Warren Buffett: Debt ceiling should be removed

[txlaw]

This idea of sovereign default being "unthinkable" due to some nebulous view of a social compact (a view not universally held mind you) or the most famous line from a battlefield speech 150 years ago (a war in which the government "of the people" imprisoned their own political dissidents) is just childish.

 

There have been 200 or so sovereign defaults in the history of this little blue planet.  201 is not some unthinkable outcome -- it's inevitable.  Believe it or not, finance didn't begin in 2009 and, heads up, Greece has done this before ... A LOT (despite what George Papandreou wants you to think.)

 

Sovereign default is simply a large efficient breach -- a legal strategy that is as old as contracts themselves.  Someone compares this to having a "gun to your head" and what I say is radical? It's not radical ... it's history.  If you a sovereign default is the end of the world, then it's a miracle we have come this far with all those "world ending" sovereign defaults from the past. 

 

The point is not that default is literally "unthinkable."  Of course, the US can default. 

 

I'm arguing that you should not characterize any such default as merely "the government" reneging on its obligations.  In my view, our theory of government holds that government actors are agents of the people, and the people are sovereign.  Or as Benjamin Franklin said, "In free governments, the rulers are the servants and the people their superiors and sovereigns."  Therefore, ultimate authority resides in the people, and if the US government defaults on its obligations, the people have defaulted on our obligations.

 

That is not a childish view, of course.  It is a view on political philosophy. 

 

But let's leave the political philosophy aside and talk specifically about the effects of a US default (whether or not that is default by the government or default by us, which is a tangential point in this debate).

 

What WEB is arguing is that if the US defaults, that could potentially have a huge negative effect on the US economy.  Interest rates could shoot up, which would further reduce the prospects of climbing out of this predicament we find ourselves in.  Confidence in the US government and confidence among economic actors could decrease to the point that it affects the recovery, as well.  If the US slips back into recession, then the global economy will be affected. 

 

In other words, a default could have a huge impact on the lives of people in the US and across the world.

 

So the point is that there is a possibility (but not a certainty) that catastrophe could result from the US defaulting.  Therefore, if we believe in risk management, we should not be taking any chances with the US defaulting.  Yes, life will go on after a default.  But it could be much worse for people because of that default.

 

Perhaps you do not agree that there is a possibility of catastrophe occurring if the US defaults.  Then that is what you should be arguing. 

[Liberty]

And it's not like the kind of default that is on the table right now would reduce debt obligations. The US would still pay its debts in most likely scenarios, but only after creating a crisis of confidence among its debtors. How is that good, I'm not sure...

[Tim Eriksen]

Am I wrong in thinking that everyone in the government agrees that we must spend less, but that the primary hang up is whether there should be tax increases incorporated into any deal?

 

I am sorry to say that I think you are wrong. Everyone in the gov't does not agree that we must spend less. The only reason that we are now having this debate in Congress is because of the outcome of the 2010 elections. If the Democrats still had control of both houses of Congress and the Presidency there would be no debate about spending less. There would have been no extension of the tax cuts in December, taxes would have increased. Unchallenged, the 2011 budget deficits would be between $1.5 to $2 trillion, and taxes would have been raised yet again in an attempt to cover the shortfall. Does anyone out there doubt this???

 

I agree that we are actually starting to grapple with this issue because the Democrats lost control of Congress.  I actually think it was a good thing that the Dems lost control.

 

But I wasn't literally saying that everyone in the government agrees that we must spend less.  What I was implying was that both the Republicans and Democrats have put long-term spending reduction plans on the table. 

 

The Obama plan was put out in April.  The Republicans didn't like it because it didn't go far enough on entitlement cuts (particularly, health care cuts) and because of the tax increases on high income Americans. 

 

Obviously, Obama's intention was to come to a compromise where both sides would give concessions.  Up until now, though, the House Republicans have refused to make concessions on revenue (tax) increases, and they are being recalcitrant about this to the point where they're willing to put a gun to the head of the nation's economy.

