric," he had said earlier.

Astonishing words from the President. Words I did not think I would ever hear. By nature, he is not angry; he works very hard at not drawing lines in the sand. And here is anger. And there is a clear line in the sand.

I think Republicans are in trouble. They did not know or respect their adversary. They assumed political calculation, endless maneuvering, and then a cave-in. Wrong. They have lost their internal unity. They have lost the media. They are losing or have lost the people. Talking to Laura Ingraham this morning, McConnell said a default will be blamed on Republicans, and like 1995, they will then assume co-ownership of the tough economy.

So what will they do? The President charged both sides to put their best offer forward by Friday. My guess is Republicans will put a $2.0-$2.5 all spending cut program forward. Democrats will put a similar size plan forward, but including new revenues. No agreement will be reached.

Next week Republicans in the House will try to put the unagreed to deal to a vote, and it will be defeated, with a lot of Tea Party Republicans voting no. Dems in the House probably will not get a chance to vote on their version, but if it is put to a vote, it might pass. I think enough Republicans might break with leadership and support new revenues. But a betting man would say there is a real chance we will get to next Friday with no legislation.

Then what? Possibly McConnell's deal, which might pass. If not, a clean debt service increase, which might fail once, even twice, but then, at the last minute, it will pass.

If Republicans fail to get ennabling legislation through by August 2, Obama will simply exercise the 14th Amendment option, or, as discussed earlier, ask the Fed to give Treasury money to keep paying the bills.

We will not default.

And how dangerous Republicans are will be clear to many, if not to all.

Tuesday, July 12, 2011

McConnell's Debt Ceiling Plan

A short post tonight.

Senator McConnell's plan to solve the debt ceiling debate caught lots of folks off guard. Ezra Klein at the Washington Post does his usual excellent job of explaining the Byzantine details - Exra Klein explains Mitch McConnell's Surprising Plan.

My short take: McConnell now realizes Obama will not cave on the revenue question. And he knows his side won't compromise on taxes/revenues. So what to do? Propose a complex solution that essentially takes the debt ceiling issue out of Congress' control and gives it, more or less, to the President.

This is the first crack in the unified Republican line. In politics-speak, McConnell blinked. A significant number of voices from the right are angry. Eric Erickson at Red State considered lynching until he softened his headline. The 2012 candidates are generally vague or negative. The President has not yet spoken out. My guess is he won't attack it; he will simply keep urging negotiators to keep going and get a deal done.

What happens now? I think the ground has changed. I think Republicans now know they either give ground on revenues, or there will be no deal, and they will take the hit for turning down Obama's Grand Bargain. Will they do it? I don't think so. The President will then call for a clean debt ceiling increase without conditions, and he will get it.

Monday, July 11, 2011

Where I Stand

The Republican party, its leadership, and its governing philosophy have run amok. Their politics are fear based. First it was the War on Terror. Now it is Big Government with its assault on Liberty and Economic Survival. There is no vision of what the future should look like. They are against many things, and for nothing much except lower taxes and smaller government.

There has been not a word of self criticism, reflection, or apology for the ruin their efficient market/low regulation/self correcting market philosophy has caused. The level of control fraud that pervaded Wall Street during the housing boom is difficult to imagine. The Pimco/Blackrock,NYFed $8.5billion settlement with BOA is the tiny tip of the iceberg: Up to 60% of the mortgages in these 530 trust files did not meet the reps and warranties. And guess where the discount on the mortgage purchase prices went - to investors? Of course not. To the control fraud managers. And why in 2004 did the entire mortgage securitization chain (investment banks, banks, trust banks, law firms) stop following their own PSAs' for the trusts so that no one really knows who owns much of anything anymore, and the foreclosure and housing markets are backed up, because the notes and the properly endorsed mortgages are simply not there, where the Trustee Banks have every year certified that they were. I have a VP friend in a major servicer who told me they stopped sending the original notes to the trusts a long time ago. Not a word about this from Republicans. And all they could do in the final FCIC report is blame Fannie and Freddy and disassociate themselves from the overall and excellent report from the Commission. 

Republicans care not a whit about the income inequality that has grown so strongly in the past 30 years. Ryan's budget, which the President properly called "neither courageous nor serious" simply ends Medicare as a defined benefit program, and converts it to a defined contribution program, where the premium support will grow well below the rate of medical cost inflation. We can't control costs of healthcare says Ryan, so let's not try. Let's shift the costs to Seniors. Petersen and Walker have been very effective in terrifying everybody about unfunded entitlements that we cannot afford, so we had better go ahead and shred the social safety net.

