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Op-Ed Contributors Obama Should Raise the Debt Ceiling on His Own By ERIC A. POSNER and ADRIAN VERMEULE Published: July 22, 2011 PRESIDENT OBAMA should announce that he will raise the debt ceiling unilaterally if he cannot reach a deal with Congress. Constitutionally, he would be on solid ground. Politically, he can’t lose. The public wants a deal. The threat to act unilaterally will only strengthen his bargaining power if Republicans don’t want to be frozen out; if they defy him, the public will throw their support to the president. Either way, Republicans look like the obstructionists and will pay a price. Where would Mr. Obama get his constitutional authority to raise the debt ceiling? Our argument is not based on some obscure provision of the 14th amendment, but on the necessities of state, and on the president’s role as the ultimate guardian of the constitutional order, charged with taking care that the laws be faithfully executed. When Abraham Lincoln suspended habeas corpus during the Civil War, he said that it was necessary to violate one law, lest all the laws but one fall into ruin. So too here: the president may need to violate the debt ceiling to prevent a catastrophe — whether a default on the debt or an enormous reduction in federal spending, which would throw the country back into recession. A deadlocked Congress has become incapable of acting consistently; it commits to entitlements it will not reduce, appropriates funds it does not have, borrows money it cannot repay and then imposes a debt ceiling it will not raise. One of those things must give; in reality, that means that the conflicting laws will have to be reconciled by the only actor who combines the power to act with a willingness to shoulder responsibility — the president. Franklin D. Roosevelt saw this problem clearly, and in his first inaugural address in 1933, addressing his plans to confront the economic crisis, he hinted darkly that “it is to be hoped that the normal balance of executive and legislative authority may be wholly equal, wholly adequate to meet the unprecedented task before us.” “But it may be,” he continued, “that an unprecedented demand and need for undelayed action may call for temporary departure from that normal balance of public procedure.” In the event, Congress gave him the authorities he sought, and he did not follow through on this threat. The basic problem today is that the president and the House Republicans are locked in a classic bargaining game. The worst outcome for both is default on the debt, but each side holds out for a favorable deal. They will certainly go to the wire, but economists who have studied bargaining games have shown that there is always a real possibility of breakdown rather than compromise, because only by refusing to deal can each side convey the seriousness of its position. That is why labor strikes occur even though workers and managers do jointly better if they make a deal. Failure to raise the debt ceiling, however, is not akin to any old plant shutdown: it would be catastrophic. A proposal has been floated by Senator Mitch McConnell of Kentucky, the Republican minority leader, under which Congress would delegate to the president the power to raise the debt ceiling, subject to some minor procedural constraints. Mr. McConnell’s ploy is suspect, because it assumes away the problem that it attempts to solve: the internal paralysis of Congress. Congress probably cannot act on its own — for example, by creating a veto-proof budget — because it is internally deadlocked. Not only do Democrats and Republicans disagree, but so do the Republican leaders, who want to avoid a debt default, and the Tea Party-inspired Republican back-benchers, who appear to believe that only a purifying Götterdämmerung can put public finances back in order. The latest proposed deal negotiated by House Speaker John A. Boehner and President Obama is vulnerable to the same problem. Discussions of an earlier proposal to rely on the 14th Amendment for the President’s authority to raise the debt level centered on whether the debt issued after the president’s action would be under a cloud. Commentators pointed out that the language in the 14th Amendment, which commands that the validity of legally authorized public debt shall not be questioned, does not explicitly authorize the president to do anything. But debt under a cloud is better than default. It would be better if the parties made a deal, but if they don’t, default is the worst outcome. The 14th Amendment is a red herring, however; even if its debt provision did not exist, the president would derive authority from his paramount duty to ward off serious threats to the constitutional and economic system. Mr. Obama needs to make clear that he will act unilaterally to raise the debt ceiling if Congress does not cooperate; if he does so, then we predict that Congress will cooperate by enacting the McConnell plan or a similar fig leaf, and so Mr. Obama will not need to follow through on his threat, and the constitutional crisis will pass — just as it did with Roosevelt. Republicans will be publicly outraged, but privately relieved. They do not want an economic catastrophe; they can avoid violating their no-taxes pledge; and they retain the power to fight the budget battle another day. As for the president, he really has no other choice. Eric A. Posner, a professor of law at the University of Chicago, and Adrian Vermeule, a professor of law at Harvard, are the authors of “The Executive Unbound: After the Madisonian Republic.”

