On the Corner of 14th and Wall Street

A number of commentators have asked: Why did the president categorically reject recourse to the 14th Amendment to raise the debt ceiling, even as a bargaining chit, when that rejection forced Democrats to accept a deal mostly on Republican terms?

The New York Times' Joe Nocera writes:

My own view is that Obama should have played the 14th Amendment card, using its language about "the validity of the public debt" to unilaterally raise the debt ceiling....Inexplicably, he chose instead a course of action that maximized the leverage of the Republican extremists."

Well, let me explain the inexplicable.

Obama, speaking a week before the final deal, said that his lawyers advised him that the 14th Amendment did not apply. In fact, a lot of very well-informed constitutional scholars say otherwise.

But this is not the real story. The main reason Obama rejected taking the 14th was that his Wall Street cronies, from Chief of Staff Bill Daley and Treasury Secretary Tim Geithner on down, were told by the financial industry that recourse to the 14th Amendment would spook financial markets.

Presumably, use of the 14th Amendment would have produced lawsuits. And the lawsuits might have caused some investors to shun some Treasury securities or money-market funds filled with Treasury securities. And the bond rating agencies might have reacted badly.

This projection of worst-case outcomes, of course, is all speculation -- Wall Street's stock in trade. But look what happened when the deal finally passed. The stock market tanked!

That's because the real economy is going to hell in a handbasket. On Tuesday, a report showed that consumers, the source of most demand in the economy, were cutting spending at an increasing rate. Last Friday, the Commerce Department revised the GDP growth figures downward, from a weak 1.8 percent rate in the first quarter to a dismal 0.4 percent. Durable-goods orders have tanked.

David Frum, the very conservative former Republican special assistant to Bush I, in a Monday commentary for CNN observed:

1) Unemployment is a more urgent problem than debt. 

The U.S. can borrow money for 10 years at less than 3 percent. It can borrow money for two years at less than one-half a percent. Yes, the burden of debt is worrying. Yet lenders seem undaunted by those worries.

Meanwhile, more than 14 million Americans are out of work, more than 6 million for longer than six months. The United States has not seen so many people out of work for so long since the 1930s.

2) The deficit is a symptom of America's economic problems, not a cause.

When the economy slumps, government revenues decline and government spending surges.

Federal revenues have collapsed since 2007, down from more than 18 percent of national income to a little more than 14 percent. To put that in perspective: That's the equivalent of losing enough revenue to support the entire defense budget.

Federal spending has jumped to pay for unemployment insurance, food stamps, and Medicaid benefits.

Fix the economy first, and the deficit will improve on its own. Cut the deficit first, and the economy will get even sicker.

3) The time to cut is after the economy recovers.

Businesses are hoarding cash. Consumers are repaying debt. State and local governments are slashing jobs....Right now, there's only one big customer out there: the federal government. How does it help anybody if the feds suddenly stop buying things and paying people?

Wow! Why aren't more Republicans speaking like this? Maybe, as the real economy keeps tanking, and austerity only makes matters worse, more will.

As for those credit-rating agencies, nobody should take them seriously. These are the geniuses whose corrupted process led to the financial collapse because they were willing to bless subprime junk with triple-A ratings. So now they think maybe Treasury bonds are worth less than subprime? These people belong in jail for the fraud they committed, not in the financial driver's seat. And anyway, markets are paying no attention to these rumors. Throughout the supposed debt crisis, markets for Treasuries held up fine.

I have been pretty gloomy as this travesty of a budget debate has played out, but reality may rescue the debate and perhaps even the Democrats.

Forget what the deal said about part two of more belt-tightening coming this fall in exchange for another lift in the debt ceiling. By November, with the nation on the verge of a new, deeper recession, we will be having a very different debate.

Even President Obama, whose leadership has been pitiful, said Tuesday, speaking in the Rose Garden:

"In the coming months, I'll continue also to fight for what the American people care most about: new jobs, higher wages and faster economic growth," Obama said. "While Washington has been absorbed in this debate about deficits, people across the country are asking what we can do to help the father looking for work. What are we going to do for the single mom who's seen her hours cut back at the hospital? What are we going to do to make it easier for businesses to put up that 'now hiring' sign?"

The problem, however, is that the deficit deal gives him no tools to make a significant dent in the jobs crisis. He spoke of trade deals that will destroy American jobs, and trivial tweaks such as changes to patent law that may bear modest fruit in a decade.

Wall Street has had far too much influence in this debate, pushing for debt reduction rather than economic prosperity, coloring the White House view. But now those chickens are coming home to roost, too.

Still, there is a decent chance that by election season, we will be debating the real issues. If Obama bothers to point it out, the blood of perverse deficit policy is far more on Republican hands. This was their deal, their ideology, their victory. His main sin was not fighting harder to oppose it.

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