In addition to fear, the Party operates out of Myths - Big Ones that are absolutely impermeable to facts. I'll just mention four: the Bond Vigilantes Who Will Any Day Now Trash the Bond Markets Because of Inflation; the Confidence Fairy (without whose presence businesses will not invest); the Expand by Contracting Myth (the way to grow is to cut government spending) and the Myth of Sovereign US Default (either when China gets tired of holding US Treasuries or when the massive unfunded entitlement liabilities swamp our poor grandchildren's ability to pay). I will take each of these on in detail in blog entries, but, for now, a few facts:

*Inflation arises when demand bumps up against resource constraints. We are so far away from that scenario that it is hard to measure the distance. Oil, food and other commodity prices may jump, but core inflation will not any time soon. How can it when housing prices have not yet hit bottom, and true unemployment is 15-20%? Be happy to bet with you re 10 year Treasury price ranges over the next 3 years.

* If we continue to run a current account deficit in trade, and the consumer (unlike during the housing boom) wants to keep saving, we will have significant deficits, and we must by national accounting identity, not by my political choosing (Looking at Sectoral Balances, if the Private Sector is Saving, and the Net Export Sector is in deficit, the Government Sector must be in deficit, by accounting/mathematical identity.)

*Deficits are not inflationary, unless the economy is at full capacity. Look at Japan: 20 years of mostly deficits, near zero interest rates, no inflation, and Debt/GDP over 200%. No sign of Inflation nor Sovereign Default. Nor will there be.

*The Confidence Fairy does not cause businesses to invest. Demand for the products business makes and sells stimulates investment. Republican economics seems to leave Demand out of the equation, no matter which economic issue we are looking at.

*Expanding by Contraction - utter hogwash, and a subset of the Confidence Fairy crap. We expand when demand goes up. The tortuous logic that the Expansion/Contraction folks have cooked up is ridiculous on its face: When Government spends, the Private players, for fear of future taxes that are coming to pay for this spending, withdraw an equivalent amount of money from the market, so demand does not move. When Government contracts, the opposite happens, and demand goes up. Bull crap. Take a look at England. How's that contraction stuff helping to boost the economy? And Greece, Portugal, Ireland, even Spain. Contracting causes contraction. Thinking the opposite is dreamwork.

* Sovereign default is not in the cards for the US, with its own fiat currency. We will never run out of money. And yes, I can counter the Weimar hyperinflation story too. Sovereign nations, especially one whose currency is the reserve currency of the world, will not default.

Keeping us, without research or facts, stuck in these Myths, keeps us in fear, and we cannot chart a course forward. These are all Republican myths. They work to keep a fair portion  of the country in thrall.

I have concluded that the Republican Party and its leadership are corrupt - their interest is no longer the general welfare of the country; their loyalty is to the business elite, the wealthy, and their own political power.

Sunday, July 10, 2011

You Will Only Find What You Are Looking For

From Naked Capitalism this am:

In my non-political blogging, will be talking about stuff like this a lot. To grow in consciousness and awareness, we need to understand how our minds work, in order to have the mind as a tool, instead of the inverse. The below is an extraordinary example of how our minds look for and find what we think is there.

Reality is hugely more interesting and complicated than we first think!

“A Dramatic Demonstration of the Power of Mental Frames”

This demonstration by Simon Singh is an intriguing little exercise of sorts. Hat tip Richard Smith:

Second Thoughts on the Debt Ceiling

I am having second thoughts:

It looks like the mega deal is out ($4 trillion, with up to $1 trillion in new revenues). Boehner called the President last night to say he could not live with the revenue part of the deal. In today's meeting, the President says he will try to convince him otherwise, but my guess is the big debt agreement is dead.

So now we move back to the "medium" size program ($2.4 trillion with $400 billion in new revenues). Let's say the leadership group agrees, and takes it back to Congress.It might pass. And it might not.

What does the President do if he thinks it's going to fail, or that its chance of not passing are reasonable? Can he let August 2 come without any warning to the US, or to the markets that Treasury will pay the bills going forward after August 2, without debt issuance? At first, I thought he could. Now I am having second thoughts.