 

Now that Obama has backed the Gang of Six plan, can the GOP legitimately say that this is about saving the country from our debt versus scoring political points?

 

I would argue that the GOP can totally argue it is about saving the country from our debt.  The Gang of Six plan (or framework) sounds good on the surface, but they are only cutting projected growth in spending.  Please correct me if I am wrong, but their plan is expected to increase the overall debt by $5 trillion in ten years.  What Washington thinks is great is still stupid.  Our debt to GDP ratios will likely be worse than they are now.  Ten years plans that still don't result in a balanced budget should not be considered rational. 

 

There is a big difference in the spending reduction plans each party has put forward.  The conservative GOP plans (Ryan and Coburn) actually put some specifics, while Obama talks numbers but won't identify any specific cut/reduction.   

[Cevian]

Assuming that instead of this being the US Government, it was a Corporation in which we were all shareholders. The Corporation was very large, employing millions of people and having many families, suppliers and stakeholders dependent on it. The Company, however, had a lot of debt and it was losing money every year.

 

The articles contained a section which included a provision that had a debt limit which the Directors needed to vote on from time to time. This year, under that Clause, some of the Directors had decided not to raise the limit unless they all (including the CEO) agreed, and put specific measures in place, to change the Company's historical culture of running a deficit every year.

 

As shareholders, wouldn't we be happy with that kind of clause empowering the Directors to perform their Fiduciary obligations? At the AGM, would we really be asking and voting to remove that Clause altogether?

 

This is not a Party thing. I think this is an important discussion that everyone needs to have and, without this Clause, we would not be having it. We may each have a different answer as to how to fix the problem but I am surprised at the suggestion that the Clause which permitted this discussion in the first place be removed.

[txlaw]

I would argue that the GOP can totally argue it is about saving the country from our debt.  The Gang of Six plan (or framework) sounds good on the surface, but they are only cutting projected growth in spending.  Please correct me if I am wrong, but their plan is expected to increase the overall debt by $5 trillion in ten years.  What Washington thinks is great is still stupid.  Our debt to GDP ratios will likely be worse than they are now.  Ten years plans that still don't result in a balanced budget should not be considered rational. 

 

There is a big difference in the spending reduction plans each party has put forward.  The conservative GOP plans (Ryan and Coburn) actually put some specifics, while Obama talks numbers but won't identify any specific cut/reduction.     

 

The Gang of Six framework is another attempt to get the two sides in the House to actually come to a compromise on spending cuts and revenue increases.  The reality is that the GOP will never be able to pass the conservative plan in its pure form, without any revenue increases.  And the Dems will not be able to avoid cutting spending in the way they wish.  It would be horrible if both sides actually got what they want.  Very irresponsible.

 

There has to be a compromise.  And it should not be tied to the debt ceiling issue.  That is the key point. 

 

There's a reason why the plan put forward by Obama is light on specifics, and why almost all his plans are light on specifics.  The reason is that the House is full of representatives on both sides who are hyper-partisan.  By putting forward general frameworks, Obama signals to both sides the parameters in which the House should work to hammer out all this big legislation.  Essentially, he is saying to Congress:  "You are the legislators.  I will tell you what I will and won't veto and what I think the legislation should generally look like, but I'm not going to be the head of the party and make it so that no legislation gets through."  This angers both the GOP and the Dems. 

 

My take is that Obama is trying to be a responsible Executive.  This might not be the right approach to legislation.  But that's the approach he seems to be taking.  Only time will tell if he is right in his leadership approach.

 

I cannot tell you what are the specifics of the various plans and which are optimal.  I'm getting too much conflicting information to figure out what the hell is actually going on. 

 

But it does seem like the Senate is acting pretty rationally (both the GOP and the Dems) compared to the House.  And the House Republicans are the worst of the lot because they are posturing for the next election.

[JSArbitrage]

Obama: The Responsible Executive (another character to be played in this drama)

 

http://www.nationalreview.com/corner/256199/obama-not-always-fan-upping-debt-ceiling-katrina-trinko

 

Seriously: how do smart, educated people fall for this over and over?  The desire to want to believe that our leaders know what they are doing and do it for the greater good? Goldfish memory?