I've kind of been feeling that with the constant loss of value in the dollar over my lifetime that there has been a constant gradual default anyway. Since when does a government honor a contract when it doesn't suit them? They always find a way around them when it suits their needs. Everyone has known for years that this was coming because of making contracts that everyone knew couldn't be honored without manipulation "defaulting". Medicare, Social Security, etc. I agree with Buffett. Why have a debt ceiling when you know you can't honor it at some point in time and will have to change the contracts original terms constantly? From NY Times today BRUSSELS — European leaders on Thursday were drawing up a new rescue plan for Greece that may push the country into default on some debt for a short period, but which would also give Europe’s bailout fund vast new powers to shore up struggling economies. No details were given, but rating agencies have warned in recent weeks that such plans may constitute a limited form of default because creditors would not be repaid in full on the original terms.

Another question that comes from this. No matter which way they go. Whether they raise taxes one way or another or cut spending. Does it sound like a big sucking sound coming out of the economy? How does it affect what is a pretty weak recovery?

This would be too logical. BY THE WAY. YOU GO FIRST WITH THE PAIN THING. When you add Federal, State, Sales and local taxes where I live I already pay in excess of 50% & I'm retired and I paid into SOC SEC and they "Owe" me. :D ;D

Packer; I sure agree with your first sentence. "I think a large part of the problem is lack of trust". As a side note. I am going to the Oshkosh Airshow in a few weeks. Also may be going to Greenbay to see the "Packer" stuff. First time and I hear it's really good.

There is oftentimes a discussion of the mess we have created and the mess we are leaving our kids and the debts. From NY Times Thomas Friedman I REALIZE that I should be in Washington watching the debt drama there, but I’ve opted instead to be in Greece to observe the off-Broadway version. There are a lot of things about this global debt tragedy that you can see better from here, in miniature, starting with the raw plot, which no one has described better than the Carnegie Endowment scholar David Rothkopf: “When the cold war ended, we thought we were going to have a clash of civilizations. It turns out we’re having a clash of generations.” Indeed, if there is one sentiment that unites the crises in Europe and America it is a powerful sense of “baby boomers behaving badly” — a powerful sense that the generation that came of age in the last 50 years, my generation, will be remembered most for the incredible bounty and freedom it received from its parents and the incredible debt burden and constraints it left on its kids. It is no wonder that young Greeks reacted so harshly when their deputy prime minister, Theodoros Pangalos, referring to all the European Union loans and subsidies that propelled the Greek credit binge after 1981, said, “We ate it together” — meaning the people and the politicians. That was true of the baby boomer generation of Greeks, now in their 50s and 60s, and the baby boomer politicians. But those just coming of age today will never get a bite. They will just get a bill. And they know it. You can see that when you walk around Athens’s central Syntagma Square, where young people now gather every evening to debate the crisis and register their protests at the future being imposed on them. The facades of banks around the square have been defaced, and flapping in the wind are two large banners. One says “IMF Employee of the Year” and has a picture of Prime Minister George Papandreou, and the other says “Goldman Sachs Employee of the Year” and pictures George Papaconstantinou, the former finance minister. (And these are the good guys, trying to fix the problem.) Nearby is a picture of a baby, saying: “Father, whose side were you on when they were selling our country?” And the more blunt: “Yield to rage,” “Class war, not national war,” and, finally, “Life — not just survival” — a message that seemed filled with foreboding about what the next decade is going to be like for young Greeks. I was struck by one big similarity between what I heard in Tahrir Square in Cairo in February and what one hears in Syntagma Square today. It’s the word “justice.” You hear it more than “freedom.” That is because there is a deep sense of theft in both countries, a sense that the way capitalism played out in Egypt and Greece in the last decade was in its most crony-esque, rigged and corrupt deformation, letting some people get fantastically rich simply because of their proximity to power. So there is a hunger not just for freedom, but for justice. Or, as Rothkopf puts it, “not just for accounting, but for accountability.” “There are no jokes about this crisis,” the Greek novelist Christos Chomenidis told me. “Everyone is in a bad temper. It feels like nearly everyone is against everyone. If the economic situation gets worse and worse, I am afraid for what can happen.” The other day striking Greek cabdrivers tried to muscle their way into the minister of infrastructure’s office — only to discover that it was already full of his own ministry’s striking employees. Take a number, please. That brings up another similarity between Greece and America: that the necessary may be impossible, that baby boomer politicians in the age of Twitter may not be up to addressing problems this big. The hole is too deep and power too fragmented. The only way out is by collective action — where ruling and opposition parties unite, share the pain and take the necessary steps. But that is not happening here or in Washington. There are Eric Cantors everywhere — reckless baby boomer politicians for whom no crisis is too serious to set aside political ambition and ideology. But there is an adult lurking. China has been buying Spanish, Portuguese and Greek bonds to help stabilize these Chinese export markets. “These are delicate times, and we take a positive role,” Yi Gang, deputy governor of the People’s Bank of China, told the British newspaper The Guardian in January. This is a role America used to play, but can no longer afford. Anyone who thinks that this economic crisis, if prolonged, won’t also hasten a global power shift has never heard of the Golden Rule: He who has the gold, sets the rules. “We are so used to the Americans providing the solutions for Europe and leading,” said Vassilis T. Karatzas, a Greek money manager. “But what happens when we are both in the same boat?” What happens is that both the American and European dreams hang in the balance. Either we both put our nations on more sustainable growth paths — which requires cutting, taxing and investing for the future — or we’re looking at a world in which democracies are going to turn on themselves and fight over shrinking pies, with China having a growing say over how big the slices will be.