Who knows what the markets will do on August 2, if there is no agreement. Even if the President talks right away on August 2, there still could be market chaos. And Republicans will accuse him of lying to the American people, and the charges may well stick. After all, it has been Republicans who have been arguing that the August 2 date is bogus.

I think he will "fess up" some time before the end of the month, if a deal has not been done and passed, saying that he used the August 2 deadline date to put pressure on the system to come up with a breakthrough deal, that there is no way he is going to let the US default, that a debt limit increase is needed, but there is no huge time pressure.

Will he be hurt politically? Possibly. He will argue that he gambled and lost. He really wanted a breakthrough deal that could alter the course of budget conversations now and in the future.

How about Republicans? They turned down a $4 trillion game-changing budget deal - and why did they do this? And if they turn down a $2.4 trillion very significant deal - why? They didn't want to close some loopholes and raise some revenues from the wealthy. In other words, they care more about the wealthy and no revenue/tax increases than they do about the budget. As David Brooks has already said: If Republicans turn down the budget deal of the century, they are not fit to govern.

Pundits on both sides call Obama a weak leader and a bad negotiator. It's too early to fully review the bidding and the performance on this issue, but we have some early indications:

Republicans thought Obama would cave on revenues and do a spending cuts only deal. He hasn't and he won't.

Republicans never thought Obama would put Social Security, Medicare and Medicaid on the table. He did. They walked.

Republicans couldn't even dream of the possibility that Obama would support a bigger budget cut deal than they would sign on to. He has. And so far, they have walked.

Both Republicans and Democrats, and almost every pundit has criticized Obama for not supporting the Bowles-Simpson Deficit Commission findings. We don't have the details of the almost $4 trillion deal, but it sounds a lot like the numbers in Bowles-Simpson.

It really seems incredible: Republicans have allowed Obama to outflank them and attack from the political right (a super-size budget deal) and they are leaving the field of battle.

There is much more to come. As for me, I put in my vote for leading from the rear, when it forces your opponent to commit himself first, and then you come onto the field and use his energy against him, forcing him to retreat.

We will continue to observe this remarkable contest.

Saturday, July 9, 2011

Republicans Are About to Be Ambushed

Consider the following scenario: No debt or debt ceiling deal is reached. August 2 comes and goes. Nothing happens. Bond markets don't crack up. Life goes on.

You fill in the blanks. Here's my picture:

Pundits will assume the debt ceiling limit has been breached. A 14th Amendment defense. Treasury and the Fed will say no: the US has issued no new debt.

Because chaos can ensue when large numbers of people no longer understand how the world around them is working, the President will not wait long to talk. He will tell the American people that the country does not really need to sell debt to fund its deficit, that it can credit individual accounts and overall bank reserves with "keystrokes". The debt ceiling legislation and the practice of funding deficits with bond issues are just that - they are practices, not requirements of monetary economics.

Republicans will say they have been tricked. The President will continue his reasonableness, and say, correctly, he really wanted a debt/revenue deal, and he was willing to go a long way to get it. The unspoken message will be: it's not up to me to teach you monetary economics.

Will the public see this as dirty tricks? The President is guessing no, and I suspect he's right. He did want the debt/spending/revenue deal and he was willing to use the August 2 "deadline" as a hard cutoff date in order to raise the chances of getting a deal.

Republicans will be really and truly ambushed. They will have demonstrated their willingness to let the US go into the abyss, and at the same time they will have shown they have no idea about the underlying workings of our economy.

Here is a good link explaining why Treasury does not need to sell bonds to pay the bills -

Friday, July 8, 2011

A Low Point

I predict that, looking back, today will mark a low point for the Obama presidency. From Adam Serwer at Xpostfactoid:

"Good God, is this the day the Obama presidency died?  Horrendous monthly jobs numbers make it seem so. As the economy dives toward double-dip recession, the president is a self-bound hostage to the GOP, mired in calamitous-looking deficit reduction talks, the results of which are likely to further crimp growth while shredding the safety net.  Having let the GOP set the agenda, Obama is unlikely to find a way to further stimulus.

"This feels like nemesis nipping at the U.S.'s heels, the next tumble down a staircase that began with the Lewinsky scandal, carried through the busted and stolen 2000 election, then on to Bush busting the budget and defunding the federal government while shredding civil liberties and various norms and taboos of governance. Now, I'm haunted by Cassandra Krugman's constant forecasts of calamity triggered by too-weak progressive response to the financial meltdown, half measures that discredit a sane stimulative response.  Now the lunatics are poised to once again take over the asylum after four years of powerful incentives to sink ever deeper into lunacy -- discrediting stimulus, discrediting the once-conservative approach to universal healthcare codified in the ACA, discrediting effective regulation, discrediting an even minimal safety net."

