Debt Deal Likely to Hinge on Tea Party Compromise

Analysis

Washington lawmakers huddled Saturday in two separate camps, hoping to forge a debt deal that would avoid a U.S. Government default on its debt, but as of 1 p.m., eastern time, it appeared the only way out of the crisis was a minimalist 'last-chance' option being brokered by Sen. Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ken.

What's more, less than a half-day after McConnell first discussed the 'last-chance' debt deal - which would reduce the budget deficit by only $1.5 trillion to $1.7 trillion and allow a debt limit increase, McConnell came under heavy fire from conservatives, particularly from the Tea Party Republican faction in the U.S. House, who charged him with selling-out, and undermining the conservative agenda.

Further, as of Saturday afternoon there was little indication that even the modest, 'last-chance' debt deal would win critical support among House Republicans, who appear determined to extract even more concessions from President Barack Obama, D-Ill. and Congressional Democrats.

One example: dozens of House Republicans vowed to not support any increase in the debt limit unless it is accompanied by legislation -- known as the Cut, Cap, Balance Act -- that would cut federal spending by more than $100 billion in fiscal 2012, cap future annual spending at a level equal to 18 percent of U.S. GDP, and would prohibit raising the debt limit unless Congress sends to the states a proposed balanced-budget constitutional amendment, The New York Times reported Saturday.

The Republican Cut/Cap proposal is considered to be 'dead on a arrival' in the U.S. Senate, where Democrats hold a majority and will not support a cap on federal spending at 18 percent. Federal spending has averaged 20 percent of U.S. GDP for decades, and will likely rise as Medicare service costs increase with the retirement of the Baby Boom generation.

A cap at 18 percent would, by extension, prevent the expanded use of the federal government in social policy as demographics require it -- something most liberal Senate Democrats would oppose strongly, which underscores the difficulty in getting even the minimal 'last-chance' debt deal through Congress, if House Republicans attach the Cut/Cap provision to it.

Meanwhile, the clock continues to tick toward the August 2 deadline when the U.S. Government runs out of both money and borrowing authority. If the U.S. Government defaults, the nation's credit rating would be downgraded --- rating agency's S&P and Moody's have warned about this -- the U.S. Treasury would not be able to borrow money, and government payments to senior citizens on Social Security and to other payment recipients would likely stop.

In addition, U.S. Federal Reserve Chairman Ben Bernanke, in Capitol Hill testimony earlier this week, underscored that a default would trigger a huge financial calamity, adding that it would send a financial shockwave throughout the global financial system.

Bernanke said U.S. Government bonds are considered the lowest-risk bond investment class in the world, and serve as a benchmark for interest rates for other, more-risky bond and asset classes. If investors can't count on the safety of U.S. debt, they would ask for higher interest on that asset class, pushing up the interest rates on other assets, among other ripple effects, he said.

Others in the Wall Street community said it would not even take a complete government default, just a late interest or principal payment on a tranche of bonds, for investment funds and hedge funds, among other institutional investors, to start pricing higher risk into U.S. Government debt -- something that would ripple through the financial system and send home mortgage interest rates, car loan rates, and credit card rates substantially higher, within hours.

Political/Public Policy Analysis: Assuming no other developments on Day 6 of the debt deal impasse, on a scale of 0 to 100 percent, put the likelihood of a U.S. Government default at 40 percent on Saturday afternoon, up 10 percentage points from Friday.

The Tea Party faction of the Republican Party now appears to be dominant, and barring a reassertion of caucus authority by House Speaker John Boehner, R-Ohio, that does not bode well for even the 'last-chance' debt deal.

The reason? The Tea Party faction does not believe in compromise. They are an extremely conservative, ideologically-driven entity that views any compromise as defeat, and a compromise with President Obama as akin to making a deal with a socialist.

Further, it's not a stretch to say that the Tea Party faction would rather see a U.S. Government default and the negative financial market and economic consequences that would stem from it, than raise the debt ceiling by more than specific reductions in federal spending.

For many Americans, particularly for Moderate Independents and Moderate/Liberal Democrats, the Tea Party stance is extreme, irresponsible, even irrational, given the consequences of government default.

However, after one identifies the Tea Party's premises, the stance appears quite logical: it's rooted in the assumption that no Democratic presidency -- not Bill Clinton's or Barack Obama's -- is legitimate, and that the nation must be led by conservative values only -- values that will reduce the size and role of the federal government. With the above premise known, one can understand why every major bill Obama proposes (or that Bill Clinton proposed) must be opposed without compromise, even if conservatives have proposed them in the past: because the bills originate from an 'illegitimate president' they are opposed prima facie.

In the Tea Party's defense, it would argue that it has the answers to the nation's economic and social problems, and that only when the size of the federal government is reduced, will the American economic system, corporate capitalism, will be able to work its magic.

If the Tea Party is right, then the United States is headed toward a new golden age of prosperity for all under conservative rule.

But if the Tea Party is wrong, and/or if a default occurs, the United States is headed for an epoch-changing economic and social calamity.