Diary of a Financier

US Failing to Reach a Debt Deal: When Babysitters Need Babysitting

In Idiosyncrasy, Politics on Sun 24 Jul 2011 at 18:47

I decided not to check the news all weekend, because I can’t handle the stop-and-go indecision of this US debt deal. Every marginal development (progression or regression) apparently warrants a press conference and superlative headlines.

Just coming back from a beautiful weekend on the New Hampshire lakes now. Since I’m headed back to reality, I decided to check Reuters for the going-ons… a “pinch me” moment as always. No debt deal yet, of course. Looks like the highest probability outcome is a small, short-term solution, which Barack Obama vowed to veto. With time short, Mr. Obama will have to succumb to whatever deal Congress can agree upon. That’s just the danger zone we’re in now. Unless some [unlikely] white knight rides from the thicket with a polished, blockbuster plan, this short-term solution should spur Treasury credit downgrades at the hand of rating agencies. Certain municipalities and banks should suffer downgrades in lock-step.

I’m no masochist, but I find it ironic that the Treasury & banks have their fates quite explicitly interlocked after decades of debt binge and the public/private collusion of this recovery. In the same idiosyncratic vein, I find irony in this excerpt from the Reuters story I just read:

The global financial crisis, which was rooted in poor regulation of the U.S. housing and banking sectors, already tarnished perceptions of the United States overseas.

For political economy experts who have spent their careers focused on the emerging world, Washington’s protracted debt stand-off is all too reminiscent of the divisions more typical of developing-country politics.

So many trillions of dollars have been spent on regulation–private sector, public sector, states, sovereigns, developing, and developed. The US federal government is behind all of it, although often through mediums like the IMF or SEC. That’s not too corrupt in my opinion, given America’s admirable regard for contract law and her experience with various financial markets. That is, however, a bit hypocritical.

It’s human nature to bite-off more than you can chew. I took a class about “Power and Corruption in the Ancient World” in college. (I have a big background in Latin and classical antiquity.) Naturally, the course’s curriculum had a bias toward the suggestion, “too much power concentrated in the hands of too few inevitably corrupts.” In fact, my thesis for the class’ final paper challenged that notion, discussing historical exceptions to the rule. I compared the powerful moguls who didn’t succumb to corruption with those who did. Often, the former had power that wasn’t truly unfettered or unchecked.

That brings me back to the point. How has the US managed to maintain a super-senior state of unchecked power for so long? So many bumps along the way, so many instances of abuse. The Securities Act of 1933 exempts US Treasury securities from having to file a prospectus, for example. Also, CAPM & EMH have instilled the thinking that Treasuries are a risk-free asset. There’s an exception to every rule. I’m not super pro-regulation, but I have to say, even the babysitter needs babysitting every now and then.

With almost a calendar week remaining for the American debt deal, the country finds itself in a catch-22 that was avoidable. Not enough time for a “big” deal; cascading downgrades for a small deal. As my Dad always use to say about our beloved Red Sox, “they always snatch defeat from the jaws of victory.”


  1. […] Debt Ceiling impasse: “The babysitters need babysitting.”  (Buttonwood) […]


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