Where does this come from? It comes out of fear that the economy is not on the rebound, that this move towards austerity is the wrong direction, that Obama has bought the austerity kool-aid, that big spending cuts will send us down the economic chute, and that we will never do the investment spending needed to get the economy moving. In short, if Obama buys the Republican line that it is government deficit spending that has put us in this hole, then Democrats are in trouble, and so is the country.

Here's my hope: Obama has not fully bought the austerity story. He wants to get our long term budget house in order, and, at the same time, recognizes the need for short term investment spending. He is betting that by putting together a "big budget deal", with most of the cuts in out years, he will be able to quiet the opposition, steal Republican thunder, and put himself in a strong position for 2012.

He also thinks there is a very good chance Boehner will not be able to deliver the votes. He may in fact be betting that this is the most likely outcome. If the vote fails and the debt ceiling is not raised, Obama will tell Geithner and the Fed to keep paying the bills, without raising the debt ceiling - in other words, just "keystroke" some new money to pay creditors, but don't issue new bonds. Obama will go on TV and tell the American people: "I did my best to get a bipartisan budget deal. At the leadership level, we reached agreement, but Republicans couldn't deliver the votes. To prevent default, and still not violate the debt ceiling statutory limit, have instructed Treasury to pay the bills, but not to issue any new debt."

Our understanding of macroeconomics is so extraordinarily weak that we do not understand that the Government does not need to issue bonds to fund our deficit. The US has its own currency. It can create new currency any time it wants, as Bernanke has said, "by keystroke." If you look at the detailed Fed records during the crisis, you will see that they did a huge amount of new money creation, in order to buy up lousy mortgage assets from the banks and to fund international swap lines, when Europeans ran tight.

Republicans, if they don't provide the votes for a debt ceiling deal, particularly when the President has bent over backwards to put together a "big deal", will be in trouble. They will be solely responsible for pushing the US over the cliff. How mad will they be when Treasury keeps paying the bills. Furious. Apoplectic. Yet what will the President have done wrong, if he doesn't issue any new debt? We heard today from the General Counsel at Treasury that the 14th Amendment defense will not be used to issue new bonds. So if no new bonds are issued, and the bills keep being paid, and the President is faithfully honoring the 14th Amendment, is it his fault if no one in Washington understands money economics? 

He will be accused of bad faith negotiating, and he will say, correctly, that he really did want the budget deal, and that he never said he would not order Treasury to keep paying the bills. Republicans will look like utter fools.

I think this is Obama's game. It's why I am not as discouraged as Adam.

Thursday, July 7, 2011

Debt Ceiling (cont.)

From today's White house meeting, where one participant reportedly said: "The only two people in the room who knew what was going on were the President and the Speaker." This picture seems to capture that precisely.

So what's up? To the absolute horror of his own Progressives, Obama wants to do a budget deal - not because he has to, or because he has been coerced or tricked, but because he wants to. Why would the Speaker try to help him do that? I"m not sure. Probably wants to go down in history as changing the budgetary course of the country, or something similar.

The President gave three options: A small deal - $2 trillion; a medium deal - $3 - $3.5 trillion; and a large deal - $4 - $4.5 trillion. He went around the room (Reid, Hoyer, McConnell, Kyl, Cantor, Pelosi, Boehner) and asked people to choose what they wanted. Everyone chose medium or large.

Could this happen? More specifically, will the leadership (meeting again Sunday afternoon) recommend a "medium or large" deal back to Congress? I think it's possible now, 50-50 odds is my guess. Could it gain enough votes? It obviously depends what's in it. The President will lose a bunch of Democrats. Boehner will probably lose the Tea Party. Will the remainder be enough? I think so. Odds of all this happening? About one in three.

The stakes have gone way up for Republicans. Now the whole world knows the President is being reasonable. Beyond reasonable the liberals are saying. Absolutely nuts!! If Republicans walk now, they are in trouble. The obvious conclusion - they never really wanted a deal. They wanted to clobber the President. David Brooks will be proven right: they are simply not fit to govern.

As my Dad said, this is way better than football!