 

Obama, The Dems and Repubs are politicians through and through.  They will be for or against the same thing, depending on who is in power.  Pelosi/Boehner would vote to decide that 2+2=7 if it prevented the other from getting what they want.  That's all this is.

 

It's not responible executive Obama bringing reason to a bunch of animals.  It's not courageous Republicans preventing a sale of our children's future.  It's politicans fighting each other ... as usual.  

 

Stop falling for the same tricks over and over.  This isn't good versus evil or reason versus emotion.  And it's not enlightened finance versus defaulting luddites.

[txlaw]

Obama: The Responsible Executive (another character to be played in this drama)

 

http://www.nationalreview.com/corner/256199/obama-not-always-fan-upping-debt-ceiling-katrina-trinko

 

Seriously: how do smart, educated people fall for this over and over?  The desire to want to believe that our leaders know what they are doing and do it for the greater good? Goldfish memory?

 

Obama, The Dems and Repubs are politicians through and through.  They will be for or against the same thing, depending on who is in power.  Pelosi/Boehner would vote to decide that 2+2=7 if it prevented the other from getting what they want.  That's all this is.

 

It's not responible executive Obama bringing reason to a bunch of animals.  It's not courageous Republicans preventing a sale of our children's future.  It's politicans fighting each other ... as usual. 

 

Stop falling for the same tricks over and over.  This isn't good versus evil or reason versus emotion.  And it's not enlightened finance versus defaulting luddites.

 

Of course I do not believe that all the politicians are doing everything for the greater good . . . or that they are acting like animals.  Or that this is good versus evil.  Or that people who are fine with defaulting are luddites.  Not sure how you are getting that from my previous posts.  You are either intentionally twisting my words or are unintentionally misconstruing what I'm saying.

 

As value investors, we all know that incentives matter, and that there are perverse incentives that affect how politicians behave.  We should also be aware that the US two party system and the way that coalitions are built will affect the stances that politicians take, especially in the House, where it really matters how the "team" strategizes and plays "the game."

 

But politics is the art of compromise.  And right now, only the Senate and the White House are really willing to come to compromises on these big issues in a timely manner.  Both sides of the House, and particularly the House Republicans, are playing chicken in a way that is very dangerous.  It's like the first TARP vote all over again.  See http://www.rollcall.com/issues/57_10/Debt-Ceiling-Vote-TARP-GOP-207467-1.html.

 

I do not mean to suggest that Obama doesn't play politics.  He certainly does.  He is a very gifted politician.

 

But being a gifted politician and trying to do what's right for the country are not mutually exclusive.  I was no fan of George W, but I would never say that he wasn't trying to act in a manner that was beneficial to the country when he was President.  Remember how George W was in favor of TARP, but it was the House GOP that killed it in the first vote?  The reason that the House GOP did this was because it was "an election-defining vote," as the Republican political consultant states in that article from Roll Call.

 

Your article quotes Obama in 2006, which was before the financial crisis:

 

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

 

Far from being a sign that Obama is a hypocrite, it shows that Obama believes that we have a major debt problem.  It also shows how policy decisions change depending on the circumstances.  Ever heard of countercyclical policies? 

 

Five years ago, I was also arguing that we should be clamping down on spending, addressing the entitlements issue, and acknowledging that we made a huge mistake getting into an unnecessary war that was sucking up crazy amounts of money.  I still believe those things, but I do not think that now is the time to drastically cut spending.  Nor do I think it would be a good idea to default on our obligations at this time, when the global economy is still in a precarious situation.

 

[Tim Eriksen]

 

Your article quotes Obama in 2006, which was before the financial crisis:

 

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

 

Far from being a sign that Obama is a hypocrite, it shows that Obama believes that we have a major debt problem.  It also shows how policy decisions change depending on the circumstances.  Ever heard of countercyclical policies? 

