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The Debt Ceiling And The Liberal Brain

I am conflicted about the debate over the debt ceiling. As an instinctive conservative who believes our country’s financial reputation should be managed prudently, any talk of default, even if only technical default, is deeply disturbing. A country’s reputation for being a good credit and honoring its obligations is a trust, one that Americans have traditionally held to be of the highest importance ever since Alexander Hamilton created a national credit system to cement the union among the newly United States.

Moreover, US government securities have played a pivotal role in the development of modern financial theory, one of whose key assumptions is the risk free rate, and those gradations of credit risk beyond it that go into the determination of interest rates. For all practical purposes, the dollar and Treasury securities are the anchor of the global financial system and the complex financial models that run it – not the Euro, the pound, the yen or the renminbi. Anyone who would upset the apple cart must be mindful of the law of unintended consequences.

But. (You knew there would be a but!). What if the government that created the reference currency and interest rate matrix is recklessly injecting risk into the system? Then the risk analysis changes. It may be LESS risky to reign in this behavior now. That is the shifting terrain on which the players in this battle will be conducting their battles.

I don’t know the answer, and will be following the experts very carefully as this debate unfolds. To decide wisely we must understand the liberal brain, a subject I have touched on in the past. Ever since the Democrats won back control of Congress in November 2006, they have embarked on a high stakes strategy of reckless, improvident spending to alter the balance of power in our economy, and to exalt the public sector at the expense of the private. They used the severe recession and traditions of stimulus spending as their fig leaf. But no one is being fooled. It has been a naked power grab, all the more infuriating because of its abysmal economic results.

There is a reason that the Founding Fathers put the control of the nation’s finances in the hands of Congress, and especially that branch of it that goes before the people every two years. The colonists who rebelled against the English crown cut their teeth in battling the royal governors and choking off their funding. The framers of the Constitution wanted to institutionalize this power over the purse to safeguard liberty.

Modern liberalism has pursued an ethos of wild spending beyond the wildest dreams of the New Deal, the Great Society and Clintonomics. Reasonable minds can differ about how fast we can change course, and those differences will surface in the debt ceiling debates. But change course we must, and we must be acutely sensitive to the distinction between compromise and capitulation to blackmail. And like a Supreme Court justice once famously observed about pornography, we’ll know it when we see it.

streetwisehttp://www.unifiedpatriots.com
Career financial professional with 30+ years in treasury management. American Airlines retiree. Lifelong Republican with center-right views. Host of Italian Tomatoes radio show on Blog Talk Radio. Managing Editor- www.jetamore.com, a travel and aviation blog.

5 COMMENTS

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5 COMMENTS

  1. Whew! You say you don’t have the answer, SW – I’m not sure I even understand the problem. I just have more questions. I don’t know jack about finance, interest rate calculations, etc. When you say the idea of default is disturbing, I think back to the fall of 2008 when we were told we were in crisis mode. I have read a little bit about the background of it, not much, and didn’t understand what I read. But all the financial gurus, at least in Washington, we are told, agreed that we were about to go over a cliff and something massive had to be done. Explain to me how, with all the safeguards that have been put in place since 1929, all the laws that have been passed, all the regulations and regulators, analysts, professionals and everything else, is it possible that something was missed that put us that close to diaster? And then, why should the public believe that we were that close to Doomsday when we hear about how TARP and everything else was bungled and mismanaged and what the banks did or didn’;t do with the money? They bungled it and mismanaged it and we still didn’t fall off the cliff? Then, we recently hear about the stimulus which was 787b being recalculated by CBO to be 43b MORE! How could they miss it that much? And then, what is it, Medicare? I think that’s the one. Now they’re saying it’s going broke five years earlier than they previously thought. FIVE YEARS? How can they miss a projection by five years?
    Why did the economic people abandon their traditional definition of a recession as two consecutive quarters of negative GDP, which didn’t happen until after the 2nd quarter of ’08, and say, “Oh, the recession actually started at the end of ’07”??
    Again, I don’t understand much of it, but I think you actually do have the answer. And that is, as you say, the dollar is the standard, the traditional American way is the model, too much reliance on the opinion of socialist countries leads us to weakening ourselves and destroying the confidence of the developing countries, furthering and worsening the malaise. If it’s truly a global economy, then it doesn’t matter. If that has been way too overstated, then charity starts at home.