Tuesday, July 5, 2011

The Debt Ceiling Fight

From Xpostfactoid today:

"To listen to Obama's statement about budget negotiations this afternoon, you would think that he has willingly embraced the debt ceiling deathline as a means to force a deficit reduction deal quickly: the current negotiations under threat of default are, he said, "a unique opportunity to do something big."  Refusing to entertain the possibility that a comprehensive 10- or 12-year deal won't be struck before the August 2 debt ceiling deadline, Obama said that lawmakers should not "kick the can down the road" with a short-term raise of the debt ceiling.

"I hope Obama proves me wrong, but it seems to me that there is something fundamentally wrong with this "opportunity". He should not be trying to negotiate a multi-year $4 trillion deal in this short time frame, under threat of default, with a GOP that continues to swear,as Boehner did today in response to Obama's speech, that it will not raise taxes at all. It's either madness or some kind of feint.

"In my nightmares, Obama shapes up as the General McClellan of the deficit wars -- wondrous in his ability to inspire the troops, baffling in his unwillingness to fight.

"I hope he pulls a rabbit out of a very shallow hat. But I don't see how he can."

And this from a Progressive, and a very smart one at that.
People still can't tell what Obama's doing. Here's my take:

The President sincerely hopes Republicans will take the deal: about $2 trillion in cuts, $400 billion in revenue increases from closing loopholes. 83% spending cuts, 17% revenue increases. In March, the Republican Study Committee came out with a blueprint for 85% spending cuts and 15% revenue increases. He is offering just what they asked for, plus rounding errors. Will they take it? Probably not. Why not? They think the President will cave. So does Adam Serwer at Xpostfactoid. McClellan is not the right general to be compared with.
Will the President cave? No. Why not? Did you read David Brooks' column Monday - "The Mother of all No Brainers" . Here are the key graphs:

"The struggles of the next few weeks are about what sort of party the G.O.P. is — a normal conservative party or an odd protest movement that has separated itself from normal governance, the normal rules of evidence and the ancient habits of our nation.
"IF the debt ceiling talks fail, independents voters will see that Democrats were willing to compromise but Republicans were not. If responsible Republicans don’t take control, independents will conclude that Republican fanaticism caused this default. They will conclude that Republicans are not fit to govern.
"And they will be right."

He won't cave because he doesn't have to. Brooks, a conservative columnists, is right. He is calling the Republicans out. Obama and the Democrats have consistently been willing to compromise. Republicans have not. The goal posts have been continually moved. And they still think he will cave.

Obama said he doesn't want to kick the can down the road, but he, as usual, did not draw a final red line in the sand. So there's a chance this will get kicked down the road, because he might take a "reasonable offer" from Republicans. The strategy requires him to remain reasonable.

I hope this doesn't happen. I hope Republicans, confident that the President will flinch, take us right off the cliff, only to discover Treasury is still paying the bills and that most responsible people now know what Brooks does: the Republican Party has gone nuts.

Monday, July 4, 2011

Obama and the Economy

Here's today's (from my perspective) must read - Frank Rich: Obama's Original Sin. Rich makes a compelling argument that Obama's failure to "go after the banks" could lead to his losing in 2012. I am not interested in handicapping that race right now. I want to think about why Obama has chosen his current path. Sitting right here, right now, I am not sure of my own answer, much less of what the "truth" of the matter is.

I am an Obama fan. I am also a serious student of Ken Wilber. See herehere, and here. I will post much more about Wilber's Integral Map in the future. For now, I will simply say that I believe Obama is an Integral Leader - someone who has done the necessary work of self-awareness and personal, transformative growth to achieve what Ken calls second tier consciousness and integral leadership. There is no failure-proof test to measure precisely who has achieved this level; Ken's estimate is that this level is beginning to emerge, but that now only 2-4% of the population has achieved it. I do not posit this to convince you that this is true. I do so to let you know the depth of my respect for our President, and to encourage you to see this question through my eyes.

So why has Obama thus far let the banks off the hook?

Frank Rich suggests that Obama is less comfortable in the economic domain than he is in, say, the race domain. When Rich rhetorically asks why the President hasn't dumped Bob Rubin, Tim Geithner, et al., like he dumped the Rev. Richard Wright, he answers his own question by saying that Obama is completely sure of himself in the race domain, but not so confident in the economic arena. This sounds logical, but appears to fly in the face of the President's seemingly inexhaustible sense of self confidence. What did the President know about military matters, or running a war? Yet no one, and certainly not Bob Woodward, thinks anyone other than Obama made the key calls in the Afghanistan surge and drawdown situations.