 

Five years ago, I was also arguing that we should be clamping down on spending, addressing the entitlements issue, and acknowledging that we made a huge mistake getting into an unnecessary war that was sucking up crazy amounts of money.  I still believe those things, but I do not think that now is the time to drastically cut spending.  Nor do I think it would be a good idea to default on our obligations at this time, when the global economy is still in a precarious situation.

 

 

I think you are being too kind to Obama.  Many would say Obama's quote in 2006 was purely politics.  Who can tell?  Shouldn't we judge based on actions and not words.  He didn't show any concern about a debt problem as President until the last few months.  His original budget plan surely didn't address the issue.  I guess what person sees as being an Executive another person sees as thumb sucking. 

 

I also think we are too quick to label the House as unflexible, and the problem.  There is a reason beyond politics.  For example, the new Republicans do not want government spending to be 25% of GDP.  They think it should be under 20%, therefore tax increases are off the table.  It in their minds should be all about spending cuts and policies that will help economic growth.  Many Democrats appear to be inflexible as well in that they refuse to support a plan that does not increase taxes.  At least that fits with their political philosophy. 

http://www.bloomberg.com/news/2011-07-21/grand-bargain-returns-to-u-s-debt-talks-as-negotiators-open-paths-to-deal.html

 

The problem is those who cannot match the revenue and the expenditure.  Those who want increased spending and lower taxes.  This sad tragedy started under Reagan when the Democratic Congress accepted the tax cuts but largely rejected the spending cuts he proposed, and Reagan accepted it.  Since then we have had nearly thirty years of stupidity.  One could make a case that what many call the irrational extremes (the House) are actually rational, in that their view of the size of government matches their view on the appropriate level of taxation, whereas some in the middle are wanting spending without paying for it (i.e, both parties in the Senate).  It is case where we would be better off with one side or the other winning, but compromise is not working.  Sadly, most Americans do not understand the issue, or cannot decide which course of action is best.

[zarley]

As always, Howard Marks has summed things up nicely in a memo to clients:

 

http://www.oaktreecapital.com/MemoTree/Down%20to%20the%20Wire%2007_21_11.pdf

 

I have a hard time seeing much to disagree with there.  

[Liberty]

As always, Howard Marks has summed things up nicely in a memo to clients:

 

http://www.oaktreecapital.com/MemoTree/Down%20to%20the%20Wire%2007_21_11.pdf

 

I have a hard time seeing much to disagree with there.  

 

Thanks for posting. This is a good reminder:

 

"Home equity loans enabling owners to drain off any equity in their homes.  Fifty

years ago these were called second mortgages, and people who had them were

considered by their neighbors to be in financial trouble."

 

Crazy how renaming something can totally change how people see it.

[txlaw]

 

Your article quotes Obama in 2006, which was before the financial crisis:

 

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

 

Far from being a sign that Obama is a hypocrite, it shows that Obama believes that we have a major debt problem.  It also shows how policy decisions change depending on the circumstances.  Ever heard of countercyclical policies? 

 

Five years ago, I was also arguing that we should be clamping down on spending, addressing the entitlements issue, and acknowledging that we made a huge mistake getting into an unnecessary war that was sucking up crazy amounts of money.  I still believe those things, but I do not think that now is the time to drastically cut spending.  Nor do I think it would be a good idea to default on our obligations at this time, when the global economy is still in a precarious situation.

 

 

I think you are being too kind to Obama.  Many would say Obama's quote in 2006 was purely politics.  Who can tell?  Shouldn't we judge based on actions and not words.  He didn't show any concern about a debt problem as President until the last few months.  His original budget plan surely didn't address the issue.  I guess what person sees as being an Executive another person sees as thumb sucking. 