It sounds somewhat like Katsenelsons' Active Value Investing. Making money in range bound markets. Only this is about the before and after story.

I would bet this is how Munger would describe all this. From the piece on the Berkshire board by Alice Schroeder talking about him. Besides, nobody else would say a lot of the entertaining things that have come out of Charlie Munger’s mouth, such as when, in 2000, he criticized bankers who foisted worthless Internet stocks on the public by saying, “If you mix raisins and turds, they’re still turds I'm sure he would expand that to this whole political bunch of crap.

It doesn't have to be that way. Know your customers. Keep in personal contact with them. Don't lend money to people who don't pay bills on time or to those who don't calculate the balance in their checkbook. Make sure loans are well collateralized. Roll over loans to treasuries when the credit cycle expands to imprudent lending practices. Old school banking basics from a relative who owned and ran a small bank until he semiretired in the late 1980's after he turned 100. His bank's balance sheet was so strong that he increased its book value 50% from 1929 to 1932 after converting most of his bank's assets to treasuries before the stock market crashed in 1929. Those were priceless people. Like Buffett, Munger, Watsa, Cummings. But so few in banking business any more. Even fewer in government apparently. It looks like ideology is going to trump rationality. >:(

This would have been an excellent question in 2006. They done already been rescued. It will be years before you have to worry about a bank stepping in do do again. But it May be years before you make any money in em either. Darn. As usual I was a day late and dollar short with my question. Question is maybe it won't have anything to do with them stepping in do do again. 4)"The banks weren't out of money; they were out of confidence." But this. Your quote " But it May be years before you make any money in em either." Darn again. I'm inum C & BAC.

VERY STRONG!

Book written by Stephen L. Weiss. One of the chapters was about Richard Pzena a fairly good investor. A few items taken from the chapter. 1) Pzena's superb track record as a deep-value investor rested on a tried and true formula. He would choose stocks based on the underlying company's normalized earnings, confident that a temporary disruption in the business was a short-term phenomenon. As it turns out, however for pzena vis-a-vis financial stocks- the tried and true formula is not always, and not necessarily the right one. Case in point: Pzena found himself with 40% of his portfolio invested in financial institutions at a time when financial institutions were being fundamentally restructured. Anotherward's there was no going back to the old normal, and nobody had any idea what the new normal was going to look like. Ralph Waldo Emerson wrote "All history becomes subjective". "In other words, there is properly no history, only biography. What every mind does not see, what it does not live, it will not know". 2) The second thing "Patience" the other tried and true strength of the value investor also didn't work. Financial stocks ran out of runway and sentiment continued to worsen. This time was different, but no one could see that. 3) Perhaps the lesson is that history can be a guide to patterns of fact but not to psychology. The emotion of past events is lost within stock charts and data. The effect of sentiment-the power of market psychology- can be weighed only as part of an investment calculation with real-time experience-- on-the-spot, live assessment as events are unfolding. 4)"The banks weren't out of money; they were out of confidence." So my question is. We know that the the US Fed and European banks can print all the money they want. But what happens amid defaults and the change in confidence factors resulting from that? What happens when governments step in to fundamentally alter the capital markets? What might happen with the banks? It's not like we're talking about a regular business.

