There is little to do by way of economic analysis this week, because everything depends on the timing and extent of Washington idiocy.
As to which, as I type this Friday morning, it appears that we can confidently put to rest two assertions:
(1) this is all Kabuki and ultimately rational actors will prevail. Wrong. If this were just kabuki, it would have ended as soon as Wall Street called their servants in Washington and told them to make a deal. Instead, already we are paying a price in the markets and with the ratings agencies - who are likely to downgrade US debt even if a deal does emerge over the weekend. As Calculated Risk concedes this morning, "it is already impacting the markets." It does not matter that we can easily pay our debts, if there is a sufficiently powerful faction able to block those payments and willfully default.
(2) Barack Obama is a shrewd negotiator, backing the GOP into a corner. Wrong. Even if Obama were playing "11 dimensional chess" or "the long game," and actually facilitated this crisis in order to enact his "Grand Bargain," this has not happened. Instead the Teahadists have insisted on total, abject capitulation. Obama may have wanted a "balanced approach", but he has already moved from 2/3 cuts to 1/3 revenue increases, to 100% cuts and 0% increases, and still the GOP extrmemists have refused to budge. It is not out of the question that an extremist Tea Party wet dream will be passed by the House on Monday, leaving the Senate and the President with the options of adopting that bill, or facing immediate default. Via Big Tent Democrat a/k/a Armando, here is Robert Kuttner with a spot-on criticism:
This may sound churlish at such a moment, but in addition to blaming the recklessness of today’s Republican party, the man who deserves substantial blame for this impending economic doomsday is Barack Obama. For two and a half years, he has been all but training the Republicans, Pavlov fashion, to keep rejecting compromise. He has done this by rewarding them with a treat every time they up the ante or move the goal posts. [. . ] if the Republicans, like Europe’s leaders of 1914, miscalculate and create disaster, the responsibility will partly be theirs but also partly our overly eager-to-please president.
In other words, Obama may have the intellect of John Quincy Adams, and the soaring rhetoric of JFK or Reagan, but he has the economic instincts of Herbert Hoover, and the negotiating skill of Jimmy Carter.
Imagine if the Tea Party gets their capitulation now, and the world is saved from US default next week. They will pay no price with the public, who will believe that at the last moment, all became well again. Imagine what the budget "negotiations" will be like, let alone if the debt ceiling must be raised again before January 20, 2013. There is no good solution now, only the hope that once "those who cannot see, must feel," a cold and fearsome resolution will seize the electorate.