 

I also think we are too quick to label the House as unflexible, and the problem.  There is a reason beyond politics.  For example, the new Republicans do not want government spending to be 25% of GDP.  They think it should be under 20%, therefore tax increases are off the table.  It in their minds should be all about spending cuts and policies that will help economic growth.  Many Democrats appear to be inflexible as well in that they refuse to support a plan that does not increase taxes.  At least that fits with their political philosophy. 

http://www.bloomberg.com/news/2011-07-21/grand-bargain-returns-to-u-s-debt-talks-as-negotiators-open-paths-to-deal.html

 

The problem is those who cannot match the revenue and the expenditure.  Those who want increased spending and lower taxes.  This sad tragedy started under Reagan when the Democratic Congress accepted the tax cuts but largely rejected the spending cuts he proposed, and Reagan accepted it.  Since then we have had nearly thirty years of stupidity.  One could make a case that what many call the irrational extremes (the House) are actually rational, in that their view of the size of government matches their view on the appropriate level of taxation, whereas some in the middle are wanting spending without paying for it (i.e, both parties in the Senate).  It is case where we would be better off with one side or the other winning, but compromise is not working.  Sadly, most Americans do not understand the issue, or cannot decide which course of action is best.

 

Perhaps I am being too easy on Obama.

 

I would agree that Obama hasn't really been hugely involved in the negotiations on fixing our long term debt problems until recently.  He did nominate Simpson and Bowles to chair the fiscal policy commission, but he never really addressed their recommendations when they came out.  That was a very unfortunate decision.  Probably based on politics and pleasing some of the people in his party.   

 

The House is the problem, though, in my opinion.  Limiting government spending to 20% of GDP is not a bad goal.  But it is also not mutually exclusive with raising revenues either. 

 

The timing issue is a big deal as well.  Do we immediately put in spending cuts that are the functional equivalent of austerity measures or do we phase in cuts over time?

[Rabbitisrich]

The ~20% of GDP mark would have a procyclical effect more than anything else. Increasing expenditures during the good times and then cutting back during the bad seems disruptive.

[Liberty]

http://www.bbc.co.uk/news/world-us-canada-14258888

[Myth465]

I think some of you guys are nuts and the country is so polarized, that now even facts are up to interpretation.

 

The House Republicans, control the House after 1 election win. Since when does winning 1 election and 1 seat of power entitle a party / group to get exactly what they want with no compromises? The Dems really have no principles and have put everything up, but they require minor tax raises along with whatever cuts are agreed upon. This makes sense if the goal is to eliminate the deficit, it doesnt really work if all you want to do is starve the beast.

 

The House has basically said its our way or the high way. Those are the facts as far as I can tell. Not sure what you guys are seeing, or where you are getting your news from. Its a game of chicken, where one party is betting the other caves. The republicans are not budging because all of them have signed the Grover N pledge about never raising taxes (which in and of itself is insane)...

 

Obama is spinless and should have put his foot down 3 months ago, perhaps simply saying he wont negotiate with terrorist and will only sign a bill with the issues delinked. The compromiser in chief has brought this upon himself and the country inmo because every issue has been handled like this. All it has done is encourage the right.

[Myth465]

Whats wrong with something like this.

 

http://finance.yahoo.com/blogs/daily-ticker/everything-table-david-walker-plan-restore-fiscal-sanity-181615173.html;_ylt=AgklOvB.FJiXR1Xz67OYyUcp2YdG;_ylu=X3oDMTBvdDRyaDhmBHBvcwMxBHNlYwNNZWRpYUJsb2dJbmRleA--;_ylg=X3oDMTFpMm9iMzh1BGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANibG9nBHB0A3NlY3Rpb25z;_ylv=3

 

It doesnt starve the beast, but solves most of our pending issues. One party however would wholly reject it because of tax increases.

[biaggio]

5 Great Slides From Goldman On What's At Stake In The Debt Ceiling Fight

 

Read more: http://www.businessinsider.com/goldman-sachs-explains-whats-at-stake-right-now-because-of-the-debt-ceiling-2011-7#want-to-impress-your-friends-with-knowledge-about-the-debt-ceiling-done-6#ixzz1Sw0OWkFf

[rjstc]

I think some of you guys are nuts and the country is so polarized, that now even facts are up to interpretation.

