Fiscal Time bomb Ready to Explode

Huge NYT Exposé Reveals Why The Fiscal Timebomb Will Explode Next Year

Business Insider,

31 March, 2012

Nobody wants much to think about it yet, but it's well understood by everyone in Washington and on Wall Street, that a potentially massive fiscal problem is looming for the economy next year.

The issue is divided into three parts:

• Sometime in late 2012 or early 2013, Congress will have to approve another debt ceiling hike.
• At the same time, all of the Bush tax cuts are set to expire -- not just the tax cuts for the rich.
• Thanks to the last debt ceiling deal, some big time spending cuts are due to go into effect starting in 2013. In theory, these could be reversed by Congress, but in the context of everything else it will be challenging.

Trying to figure out how it will shake down is especially difficult since it's an election year.

But in the worst case scenario we could have bracing austerity (tax hikes and spending cuts) coupled with another heart-stopping debt ceiling fight. Or we could have some kind of reversal of the spending cuts and a debt ceiling fight, and perhaps another downgrade from ratings agencies, another potential confidence blast.

Just in terms of the drag on growth, recent analysis by Barclays (according to BW) puts the hit at around 3% of GDP.

Furthermore, whereas in the last debt ceiling fight, Obama was eager to ensure that there would be no cuts in 2012 (an election year), it's not clear that he'd make the same bet this time, as a lame duck (if he wins, or even just in the lame duck session), as he's apparently open to the idea of seeing all the Bush tax cuts expire on everyone.

All this was already known.

You'll probably feel even worse about things after you read the latest cover story by Matt Bai in The New York Times Magazine on the failure of Obama and Boehner to strike a "Grand Bargain" in the summer of 2010.

It's a very long, and detailed story, but one key point is that yes, Obama and Boehner, for whatever reason, did think they could work with each other, and were tantalizingly close at times to a real deal. Obama was willing to concede on spending and entitlements, and Boehner was actually willing to concede on raising revenue, a decision that could prompt a revolt within a GOP that had just been swept to power with the exact opposite mandate.

What's also clear is that all the cliches about Boehner not really being in command of his ship, and Eric Cantor wanting to undermine him seem to be true.

For example, in describing the negotiations, Bai writes:

Like much of Washington, White House aides were perplexed by the relationship between Boehner and the man who was 14 years younger and next in line for his job, Eric Cantor. During one of a series of tense White House meetings with Congressional leaders in July, Obama’s aides had been stunned — even a little embarrassed — to see Cantor, when asked for his opinion, directly contradict the speaker in front of the president. He insisted that the caucus would not accept the kind of sweeping deal that both leaders wanted. It struck Obama’s aides as breach of Washington decorum, and it appeared to betray deeper divisions inside the Republican caucus. When Daley and Geithner were first invited by Boehner to his Capitol office to restart the negotiations in mid-July, they were surprised to find Cantor there too. It was one of the main reasons that the White House dared to hope a deal might work. They assumed that Cantor’s presence meant that the two Republican leaders were now speaking with the same voice.

However, what's really worrisome is that chastened by the events of the debt ceiling debacle, nobody seems to have any hope that DC is going to have a better go of it this time around.

Now, with another debt battle looming, the chance of resurrecting some kind of grand bargain doesn’t seem very promising. Obama and Boehner have spoken only a handful of times. The administration’s most driven dealmaker, Bill Daley, never recovered from the episode, which poisoned his relationship with Harry Reid, who blamed Daley for having kept him and other Senate leaders in the dark as the negotiations unfolded. Daley resigned in January and was replaced by Jack Lew — the guy whom Boehner and his aides tried to sideline.

When I talked to Boehner about the two potential crises coming at year’s end (the possibility of automatic budget cuts and, weeks later, another vote on the debt ceiling), he told me he was placing his hopes on getting a new president. “I don’t see any real evidence that this president has the courage to lead,” he growled. He added that any comprehensive deal might be even harder to sell to his members this time around.

This is why, in the end, there's a good argument to be made that a Romney election would be much better for the economy, in that in all likelihood, a unified GOP Washington would forget about spending cuts and austerity, and quickly focusing on making sure nothing bad happens to the economy, defusing the fiscal bomb by punting.

Read the New York Times article HERE