This Morning’s Papes

July 24th, 2012 at 9:40 am

Ideological Grandstanding Isn’t Free: I’m swimming in de Nile about this one, but Rep Boehner, Sen McConnell and the R’s are threatening another round of stonewalling on the debt ceiling, which we are expected to again bump up against in February.   I won’t go through the gory details, but instead of a the historical rubber stamp (after, to be fair, lots of accusatory noise by the party not in the White House), the R’s used the ceiling as a leveraging tool, threatening default on US debt obligations unless they got what they wanted.

Well, it turns out this cost the nation over $1 billion, according to the GAO.

Months of political squabbling last summer between the White House and Congress over how to spend and save trillions of dollars cost taxpayers at least $1.3 billion, according to a new report.

The nonpartisan Government Accountability Office said Monday that the $1.3 billion in costs came as the result of increased borrowing costs for the Treasury Department. The final cost is expected to climb higher as multi-year obligations and other outstanding costs are added later.

The larger theme here is important: these days, what looks to the world like principled stands are exactly the opposite.  The R’s who held the process hostage don’t really care about fiscal rectitude in any real, pragmatic sense that could actually make a positive difference.

Neither do they care about lessening the “uncertainty” they’re always prattling on about.  If they did, they’d have compromised in the supercommittee or at least be working in earnest to avoid the fiscal cliff.

Meanwhile, they’re gearing up to waste another chunk of taxpayer money on the next reckless debt ceiling fight.

Euromess: Well, here’s the relevant numbers:

Spanish 10-year bond: 7.58%

US 10-year bond: 1.45%

That’s deep in the red zone for Spanish government bonds, reflecting investors’ negative assessment of the bailouts amidst a deepening recession and a depression level unemployment rate of 25%.

I haven’t written about this for a while because I have little to add to what’s being said elsewhere and what I think is pretty clear by now.

–The economics demand actions that are blocked by the politics. Austerity measures are contraindicated, and demonstrably counterproductive, but for the core countries to help the peripheries invokes huge outcries.  Imagine the US TARP, but targeted at Mexico and you’ll get the idea.

–The authorities—the IMF, the ECB, the European Commission—need to distinguish between insolvency and illiquidity.  In the former case—e.g., Greece—bailouts don’t work.  In the latter case, which is where I’d put Spain, but I’m less sure as this drags on, bailouts have to be of a magnitude to reflate the banks.  You’ve got to be guided by the Powell doctrine or you’ll fumble and bumble along, much like we’re seeing.

–One step forward, two steps back.  A few weeks ago, I was impressed—as were the markets—by the ECB’s decision to lend directly to the troubled banks in countries like Spain.  This was much better than lending to the countries themselves, thereby raising their sovereign debt levels.  But where’s the follow through?  Nowhere I can see.  If so, it’s precisely this dynamic that makes a tough situation even tougher.  If observers don’t believe you can implement the occasional good idea here, then market expectations, sentiments, and animal spirits quickly become your enemy, and make the lift even heavier.


Print Friendly, PDF & Email

One comment in reply to "This Morning’s Papes"

  1. David says:

    In Europe, its worse than “no follow-through.” Its been announced that while there will be lending directly to banks from the common fund, the loans must be guaranteed by the sovereigns. So they haven’t really decoupled the sovereign debt crisis from the banking crisis at all. It’s just moving around the deck chairs while the ship is sinking.

    I think all of the senior politicians are now expecting Greece to exit the Euro. When that happens, there will be a massive bank run in the periphery. If you had money in Spanish banks, would you keep it there? Neither would I.