Further pivoting towards (partial) optimism

Contemplating next year's likely showdown over raising the debt ceiling, I once again discern a slightly more optimistic feeling about Obama - though not necessarily about the prospects for limiting collateral damage - than I have typically had lately. It can't be the weather (horribly cold with 3+ months of winter still to go), and I'm not taking any meds, so perhaps it's actually based on a reasoned judgment, whether right or wrong in the end.

Let's start with the pessimistic take. He just proclaimed his view that, when there's a hostage-taking, you generally have to pay the ransom. He could not more clearly have invited the Republicans to threaten a U.S. debt default (based on not raising the debt ceiling) unless he accepts a long list of their budget priorities.

When the time comes, however, I think there's a good chance that it will play out more favorably for him than this suggests - although the prospects that the chicken game gets out of hand might actually be greater than you'd expect if you deemed him certain to fold.

BTW, just in passing, I think one reason Obama got as much out of the Republicans as he did this time around is that he held a hostage, too - the estate tax would naturally revert to 2000 levels if there was no deal, but this was something they cared about a lot more than he did.

Anyway, suppose the Republicans get very aggressive about the debt ceiling. In terms of the optics, I think it really is "their fault" if he refuses their demands and the U.S. therefore faces not only a government shutdown but also an ugly bond market event.

The markets ought to recognize, by the way, that the default is only going to be temporary. BUT - they might very reasonably take the default as a signal that the U.S. is insufficiently default-averse and thus that our credit rating should be permanently affected.

But returning to the optics of blame, Obama will have a better hand to play this time around. "Just pass a clean increase in the default ceiling" is an easier sell than "Just extend these tax cuts but not the other ones." Plus a favorable media narrative is ready at hand, treating this as 1995 Government Shutdown Part Deux.

What's more, the fact that Obama caved (or at least is perceived as having done so) in the tax cut battle actually adds credibility to his arguing to the public the next time around that, if there's a standoff, it can't be his fault. Unfortunately, it also reduces his credibility in terms of telling the Republicans that he's going to stand firm this time, but that's a separate issue.

So, what about the Republicans? This time around, I think they'll actually be more divided. I don't think Boehner and McConnell really want to go to the mat on debt default, unless they're pretty sure they can get an easy win. I don't have a very high opinion of them, but they aren't bomb-throwers at heart. But on the other hand there are people behind them, arguably with more sway over the Republican caucus, who badly want this fight and are totally fine with a default.

One scenario is that Boehner and McConnell try to make a deal that Obama will accept. But if it was good enough from their standpoint not to anger their base, it might have to be too bad for Obama to accept, even though he increasingly seems genuinely to the right of most Democrats.

Another scenario really is 1995 Part Deux - the U.S. defaults and it's bad enough to force the Republicans to retreat after getting a black eye. Only, in this case there really may be hefty collateral damage, since it's not just a government shutdown (though that presumably would be part of it) but also a bond market event that might affect the U.S. government's credit status.

Chicken games are most likely to lead to disaster when one side underestimates the other's resolve. There's certainly a chance of that here, since the Republicans may think Obama more liable to fold than he actually is. But the wild card, in terms of how much collateral damage we get first, may be Boehner and McConnell: to what extent do they underestimate him, and (since I don't think they actually want a conflagration), how much freedom of action do they actually have?