 

The House Republicans, control the House after 1 election win. Since when does winning 1 election and 1 seat of power entitle a party / group to get exactly what they want with no compromises? The Dems really have no principles and have put everything up, but they require minor tax raises along with whatever cuts are agreed upon. This makes sense if the goal is to eliminate the deficit, it doesnt really work if all you want to do is starve the beast.

 

The House has basically said its our way or the high way. Those are the facts as far as I can tell. Not sure what you guys are seeing, or where you are getting your news from. Its a game of chicken, where one party is betting the other caves. The republicans are not budging because all of them have signed the Grover N pledge about never raising taxes (which in and of itself is insane)...

 

Obama is spinless and should have put his foot down 3 months ago, perhaps simply saying he wont negotiate with terrorist and will only sign a bill with the issues delinked. The compromiser in chief has brought this upon himself and the country inmo because every issue has been handled like this. All it has done is encourage the right.

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.”

[Tim Eriksen]

Whats wrong with something like this.

 

http://finance.yahoo.com/blogs/daily-ticker/everything-table-david-walker-plan-restore-fiscal-sanity-181615173.html;_ylt=AgklOvB.FJiXR1Xz67OYyUcp2YdG;_ylu=X3oDMTBvdDRyaDhmBHBvcwMxBHNlYwNNZWRpYUJsb2dJbmRleA--;_ylg=X3oDMTFpMm9iMzh1BGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANibG9nBHB0A3NlY3Rpb25z;_ylv=3

 

It doesnt starve the beast, but solves most of our pending issues. One party however would wholly reject it because of tax increases.

 

A couple of things appear problematic to me. That plan is to balance the budget except for interest costs.  So it is acting like 200 to 300 billion of yearly deficits is acceptable.  If interest rates were to return to more historical levels it would add an additional 200 to 300 billion.  If I recall correctly Kyle Bass stated that for every 1% change in interest rates results in $70 billion of addional interest costs.  I, personally, do not think that any plan that wil likely run half a trillion dollar deficts and increases the national debt is responsible.

 

Second, it is fairly lopsided in favor of the Democratic Party.  For one many Democrats want Republicans to break their no tax pledge for political reasons as much as fiscal reasons.  Second it results in a federal govenment at 22 to 23% of GDP versus a historical 20%.  In other words, the smaller government crowd loses.  A large part of cuts are in defense, which is also more strongly supported by Republicans.  So what is presented as a fair and a "balanced approach" is really not. 

 

I for one want to see a specific plan to bring the budget into balance within six years (none of the ten year crap).  I am tired of frameworks with no specifics (Gang of Six plan).  That is kicking the can down the road.  And I don't want a plan with rosy 5% GDP growth scenarios (Pawlenty and most Republican plans).  Nor do I want a plan where increased taxes kick in before unspecified spending reductions (most Demoractic "plans").  Washington is talking like they are serious but very few actually are.  It is disgusting.  We all know the end result is going to be  plan that is presented as a great solution when it really is not. 

 

     

[Myth465]

I think thats the problem with politics. Everyone wants to impose their will on the Public. Honestly the public likes its entitlements. At this point we should just be focused on getting them to pay for them. The GOP wants to impose their will under the guise of balancing the budget. It annoys me.

 

The right level of spending vs. GDP is not really up to me. I just hope whatever it is it its paid for. You can say you want 20%, but the public wants their entitlements and benefits.

 

Personally I would go with 16.3%, buy following Ron Paul / Dennis K and ending at least 2 of the current 3 wars and closing several foreign military bases. Entitlements would be cut slightly, and taxes would be broadened. Lower rates, more people paying, and a higher overall tax take.

 

Im not god though, well at least not yet.

[Packer16]

I don't think anyone is saying take away entitlements, they are saying reduce them or at least reduce thier rate of growth.  As to Obama providing no specifics, I think it is a mistake if he is trying to negotiate a solution.  If he is facilitating the two sides that is one thing but my impression is that he was acting as a Democratic negotiator with the Speaker.  As far a I know the other side (Democrats) have no specifics to negotiate with beyond the status quo.  Let me know if I am missing something?  Thx.