Many observers say that the Democratic Party, and Obama, are just as "Wall Street captive" as the Republicans. Obama needs a lot of money to be reelected, the argument goes, and he won't, therefore, provoke a complete break with the Street. Why did he bring in GE's Jeffrey Immelt for his Jobs Council or Bill Daly as Chief of Staff? He wants the Street to know that he gets their point of view. Disillusioned liberals say Obama has sold out to the banksters, and will not move against their interests. This line makes some sense, but still seems very incomplete.

What other arguments do we hear? Obama is in thrall to Tim Geithner. Obama is completely inexperienced and doesn't know any better. Obama is chicken and won't stay in a real fight. Obama doesn't want to rock the economic boat, and attacking the banks could take them down and tank the economy. Obama wants to look forward, not backwards - he refused to prosecute the terror issue and this is the same thing. Obama wants to be a post-partisan President of all the people and does not want to be a populist and just choose one side. Obama does not want to be seen as "an angry black man", which he feels would spell sure electoral defeat. Obama is constitutionally incapable of anger and true attack politics. And so on.

So where do I come out?

I agree with Rich that this is Obama's main, and possibly his "original sin". I reluctantly accepted Obama's judgment that the country would be better served by moving forward, rather than conducting investigations of Justice or the CIA in the matters of enhanced interrogation. But I think the President has erred seriously in not requiring Justice and Treasury to conduct aggressive, serious and in depth investigations of the Banks and Wall Street around mortgage lending and securitization.

 In the mortgage foreclosure mess, the OCC and Treasury have steadfastly refused to do a thorough, in-depth investigation of mortgage loan files held in securitization trusts, sponsored by Wall Street, held by the big Banks in their status as Trustees, where the loans are serviced by the servicing arms of the big four banks (BOA, Citi, JPM, Wells Fargo). The states' Attorneys General are trying to negotiate a blanket settlement with the Banks, without having conducted such an investigation, i.e., without any real leverage with the banks, since no one really knows what's in the loan files. Fortunately, New York's AG, Eric Schneiderman, has opted out and is going aggressively after the loan files.

In an amazing recent event, BOA has agreed to an $8.5 billion settlement of a multiparty investor lawsuit (Pimco, Blackrock, New York Fed, et al.) claiming BOA/Countrywide consistently failed to meet their reps and warranties in $424 billion of mortgage loans, then bundled into securities and placed into various mortgage trusts. The suit also alleges a variety of paper documentation and servicing errors/frauds. Experts earlier had opined that this suit wouldn't get too far, because it is extremely difficult for investors to gain access to the loan files, and an earlier suit had already been dismissed on grounds of standing to sue (not enough of investors by mortgage trust issue banding together to get standing).  Some people are saying that the reason BOA has agreed to settle so quickly is that they know exactly what is inside the trust loan files, and they don't want anybody else to take a look.

Some people say the combination of Schneiderman's commitment to serious investigations and BOA's early cave-in on their (one of many) investor suits are the cracks into the rock of Bank/Fed/Obama's complacency. I hope and actually believe this is true.

So will this force Obama's hand, so that he will have to move against the banks sometime before the 2012 elections? My answer is yes. And here is my prediction: one of the major banks, probably BOA, will be under resolution authority before the election, and a major campaign theme for Obama will be to provide true mortgage principal relief for the 12 or so million underwater homeowners.

So why do I think Obama has gone easy on the Banks thus far? He didn't think he could win the fight, at least not win it and get Healthcare's ACA as well. I think he and Geithner agreed to lay off the Banks, hoping they might regain strong balance sheets through growth, and trusting that somewhere in the vast and complex US legal system, some aggrieved party or parties would force the ugly truth about Bank mortgage lending practices to the surface, and the legal system itself would, over time, grind the Banks down, begin to provide clarity, and at least some justice.

Obama is determined not to be the "angry black man", populist President attacking Wall Street and their greed and corruption, as Ferdinand Pecora did for FDR almost 80 years ago. "Don't attack," the Master says. "Let your adversary attack himself, or let the circumstances work their own peculiar logic. Patience. Save your energy. Do not fight, until you must."

I think Obama chose to wait. Was he influenced by opportunism, political calculation, special relationships, an excess of caution and the like? Yes. AND he chose to wait.