Intransigence of the Senate Democrats

Diego Sanchez Gallardo

PRSSA National Treasurer

Has anyone seen/heard these questions asked of any Democrat during the debt limit kerfuffle?

1. “Explain your vote against raising the debt ceiling in 2006.”

Gallardo (left)

2. “Explain why the unanimous Democrat Senate vote against raising the debt ceiling in 2006 did not constitute a crisis, as you have repeatedly declared this issue to be.”

3. “Explain why tax-and-spend leftist Obama’s florid rhetoric against raising the debt ceiling in 2006 earned him the Presidency, but conservative House members who ran on fiscal reform and now oppose borrowing more money are ‘acting like children’”.

4. “Explain why you Democrats are on television declaring that it is ‘extreme’ to oppose raising the debt ceiling and that the only reasonable and responsible solution is for House Republicans to negotiate with Democrat Senators and abandon certain positions ‘because this issue is so important’, but you yourself voted to pass socialized healthcare on a straight party-line vote with the entire GOP shut out of the development of the legislation and even prevented from seeing the bill before the vote.”

Of course not, everyone is too busy demonizing the Tea Party and the freshmen Republicans in the House. They’re accused of being purists. What does that mean? They stick to principles unlike the Democrats and the GOP Leadership? The Democrats, who failed to produce a bill in 800 days until last week, are now touting themselves as the warriors of fiscal responsibility. The problem is both Reid’s and Boehner’s plans are a joke for the American people. Reid’s plan supposedly reduces the debt by 1.1 trillion dollars by scaling back military operations in both Iraq and Afghanistan. Nobody in the media mentions, however, that those savings were already slated to occur even if this budget plan hadn’t existed. And to add more dissatisfaction to the bill the irresponsible Senate Democrats are rallying behind, this plan doesn’t even touch entitlements. The unsustainable Medicare and Social Security are ignored completely.

The Speaker’s plan isn’t any better. The Boehner plan merely plans to cut a $100 billion in a span of a decade, meaning a total of $1 billion in cuts per year. To say that’s a dent to the national debt is an insult to dents. At the tune this federal government is spending, we owe $100 billion per month in just interest payments.

This unserious approach to cut spending met fierce opposition from members of the Republican Study Committee and grassroots across the country. The CBO even estimated that the cuts would be lower than expected. Boehner then proceeded to amend the plan by establishing a committee to decide $1.1 trillion in cuts the next ten years. A committee comprised by 12 members, 6 elected by the Democrats and 6 elected by Republicans. But as Sen. Reid said, “this plan is dead on arrival on the Senate.” And with House GOP surely to rally to block Reid’s plan we are left with no serious approach. “Cut, Cap, and Balance” passed the House with even some Democrats voting for it, only to be stopped in the Senate without any debate. And the President has been sitting on the sidelines most of the debate, only attacking corporate jets and the wealthy. Give me a break.

And so that’s how this story ends. With the party of endless spending and entitlements unto death lecturing fiscal conservatives on how they’re leading the country into a credit downgrade. Yesterday all 53 Senate Dems signed a letter to Boehner essentially saying: your bill will never pass. If this is how Washington will behave, default is imminent.

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The author is the newly elected National Treasurer for the Puerto Rico Statehood Students Association. Gallardo is a student in American University and works for Popular Inc. 

Economic Impact of a U.S. Default

By Julio A. Cabral Corrada
Cornell '13 - PRSSA

"Pathetic”. This is the word James Gorman, CEO of Morgan Stanley, used yesterday during his remarks at a firmwide forum to describe the lack of common sense in Washington. As one of the World’s best financial minds, Mr. Gorman questioned with disappointment the capacity of our “leaders” to truly understand the economic consequences of their inability to compromise. Following the conference meeting, I went straight to my desk in the trading floor.

As I watched in my Bloomberg Terminal all the World markets (which are the engine and best indices of our economy) plummet, I acknowledged there were immediate consequences far more pivotal than a default, tax issues, and election concerns (the three topics emphasized by the politicians and the media). Thus, I decided to challenge on the subject one of my bosses and mentor, Matt Berke, who happens to be a Cornell guy and the Global Head of Equity Risk Management. His response was simple: “You do it. Research, Analyze and Facts. It should be by 10:00 pm on the desk.”

Thus, after completing a full detailed report last night by 8:33pm, I thought I could share a brief abstract of my analysis, which delineates the economic impact a default on our debt could have on our financial system. As many of you have read, President Barack Obama’s administration, Democrats and Republicans in Congress have been locked in a standoff for months over what kind of deficit-cutting measures should be tied to an increase in the nation’s $14.3 trillion debt ceiling. Tim Geithner, Secretary of the Treasury, has said the U.S. exhausts its borrowing authority on August 2 (which is next Tuesday!) and risks going into default.

This senseless political wrangling may cost the U.S. its AAA rating, adding $100 billion a year to government costs while dragging down our economic growth. A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the medium term. "Standard & Poor’s, which has given the U.S. a solid ranking since 1941, reiterated exactly one week ago that the chance of a downgrade is 50 percent in the next three months and may happen as soon as August", mentioned the credit agency.

If this were to occur, it will have a critical impact on treasury rates. Those $100 billion a year I mentioned before are capital being used for higher interest rates, and that’s money being taken away from other goods and services of the nation. Also,Treasury yields indicate that investors are favoring bank or company debt over treasuries, raising concerns of the credibility of government debt.

The short-term effect on treasuries of a downgrade would be about 5 to 10 basis points, because few asset managers would be forced to sell these treasuries. "Yields on benchmark 10-year notes fell five basis points, or 0.05 percentage points, to 2.95 percent today. That compares with an average of 4.03 percent since 2001", according to a Morgan Stanley report. The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, narrowed to 18.7 basis points yesterday, the least since March.

Therefore, as we make borrowing more expensive we are diverting tax dollars to interest payments. In other words, there is less money out there! Since it is more expensive to borrow money, then our economy does not grow (that is why the Federal Reserve has kept interest so low since the financial crisis using quantitative easing—so people can cheaply borrow money and spend more, ultimately stimulating our economy). THEN, if interest rates pick up too much then everyone will suffer. From the homeowner with a mortgage to the student with a college loan, interest rates will rise for everyone. This will hurt the pocket of all families!

Furthermore, and to top it off, I should state that the U.S. unemployment rate rose for a third straight month in June to 9.2 percent, pointing to an economy lacking momentum entering the second half of the year. Employers added 18,000 workers to payrolls, the fewest in nine months.

This is the picture which politicians, the media, and many across America are missing. I hope this helps clarify some doubts about the impact a default will have on our economy. Hopefully, in a near future we will have more intellectually prepared public servers that can make responsible legislation and public policy. This nation needs people with a common sense, not those who want to play partisan politics. The people deserve better. Tomorrow (Thursday) will shall see if a bill is passed.
Have a good one!