    • You have more questions than I have answers 🙂 But then the grand poobahs of Washington and Wall Street don’t seem to have them either.

      Basically, the safeguards put in place after 1929 did not keep up with the new products cooked up on Wall Street, especially derivatives. Also, some parts of financial deregulation went too far, in my opinion, and remaining regulations were not enforced properly. The banks created a situation where no one knew the creditworthiness of other banks or anyone else they were doing business with because of all the new fangled investment products that no one understood properly. Thus, the great intangible-fear-came close to shutting down the system in late 2008.

      Anyhow, the issue at hand with the debt ceiling is simpler. We can service the debt we have. We can’t keep adding to it at these levels indefinitely. Forcing the goverment to cut back by using the debt ceiling as a bargaining chip will be painful. Just letting things go as they are will be less painful in the short run, and much more painful in the long.

      As far as Medicare/Medicaid/Social Security- benefits will be cut or taxes raised or some combination of both. We will survive. And hopefully vent our anger on the pols who lied to us about them.

      • I appreciate your posts, Street. Reasoned and knowledgeable. I probably have a little more suspicion about all these “we must do this to save the economy…the nation…we’re on the brink, etc.” It is clear the monies went to prop up entities that shouldn’t have been propped up, and monies were used as paybacks. Likewise, the extensive expansion of our debt obligations was done deliberately, IMHO, as the Leftist/Democrats knew that we’d have to find a way to pay for it all – raise taxes – simply because our side is too weak to stand up and say “NO.” It is a matter of time as to whether they can pull it off or not.

  2. Likewise Bob ‘me no finance guru here’ but I have questions too. All I know is how this all started. Back in 2008 Pres Bush was off on some foreign trip. Paulson made a phone call to him and said you had better get back here it’s bad. Bush came back & they had some kind of emergency summit and for a couple of days after that, Bush looked like he had seen a ghost. A little later Paulson off the top of his head, wrote “$700 billion” on a napkin and said “we gotta have it or it’s doomsday.” And he got it, basically that fast. And then a lot of financial collapse type stuff happened anyway. Now what on Earth could have made everyone in government go in to instant panic like that?
    (BTW the above narrative is greatly truncated but essentially correct in sequence IIRC) I have always suspected what actually happened is, Paulson got a call from the Chinese they were going to dump all our bonds. If anyone knows the real scoop, I am all ears.

  3. Wow, “recklessly injecting risks”. Just wow.

    That phrase alone was worth the read on this article Streetwise. This phrase has so many connotations and can be used in a number of ways. You applied it to the government’s reckless spending spree, but I think it also applies to recent monetary policy with the QE series. I think even Bernanke is starting to see that he’s been “recklessly injecting risks” since he seems to be backing off talk of QE3.

    But back to the phrase, it’s one I think some of the prominent voices in our community could pick up and use to help show people how dangerous the current path of the government is. Maybe someone can get the phrase to Herman’s speech writer. Or better yet, get Paul Ryan to use it a time or two.

