The Independent Market Observer

1/3/13 – What Comes Next

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jan 3, 2013 8:50:41 AM

and tagged Fiscal Cliff, Politics and the Economy

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Much of today’s press coverage highlights the points I made yesterday—that is, how the fiscal cliff deal hasn’t really solved any of the problems and just sets the table for the next crisis in a couple of months. All true, but we are where we are.

Now, the question is this: How do we prepare for and resolve the next crisis? I think everyone agrees this is no way to run a railroad. What we’ve learned in the latest debacle, though, is that there is a way around the current dysfunction.

Let’s review what happened. First, there was quite a bit of theater and back-and-forth between the parties and between the White House and Congress. So far, so typical. Then, we got very close to a deal; Obama and Boehner essentially had one, but both sides had to get approval from their teams. Obama did, Boehner did not, and the deal collapsed. At that point, a deal was cut in the Senate and presented to the House as, essentially, a “take it or be blamed for the country’s collapse” choice.

I could be describing the fiscal cliff negotiations, but I’m actually talking about the 2011 debt ceiling debacle. The fact that the most recent negotiations played out in nearly the same way suggests we have both a pattern and a solution going forward: Cut a deal between parties in the Senate with White House approval, then force a House vote despite the opposition of a large part of the Republican caucus.

This matters because, so far, a faction of the Republican Party has been able to hold the rest of the government at bay. The general rule has been that a bill won’t be put to a vote in the House if it will not get a majority of the votes from the majority party. So any vote that will not, for example, get a majority of Republican votes won’t be presented to the House as a whole. This is what has prevented any of the previous deals from being brought up for a vote. It’s not a formal rule, just custom.

When enough pressure is applied, such as earlier this week, the Speaker can decide to bring the bill to a vote anyway. In this case, the House as a whole approved the bill, even though about two-thirds of Republicans voted against it. In this case, Boehner opted to allow the vote, where previously he had not.

Two interesting points flow from this analysis. First, we now have a way to move forward despite House dysfunction. Second, the real conflict here is within the Republican Party more than anywhere else. Republicans in the Senate could cut a deal with the Democrats, and one-third of the Republicans in the House, including Boehner and Paul Ryan, could vote for it. The problem hasn’t been getting agreement, but rather getting the House caucus to allow an overall vote on things that Senate Republicans have agreed upon.

The Republican split is exemplified by the right’s adoption of the term “McConnell tax increase” to blame the Senate majority leader for the just-concluded deal, as well as the attacks on Boehner from the right. Another example is the failure of Boehner’s “plan B” proposal to raise taxes on incomes over $1 million, which wasn’t even brought to a vote. Finally, there’s the fury from Northeast Republicans over Boehner’s decision to postpone a vote on disaster aid for Hurricane Sandy victims. A real split exists within the Republican Party, and it seems to be getting wider.

What this means for the next crisis is simple. The next Congress will be more partisan than the last, and the gaps between Republicans and Democrats, and within the Republican Party itself, will not be resolved in the next couple of months. Any deal that is cut between the Senate and the White House will have to be forced down the throat of the House, probably at the last minute. Markets will certainly be subject to volatility during that process, even if the end result works out. Remember, like the fiscal cliff, this is scheduled to happen—it’s not optional.

Any way you look at it, it will be a rough ride. Hold on tight.

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