Diary

Summary of Conference Call - Congressmen McCarthy, Jordan, and Kirk

Several of us were invited to a conference call today with Congressmen Kevin McCarthy (R-CA), Joe Jordan (R-OH), and Mark Kirk (R-IL), on the topic of the budget.

Each Congressman said a few words, then there was a bit of Q&A.

A short summary follows….

Congressman McCarthy introduced his two colleagues, who each said a few words.

Congressman Jordan spoke first, and noted that:

o “The budget is unbelievable.”
o The Obama budget does five things – any one of which alone would be bad:
1) It raises taxes;
2) It greatly increases spending;
3) It greatly furthers forced unionization (“card-check”);
4) It nationalizes health care;
5) It imposes an expensive and disastrous “cap-and-trade” scheme.
o Any of these alone would be bad, all five together are horrible – and trying to push them through in the middle of a recession only makes it all much worse….

Congressman Kirk spoke for a few minutes – but his discourse was focused on an account of a fascinating learning-experience that he recently had.

Noting that the new budget comes with a $2 trillion borrowing requirement, he decided to try to dive down into the depths of finding the actual mechanisms by which this borrowing is done.

This journey led him to the responsible authority, the “Bureau of the Public Debt” which is hidden away on 9th Street.

He actually went down there in person (kudos, Congressman!!) to visit a sale of debt – in which he witnessed the sale of $34 billion in debt in about 15 minutes.

Some interesting things he learned in detail during that visit:

o The number of participating lenders was as high as 45 a year or two ago – but has now decreased to 16;
o The principal lender now is “a foreign entity”;
o The main lender of course has been the central bank of China – by he indicated that he was told that they are losing interest in purchasing new debt;
o The new budget plan will require regular borrowing to the tune of $150 billion a week.

He described the auction he saw on the day he visited. The auction is actually formally open for 30 minutes, but all the action is in the last five minutes, when the word comes that “We’ve got cover” – meaning that there is at least enough bidding to ensure that all the available debt will be sold. From there, there’s about 90 seconds of complete chaos as the bids are sorted and the debt is actually sold.

So far, there has yet to be a failed auction (not enough bidders to get “cover”) on U.S. government debt. However, in January, there was a failed auction of debt by the German government, resulting in the auction being canceled.

Now for a really scary part. He asked the traders what would happen (mechanically) if a U.S. debt auction should fail (to get “cover”) and have to be canceled. Apparently, this would lead to an instant crisis, since these auctions are followed by the financial media. The number mentioned was that an auction failure would be a news item in about 90 seconds – or as he put it, MSNBC would be reporting it before the President had even heard what had happened.

He also noted that in terms of possible auction failures, the buyer of last resort is…. the Federal Reserve. This, of course, is…. interesting…. since that amounts to the federal government lending money to…. the federal government….

He noted that in 2008, there was $17 trillion in bids on $6 trillion in debt – which he interpreted as representing a “flight to quality” during the deteriorating financial situation of 2008. (It occurred to me later that the “$17 trillion” might not even be complete, since one assumes that a failed bidder might show up again at a later auction, and continue to do so…. in which case their rejected bids amount to multiple-counting of the same bid-funds…. ????)

His final summary comment was that this little voyage of discovery was a sobering and frightening journey. Should an auction of U.S. debt actually (for the first time ever) fail, it would set off a disaster…. in one heck of a hurry….

Since the call started late and a vote was coming up at 3pm, the Q&A was brief…. but it was interesting….

o Someone noted that apparently the German Bundesbank had faced a second failed auction, during February.

o The “cap-and-trade” proposal is effectively an enormous energy tax, and that energy tax will hit everyone – and thus will hit the lower economic rungs in a particularly devastating fashion. It was also noted that with China and India having no interest in participating in this sort of masochism, this also amounts to a huge self-inflicted wound on our competitiveness. Being from Ohio, Congressman Jordan noted that this nonsense will hit the Midwest very, very hard.

o It was suggested that the debt burden increase is so enormous that it is now more than a mere fiscal and monetary issue – it is a moral issue.

To conclude, I did as promised and asked the question that was suggested following yesterday’s conference call – with regard to the unbelievable Obama budget, “What are we going to do about it?”

Congressman McCarthy provided a two-part answer.

First, it is critical to keep getting the message out and keep hammering away. Just a few weeks ago, this seemed to be able to serve no function beyond making the best case possible from a minority position and set up for the 2010 election cycle; however, public reaction (negative) and nervousness on the part of a number of Democrats are now making it possible that there will be a reasonable chance of stopping at least substantial parts of the budget proposal.

Second, keeping with the unanimity that has been shown by the House Republican caucus on the budget fiasco, the plan is to re-float an old (but largely unused) device of actually creating and introducing a counter-budget proposal, making it available, and bringing it to the floor for a vote. The simple goal is to make it clear that there are alternatives available, and that Republicans will not be shy about making those ideas public.