Burn it all down

I'm really curious to see how the Tea Partiers deal with the first major compromise to their values: raising the debt limit. They're a fanatical bunch, and they do not want to start off their career by increasing the debt the government can bear. And Boehner and Cantor also are motivated to try to leverage the debt ceiling to spending cuts. Thing is, the White House knows that Boehner, Cantor, Ryan and the GOP leadership are grown up enough that they won't actually fail to raise the debt ceiling. In short, the GOP leadership is bluffing, and Obama is going to call their bluff.  At least, that's how it works in normal times. That's how it worked when Obama voted against raising the debt ceiling in 2006. It's a symbolic gesture but the real world demands that it be done.  But the Teahadists ... will they play along?  These guys are willing to burn it all down -- in fact, they see the debt ceiling as an opportunity to force the government to stop spending. It's a feature, not a bug! Many of them don't seem to understand the consequences of the US defaulting on its debt. So, they may not be bluffing when they say they won't raise the debt ceiling, and it's not clear that Boehner will be able to bring them along, especially if he has not extracted significant concessions from the democrats on future spending.

Fascinating times.

This is a good summary by Ezra Klein on the consequences of a default:

 

The letter Treasury Secretary Tim Geithner sent to Congress on the debt ceiling is worth reading in full, as it does a nice job describing a danger that I'm not sure most people fully appreciate. My sense is that the mental model most people have of defaulting on the debt ceiling looks something like shutting down the government. But that's not it at all. It's more like shutting down the economy.

Think back to the financial crisis. The underlying cause was that various financial entities stopped believing that their loans would be repaid, and so they stopped making loans, or began demanding such high prices for making loans that credit became unaffordable. The result was economic catastrophe.

If the federal government defaults on its debt, the same thing will happen. But in this case, it will happen to the full faith and credit of the United States, not just to Wall Street.

The basic unit of borrowing in America is the debt that the Treasury sells to finance the government. Much of the rest of the debt in the country -- even when it has no direct connection to the government -- is benchmarked against Treasurys. Treasury debt normally goes for very good prices because it's considered a virtually riskless investment: Modern America has never defaulted on its debt. If that changes, then so too will the prices the market charges to loan the government money.What happens then? As Geithner explains, "because Treasuries represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs. Interest rates for state and local government, corporate and consumer borrowing, including home mortgage interest, would all rise sharply. Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale."

And the damage done by a debt default won't be temporary. Instead, it will permanently introduce a new variable into the market's calculation of America's risk: Right now, the market doesn't believe that our political system would ever allow a debt default. The morning after a default happens, the market will have been proven wrong, and it will have been proven wrong permanently: If it can happen once, it can happen again in 20 years. In that world, the cheap debt that America enjoys and relies on is gone forever, and our economy is likely to be permanently worse off for it.

The good news is that many political players appreciate these dangers. Speaker John Boehner is trying to demand spending cuts as part of a deal, but he's been very careful to say that "America cannot default on its debt." Charles Krauthammer has been similarly declarative. “The Republicans have to be careful here," he told Fox News. "In the end the debt limit will be raised. You can't not pass it. It is catastrophic. It means American debt is in question. It can't happen.”

But these things can take on a life of their own. A revolt among backbench members of Congress killed the first iteration of TARP, which delivered a shock to the market that many economists think intensified the severity of the financial crisis. The immigration bill that George W. Bush sought was also killed by opposition that emerged from the grass-roots and talk radio even as the leaders of the two parties were pushing for a deal.

And you could imagine the same thing happening here: Sen. Jim DeMint, who's often ahead of the curve on where the conservative movement will go next, is fighting an increase in the debt limit, andtargeting his message at the GOP's freshmen class. As of yet, we really don't know how much power Boehner has over his members, nor how willing he'll be to fight for things that are necessary for the government but unpopular among his base.