  1. Whew! You say you don’t have the answer, SW – I’m not sure I even understand the problem. I just have more questions. I don’t know jack about finance, interest rate calculations, etc. When you say the idea of default is disturbing, I think back to the fall of 2008 when we were told we were in crisis mode. I have read a little bit about the background of it, not much, and didn’t understand what I read. But all the financial gurus, at least in Washington, we are told, agreed that we were about to go over a cliff and something massive had to be done. Explain to me how, with all the safeguards that have been put in place since 1929, all the laws that have been passed, all the regulations and regulators, analysts, professionals and everything else, is it possible that something was missed that put us that close to diaster? And then, why should the public believe that we were that close to Doomsday when we hear about how TARP and everything else was bungled and mismanaged and what the banks did or didn’;t do with the money? They bungled it and mismanaged it and we still didn’t fall off the cliff? Then, we recently hear about the stimulus which was 787b being recalculated by CBO to be 43b MORE! How could they miss it that much? And then, what is it, Medicare? I think that’s the one. Now they’re saying it’s going broke five years earlier than they previously thought. FIVE YEARS? How can they miss a projection by five years?
    Why did the economic people abandon their traditional definition of a recession as two consecutive quarters of negative GDP, which didn’t happen until after the 2nd quarter of ’08, and say, “Oh, the recession actually started at the end of ’07”??
    Again, I don’t understand much of it, but I think you actually do have the answer. And that is, as you say, the dollar is the standard, the traditional American way is the model, too much reliance on the opinion of socialist countries leads us to weakening ourselves and destroying the confidence of the developing countries, furthering and worsening the malaise. If it’s truly a global economy, then it doesn’t matter. If that has been way too overstated, then charity starts at home.

    • You have more questions than I have answers 🙂 But then the grand poobahs of Washington and Wall Street don’t seem to have them either.

      Basically, the safeguards put in place after 1929 did not keep up with the new products cooked up on Wall Street, especially derivatives. Also, some parts of financial deregulation went too far, in my opinion, and remaining regulations were not enforced properly. The banks created a situation where no one knew the creditworthiness of other banks or anyone else they were doing business with because of all the new fangled investment products that no one understood properly. Thus, the great intangible-fear-came close to shutting down the system in late 2008.

      Anyhow, the issue at hand with the debt ceiling is simpler. We can service the debt we have. We can’t keep adding to it at these levels indefinitely. Forcing the goverment to cut back by using the debt ceiling as a bargaining chip will be painful. Just letting things go as they are will be less painful in the short run, and much more painful in the long.

      As far as Medicare/Medicaid/Social Security- benefits will be cut or taxes raised or some combination of both. We will survive. And hopefully vent our anger on the pols who lied to us about them.

      • I appreciate your posts, Street. Reasoned and knowledgeable. I probably have a little more suspicion about all these “we must do this to save the economy…the nation…we’re on the brink, etc.” It is clear the monies went to prop up entities that shouldn’t have been propped up, and monies were used as paybacks. Likewise, the extensive expansion of our debt obligations was done deliberately, IMHO, as the Leftist/Democrats knew that we’d have to find a way to pay for it all – raise taxes – simply because our side is too weak to stand up and say “NO.” It is a matter of time as to whether they can pull it off or not.

  2. Likewise Bob ‘me no finance guru here’ but I have questions too. All I know is how this all started. Back in 2008 Pres Bush was off on some foreign trip. Paulson made a phone call to him and said you had better get back here it’s bad. Bush came back & they had some kind of emergency summit and for a couple of days after that, Bush looked like he had seen a ghost. A little later Paulson off the top of his head, wrote “$700 billion” on a napkin and said “we gotta have it or it’s doomsday.” And he got it, basically that fast. And then a lot of financial collapse type stuff happened anyway. Now what on Earth could have made everyone in government go in to instant panic like that?
    (BTW the above narrative is greatly truncated but essentially correct in sequence IIRC) I have always suspected what actually happened is, Paulson got a call from the Chinese they were going to dump all our bonds. If anyone knows the real scoop, I am all ears.

  3. Wow, “recklessly injecting risks”. Just wow.

    That phrase alone was worth the read on this article Streetwise. This phrase has so many connotations and can be used in a number of ways. You applied it to the government’s reckless spending spree, but I think it also applies to recent monetary policy with the QE series. I think even Bernanke is starting to see that he’s been “recklessly injecting risks” since he seems to be backing off talk of QE3.

    But back to the phrase, it’s one I think some of the prominent voices in our community could pick up and use to help show people how dangerous the current path of the government is. Maybe someone can get the phrase to Herman’s speech writer. Or better yet, get Paul Ryan to use it a time or two.

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