Bottom line is no matter what happens we will muddle along because the alternative is not an option. Good companies will find a way to survive. I will hold some cash to have available to use, giving some flexibility to add more to companies, or whatever seems more prudent as we see the effects. Until inflation restarts. Eventually more inflation because politicians know that with deflation they will be voted out of office because people will lose their jobs. With inflation everyone will bitch but most will at least still have their jobs. The sad thing is people will be happy to have inflation because the alternative is worse.

/quote]“Anyone who isn’t confused really doesn’t understand the situation.” I took this from an article that was from a guy discussing the European situation. The majority of people can't forsee what might happen to things including our banks once country's there start defaulting no matter how much subterfuge they use to confuse the fact. We recently had a meltdown that many really "smart" people thought could happen but really couldn't rationalize and so weren't prepared for. Maybe this is why so many people put it into the too hard to understand pile and hope it all works out and go on to something else. Some people are advocating cash, some precious metals, some are saying we'll have a monster rally. It will be interesting that's for sure. Also a link to another short discussion on this topic. http://www.gurufocus.com/news/138664/debt-and-deficit-when-graphics-speak-louder-than-words

London Review of Books: "Once Greece Goes" http://www.lrb.co.uk/v33/n14/john-lanchester/once-greece-goes

http://www.stockopedia.co.uk/content/the-absolute-return-letter-greece-what-happens-next-58093/ Niels Jensen Occupation: Fund Manager, Market Professional Interests: Bonds, Economics, European Markets, Funds, Gold, Hedge Funds, Oil, Stocks About Me: Niels is a founding Partner of Absolute Return Partners LLP and its Chief Executive Partner. He is a graduate of University of Copenhagen with a Masters Degree in economics. He has 25 years of investment banking, private banking and asset management experience. He began his career at Andelsbanken (now Nordea) in Copenhagen. In 1986, he joined Shearson Lehman (now Lehman Brothers) in London, where he built up the firm’s equity franchise in Scandinavia. In 1989, he joined Goldman Sachs with a similar mandate, i.e. to establish a Scandinavian franchise for Goldman. In 1992, he became Co-Head of Goldman’s U.S. equity business in Europe, a post he held until 1996, when he joined Oppenheimer in London and became its Head of Europe. Following CIBC’s acquisition of Oppenheimer, Lehman Brothers bought Oppenheimer’s European private banking operation in 1999, and Niels found himself back at the firm he left ten years earlier, now in charge of its European Private Wealth Management business. Whilst at Lehman Brothers, he developed the concept of investing that has now been put into effect at Absolute Return Partners. In December 2006 Niels was appointed as a Director of Trafalgar House Trustees Limited, advising one of the UK's leading corporate pension funds on its investment strategy.

Always; Don't know if you've read "Always something to do" about Peter Cundill. He has a great investing checklist in the book and it really makes me think about stocks I'm studying. He also said you'll never satisfy all items but it will give you a good guide and make you think instead of being stuck with nothing but rigid rules that sometimes give you false confidence.

Most of my biggest have been this way also. Usually after shamelessly getting ideas from people like Mason Hawkins, Berkowitz, Klarman, LUK, and a few others. They have done the heavy work that I haven't got the ability to do myself. I probably wouldn't have had the confidence do some of them otherwise. Like ACF when Luk bought them a few years ago. Early 2000s DOX & PXD when they were both less then $10.00. None of them could have met a strict value criteria list. But when they work out like these you don't need do a lot of searching or a lot of other deals. Just ride them. So this statement from Sharper "Relaxing constraints can expose you to a world of pain, but it is how you learn 2) Investment is a art not a science - intuition, application, courage, & experience is also a large part of it" says the rest of what I do very well." I agree with.

Sure, but back then his relative performance if I remember correctly, was still quite good, or at least average. This time other funds are doing well and he's not. That's different from everyone doing horribly and FAIRX doing less horribly or equally horribly. Plus he's had a lot of press lately (morningstar's manager of the decade etc) so I'm sure there's a lot of 'hot' money that found its way into the fund. Before that he was still reasonably well known, but no where near as well as he is now. So those investors who found him understood his style better. My bet would be most of the money pulling out is made of new investors. I'm sure there are a few long time investors pulling out because of the St Joe's hoopla, but my guess is that's the minority... I agree.

