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With 2 Sides Far Apart on Debt Ceiling Debate, Wall Street Shrugs (For Now)

With the August 2nd deadline for raising the national debt ceiling drawing ominously close, Republicans and Democrats spent Monday moving farther apart. New plans lobbed by both parties to resolve the debt ceiling debate are so at odds, it prompted one Washington insider to describe the goings-on in D.C. as "dysfunctional" and a "three-ring circus," and suggest that the American people were becoming "collateral damage to Washington's political warfare." That insider was in fact, President Obama, who after Monday's big backslide, upgraded his bully pulpit delivery, foregoing last week's press conference routine for a national address to make his case for compromise.

Two Steps Back?

The president took to the airwaves just hours after it became clear that far from inching closer to compromise, Washington was creating a new chasm it must scale, with the introduction of two completely new plans:

The Republican Plan: House Speaker John Boehner unveiled a two-step plan. Step one would target $1.2 trillion in spending cuts -- without touching Social Security or Medicare -- over the next 10 years in return for allowing the debt ceiling to rise by about $1 trillion immediately. That's about enough to just get us through the next seven months before we hit the debt ceiling once again. That's when Boehner's step two comes into play: The Speaker proposes a bipartisan super committee of 12 Congressional members sit down and come up with another $1.8 trillion in cuts over 10 years -- this time he wants entitlements to specifically be on the cutting table -- in return for allowing the debt ceiling to be raised by another $1.6 trillion in early 2012. That increase in the ceiling would be enough to get us through the 2012 elections without the fiscal debate threatening the economy. Boehner also called for a balanced budget amendment, and specified that no deal could increase tax increases.

President Obama dismissed this plan in record time, once again reiterating his position that he would not sign any short-term deal that kicks the debt ceiling and deficit can down the road...and right into the heart of the 2012 election cycle.

Moreover, it's in no way a given that Boehner can get enough votes from his own party to get it passed. There is the not-so-small matter of the Tea Party freshmen still say they will not vote for any increase of the debt ceiling. (That's why Senator Mitch McConnell came up with his no-vote proposal two weeks ago.) Moreover, if there has been no ability to date to reach a bipartisan compromise on deficit reduction that would shave a trillion or two or four, why are we supposed to believe that Boehner's proposed super committee would somehow be able to get it done?

The Democratic Plan: Senate Majority leader Harry Reid's plan would trim $2.7 trillion in spending over 10 years and gets the debt ceiling raised enough to keep it out of play through 2012. Of the $2.7 trillion in cuts, the big ticket items are a $1.2 trillion reduction in discretionary spending -- no entitlement programs are touched -- and the assumption of another $1 trillion in savings from winding down the wars in Afghanistan and Iraq. Reid's plan also throws in $100 billion more in savings that both sides apparently agreed to during the Joe-Biden led debates of June, including cuts to agriculture subsidies, a $30 billion haircut through reforming Freddie Mac and Fannie Mae, and $40 billion in savings from going after fraud in all sorts of places (warning: IRS enforcement would be ramped up.)

What's Next?

Well, that is literally the $14.3 trillion question of the moment. It looks like Wednesday could be moving day: It's when Speaker Boehner has called for a House vote on his plan. Even if it passes, it's going to face an even tougher audience in the Democratic-controlled Senate. If it doesn't pass, then it looks like Senate Majority Leader Reid's plan moves onto center stage. And there the situation is reversed: Even if Reid's plan passes the Senate, it would then face gale-force resistance in the House. Basically, neither plan, as currently devised, has a chance of making it to 1600 Pennsylvania. To get something passable there needs to be -- wait for it -- compromise. And as President Obama noted in his Monday address, compromise has become a "dirty word" in Washington. The president expressed confidence that we would in fact get that compromise from Congress, but what else is a President going to say?

The main goal of Obama's primetime address was to implore Americans who agree with his "balanced approach" to deficit reduction, to let their representatives know they want compromise. For the record, "balanced" here is not exactly a Webster Dictionary reading of the word. A big, grand-bargain-like $2.4 trillion deficit reduction deal Obama had handed to Speaker Boehner two weeks ago would have generated about 80 percent of deficit reduction through spending cuts, and less than 20 percent through revenue hikes (some changes to tax loopholes and deductions/exemptions/credits, but no increase in tax rates). The Republicans can't live with an 80-20 deal; so far they are insisting on 100-0. In his televised response to the President's address, Speaker Boehner wasn't backing down on this: "The president has often said we need a 'balanced' approach -- which in Washington means: we spend more. . .you pay more. Having run a small business, I know those tax increases will destroy jobs." For what it's worth, the plan Obama reportedly presented to Boehner didn't include more spending; just lots of cuts and what amounted to a small bone (for Democrats) of increased tax revenue.

Wall Street Remains Patient
Obama took his case to Main Street, in part because so far Wall Street is not applying any pressure on Washington to get its act together. We've yet to hear a peep from the bond vigilantes, and the stock market keeps flirting with being sorta' upset about it all, but as Monday's 0.56 percent decline in the S&P 500 shows, it's not really that upset. Yet.

The last time Washington was this dysfunctional was in late 2008 in the depths of the financial crisis. When a bailout bill failed, the stock market registered its disapproval of that abdication of responsibility by tanking 800 points in intraday trading. That was all it took for Congress to reconsider. So would that happen now? Well, there's a big difference between a bona fide financial crisis and the purely political crisis that Washington has created. Again, for the record, the debt ceiling has been raised dozens of times, under administrations of both political persuasions. This is not a new problem. Just a newly manufactured crisis. So far, Wall Street is waiting for the grown-ups to emerge and make a deal by finding their way to compromise. If that doesn't materialize in the next few days, well then things could get really interesting.
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