Tea Party Headed for a Full Rout

My guess is that if the government shutdown and debt ceiling issues are not resolved by next week the markets will begin to decline significantly. Yesterday the Dow was down almost 140 points. It's one thing for the government to shut down and 800,000 workers to be sent home, but it's quite another for people to see the value of their 401(k) accounts plummet. Most people rely on the market for their retirement; that's where the nest egg is stored. The days when workers had a defined-benefit pension plan as well Social Security are over. Once the stock market begins a day-after-day tumble that will be when the Tea Party folds; it will be at this point that, as Obama likes to say, "the House Republican fever will break." Look for this to happen next week if a deal isn't struck over the weekend.

The deal being discussed once again centers around eliminating the medical device tax portion of the Affordable Care Act. There are also muffled noises from the odious Paul Ryan, chairman of the House Budget Committee, about a grand bargain (re-branded as a "down payment") on the budget which would include cuts to Medicare and Social Security. The medical device tax bargain was shot down by Senate leadership. And as for Paul Ryan, I wouldn't believe anything he says or any plan he even remotely comes in contact with.

The problem for Republicans is now that they have gone ahead and actually gone over the brink any deal that Democrats agree to will reinforce the effectiveness of the Tea Party strategy of "government by crisis," something that Democrats, who now occupy the high ground, are rightly unwilling to do. Republicans are mewling about the need for face-saving, that the Democrats need to toss them a bone -- repeal of the medical device tax -- so that they can ratchet back the shutdown. But, once again, why would Democrats do this? If they do they'll just be insuring that it will happen again.

No, the only way out of the impasse is for a full rout of the Tea Party caucus. And though there are plenty of complaints being voiced by Republican Party elders and governors -- Haley Barbour correctly points out that Obama's approval rating was in free fall prior to the shutdown standoff, but no more -- I think it is going to take consecutive days of the Dow falling by a couple hundred points before the pressure is great enough to force Boehner's hand. A significant development from yesterday is the story that Boehner will not allow a default on the debt, presumably by doing what he has so far be unwilling to do with the government shutdown -- allowing an up or down vote on the floor of the House. The Speaker of the House is getting pummeled in the press now, but I still think there is validity to the idea that he is playing the Tea Party against itself, backing the fire eaters on the government shutdown to expose them and burn them out prior to the larger catastrophe of a default on the debt.

Adam Liptak has a piece about Obama's options to raise money if the House Republicans refuse to raise the debt ceiling. Legal opinion centers on the Constitution's 14th Amendment:

Eric Posner, a law professor at the University of Chicago, said that the meaning if not the words of the Constitution left Mr. Obama with room to act. 

“The president has inherent emergency powers,” he said. “It has long been understood that the president should act to protect the country.” 

That is the broadest option for Mr. Obama. The second is based on the actual text of the Constitution, though there is a dispute about what the words in question mean. Section 4 of the 14th Amendment says: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” 

The provision, adopted in 1868, was meant to ensure the payment of Union debts after the Civil War. But it was written in more general terms, as the Supreme Court once noted in passing. “While this provision was undoubtedly inspired by the desire to put beyond question the obligations of the government issued during the Civil War,” Chief Justice Charles Evans Hughes wrote in 1935, “its language indicates a broader connotation.” 

On Thursday, Mr. Carney dismissed the argument, popular in some legal circles, that the amendment authorized the president to raise the debt ceiling. 

“We do not believe that the 14th Amendment provides that authority to the president,” he said. He added that the meaning of the provision had divided constitutional scholars. That alone, Mr. Carney said, “means that it would not be a credible alternative.”

Listen to the Left

Peter Eavis' frontpage story this morning about the Dow hitting its all-time high yesterday is worth reading. It's peppered with skepticism. We had a tech bubble followed by a real estate bubble; this is a Fed bubble:

Previous highs occurred when investors believed the economy could keep growing without any extraordinary assistance. By contrast, this rally has occurred on the back of enormous monetary stimulus by the Fed and the world’s other central banks. 

Since the end of 2007, five major central banks have injected some $6 trillion into the global economy, according to figures from the Bank for International Settlements. This was done to prevent bank runs and revive economies. 

As the stimulus forced down interest rates, it eventually whetted investors’ appetite for riskier assets like stocks.

And this from today's naked capitalism blog:

It’s hard to fathom the celebratory mood in the US markets, save that the moneyed classes are benefiting from a wall of liquidity reminiscent of early 2007, when risk spreads across virtually all types of lending shrank to scarily low levels. Then the culprit was not well understood, although Gillian Tett discerned that CDOs were a huge source of leverage, and in April 2007, an analyst, Henry Maxey at Ruffler, LLC, did an impressive job of piecing together how levered structured credit strategies were driving market liquidity. 

Now it’s a lot easier to see what is afoot. The Fed has been trying to reflate asset values to goose the real economy. What it has done instead is goose the incomes of the top 1% while everyone else is on the whole worse off. But the central bank is suffering from a very bad case of “if the only tool you have is a hammer, every problem looks like a nail” syndrome. It’s unwilling or unable to admit that its program is working only for a very few. It has convinced itself that if it just keeps on the same failed path long enough, things will turn around. As we can see from Japan, “long enough” can exceed 20 years, and it is not clear that the latest Japanese pump priming will finally pull the economy out of the ditch.

What's called for is a massive public works program that would employ the unemployed and build things that future generations could use to live better lives. But this is not going to happen because Republicans as a minority party have figured out how to control the national government. I would guess the GOP will control the House and the Supreme Court for at least the next decade. And to be charitable to Obama, assuming he's not the Manchurian Candidate of the 1% as the Counterpunch Left perceives him, I think this is what lies behind his search for a grand budgetary bargain with Republicans here and now; he doesn't see them going away anytime soon. So better to try to cut a deal now on Social Security and Medicare that doesn't include an increase in eligibility age; cut a deal now while his election mandate hasn't completely evaporated (as it almost already has).

Generally, as a rule of thumb, the Left is right; that's why it's wise to pay attention to what is being said on blogs like naked capitalism and web sites like Counterpunch and in publications like Monthly Review; while not being 100% correct (who is?), the interpretive framework is more coherent. To give one prominent example of the Left being spectacularly correct while simultaneously the Right was disastrously wrong recall Saddam's weapons of mass destruction. The Left went with Hans Blix and said there's nothing there. And they were right. Don't ignore the Left.