As I've said. I think many people stuck with Berkowitz during the biggest meltdown since the great depression. Certainly not anywhere near as many sold out like Romicks did back then. My question now is who is he becoming? Is he still going to be the Berkowitz I knew which I liked. Or is he going to start trying to be a Eddie Lampert? Ian Cummings? Warren Buffett? I'm not saying he can't be like them. But until he really explains what his new plan is or proves he can emulate those guys on the "Buying a business and running it side" and do it WELL I have questions. One last question. FAIRF has been under some selling pressure obviously. Why not buy FAIRF now rather than waiting for those stocks to dip? I think he carries enough cash in reserve and always has that he won't be forced into having to sell them off to cover redemptions. Thanks

Parsad; You said "I think that's kind of what my point is. You trusted him for some time, and he did very well for you, yet now you are second guessing his judgement after he's been involved in this venture for about six months. 10 years versus six months. It's why investors pull money at the bottom." "Take a look at Mohnish's fund. He was down nearly 70%, yet one of my own partners, whose family had capital with Mohnish, were thinking of pulling. I told them that he didn't suddenly become stupid. That it will take time, but he has more vested than anyone else, and would probably make their money back. It may take some time, but he would most likely earn it back, and in the meantime he wasn't getting paid a cent." I agree with a large part of what you have said. However, selling out in the mid 30s which I did is not selling out at the bottom. Many people selling out now are selling out in the 30s. My recollection which is maybe wrong is there were not large redemptions in 08 and 09 like now. I may be wrong about that as I haven't checked back but that's my recollection. I do remember the price of Fairholme getting down to the 16s. A cut of about 1/2 from 32 or so. You would have thought that the "Small" investors would have been scared out in massive numbers then. Also, I don't remember Mohnish changing his fund strategy to include buying operating companies that he would have been responsible for. I would have stuck with him as I did with Berkowitz at the time. I remember him changing his allocation sizes but not much else. Mevsemt;Your question. Now let me ask this: if Fairholme had never been involved with JOE but still had 6 months of lagging performance do you think the fund would've faced the same redemptions? My guess is "yes," but in this case people would've found some other convenient reason to justify selling. Good question! Were there more redemptions in the market crash of 08 & 09 than there are going on now? As I stated above, peak to trough Fairholmes price went from about 32 to between 16 & 17. Now it's been back up as high as 36 or so. You would have thought the "Small" investor would have been spooked out thinking the whole world was crashing back then. Did that happen? I've tried to be careful of when a company is doing a great job sticking to their business and making a good return for their investors, then they decide to change their model or expand out of their area of expertise and they have to start worrying about something else. Not always, but often times their investors suffer even though the companies intentions are honorable. Also there are some pretty good investors who don't believe this was a very good investment. Only time will tell who's right. But uncertainty isn't always good in investing and that may be what's happening with this. Also, if he proves he can handle this and continues growing the value of Fairholme people can always buy back in. Most people probably weren't buyers at market lows but in the 20s or 30s anyway. To both, good discussion, Ron

Are you saying that because for the first 29 years Van Den Berg did great but for the last 10 years he hasn't even beaten the S&P we should claim he's still doing great for his investors? I am speaking about performance numbers from his own web site by the way. Hopefully he'll come back strong. Maybe you can put him in a strong performance category, I myself can't. No one was questioning that Arne in not a great guy by the way. This year he's doing better. Hopefully for his investors he'll continue. He wasn't for me and I pulled out. Luckily it was before 2008. Also I invested with Berkowitz when he first started his fund and added money all the way up til now. I'm sure he'll bounce back at some point, but my gripe now is his involvement with Joe. It would be like if I hired him to manage my money in a mutual fund which he did great at. Then he decided to go off part time running a hard to operate business. Now I'm all confused. Is he going to be a hedge fund? Mutual fund? Property manager? I hired him to be a mutual fund manager! I stuck with him through 2008-2009 when his fund went from the low 30s to the mid teens. I knew what he was doing and I knew he was going through a rough time but he was concentrating on his mutual fund business and would come back. Now I've sold off about 75% and will put my money somewhere else for now. I have to agree with mrstockwells comments.

That is a really good site. Thanks for asking the question and thanks for bringing that site to our attention.

I agree he sure does and I'm sure as good as he is he'll do well for himself and his investors. I guess my thought is Buffett as an example really try's not to get involved in operating company management and stays in his area of expertise which is capital allocation. For Berkowitz his is stock picking and such. I just wonder if he wishes he didn't have the St. Joe distraction. This is part of a thread I started a short while back. Seems to be getting a little more relevant at this point.

About 30% cash. Any time any of my stocks drops 20% I will add back up to my original allocation.