 

Packer

[Tim Eriksen]

I think thats the problem with politics. Everyone wants to impose their will on the Public. Honestly the public likes its entitlements. At this point we should just be focused on getting them to pay for them. The GOP wants to impose their will under the guise of balancing the budget. It annoys me.

 

 

I completely agree that whatever the level of spending in relation to GDP it must be paid for.  That has been my point.  Where we disagree is that I see rationality at the extremes (spending commensurate with taxes whether high or low).  You implied the House was a problem where I think they are the more rational of the extremes (the level of taxes that fits their model is doable and should result in a strong economy, whereas a model with revenues at 25% of GDP is extremely difficult, which is why they have yet to present a plan showing how to achieve it).  The problem is the compromisers.  The compromisers are trying to keep both high spending and low taxes and trying to deceive the public in order to do so.  They present themselves as fair and wise when they are not.  Any plan that basically follows the same path of the last thirty years and hopes for a different result is foolish (if not insane).  How in the world can anyone think that the best plan is one that increases the national debt by 5 trillion over ten years. 

 

You are definiely right that the public likes their entitlements.  They also like others to pay for them.  Isn't that the whole problem?  Washington is following what the voters tell them.  Sadly the voters are grossly ignorant.  Way too many think foreign aid is a large part of the budget and that trimming it would make a meaningful difference. 

[Guest ValueCarl]

Question for Mr. Buffett? Why hasn't he recommended to The American People that, they FIRE their nearly 100 year old miscreant banker at the FRAUDULENT RESERVE who has aided and abetted with zero risk, quite frankly, at a seven percent RISK FREE CHARGE, the silly folly of the PEOPLES representatives who have been poorly advised by those same "MEDDLING" middlemen throughout the decades?  >:(   

 

His partner, Mr. Munger, has duly advised investors over the years that, "the definition of insanity is doing the same things over and over again while expecting a different result."

 

All this debt ceiling banter is a distraction to the 100 year destruction of the Peoples' currency by a fiat printing machine which has denigrated the dollar to 4 cents of its original value since their involvement circa 1913.

 

Haven't these two sages caught on to this pattern yet, or is their something they refuse to tell to, "The American People."  :o

[Rabbitisrich]

I think thats the problem with politics. Everyone wants to impose their will on the Public. Honestly the public likes its entitlements. At this point we should just be focused on getting them to pay for them. The GOP wants to impose their will under the guise of balancing the budget. It annoys me.

 

 

 

You are definiely right that the public likes their entitlements.  They also like others to pay for them.  Isn't that the whole problem?  Washington is following what the voters tell them.  Sadly the voters are grossly ignorant.  Way too many think foreign aid is a large part of the budget and that trimming it would make a meaningful difference. 

 

If entitlements are sticky and they continue to comprise a large percentage of liabilities, then isn't a GDP spending target asking for trouble? Whole industries arise from government spending, which means that lobbyists and special interest parties emerge to resist irrelevance. I see such a plan heading down the path of the "debt limit", except with the same chart as the social security cost of living adjustment.

[twacowfca]

Am I wrong in thinking that everyone in the government agrees that we must spend less, but that the primary hang up is whether there should be tax increases incorporated into any deal?

 

I am sorry to say that I think you are wrong. Everyone in the gov't does not agree that we must spend less. The only reason that we are now having this debate in Congress is because of the outcome of the 2010 elections. If the Democrats still had control of both houses of Congress and the Presidency there would be no debate about spending less. There would have been no extension of the tax cuts in December, taxes would have increased. Unchallenged, the 2011 budget deficits would be between $1.5 to $2 trillion, and taxes would have been raised yet again in an attempt to cover the shortfall. Does anyone out there doubt this???

 

 

 

Now, let's see.  Which party was in complete control of congress in December, 2010 when the Bush tax cuts were extended and lots of other goodies handed to high income types?  Was it the same party that has the Lion's share of ultra high income financial supporters? 

[Liberty]

http://www.bloomberg.com/news/2011-07-22/obama-says-republicans-walking-away-from-fair-deal-in-debt-ceiling-talks.html