He was bluffing:
After numerous attempts to take his case to the American people, Obama may be chagrined to find that no one’s buying it. That’s what happens when bluffs get called.
I like the comment: “Bluffy the Job Slayer.” Heh.
Has the president ever convinced the American people on anything with his endless speechifying, other than to elect him? He failed on health care, on stimulus, on Libya, and now on this. But they keep doing it, because it’s all they have. As with Clinton, the presidency is an endless campaign to them.
[Update later afternoon]
Is the White House press corps finally catching on to Bluffy?
And so, at long last, we reach the bitterly logical conclusion of O’s debt-ceiling-as-reelection-strategy gambit: Six agonizing minutes of his paid flack playing dumb while reporters ask why, at the eleventh hour and after months of negotiations, the “adult in the room” still hasn’t produced his own formal, score-able proposal. The answer, of course, is that the more he publicly commits to a plan, the easier it is for the GOP to use it against him next year. So he’s doing what any “adult” supervising a group of unruly children would do. He’s sitting back and staying quiet to protect his own precious ass while they fight it out.
I think it’s time for a timeout. And a dunce cap.
OMG we’re gonna default! OMG we’re gonna default! The markets are going to crash in Asia if we don’t make a deal by 4 pm!
Two days later, the 10-year T-note is at 2.95%. Treasury debt has been trading around 3% for the last three weeks even as the Beltway hysteria has reached ever greater fever pitches and the odds of raising the debt ceiling have substantially declined. InTrade odds of a debt ceiling deal during that period have gone from over 50% three weeks ago to 26% today.
Indeed, a few months ago the InTrade odds were near 100% and Treasuries were trading at 3.55%. Over that period confidence in the federal debt has _increased_ as the debt ceiling brought normally free spenders to the spending-cut table.
While the Beltway based press mindlessly parrot the party line hysteria that the debt ceiling Apocalypse is near, Treasury investors actually bother to do the federal budget arithmetic for themselves and life goes on.
If you dig into the weeds, I think this is less hopeful than you think. Obama has lost support among Democrats because they don’t think he’s been forceful enough in pressing for massive tax increases. Among Republicans he’s long ago reached rock bottom, and among independents his support on jobs and the economy is still higher than Congressional Republicans.
I think there would be a national majority in favor of dumping Obama. The problem is that 45% want to replace him with someone more conservative, 35% want to replace him with someone even further left, a genuine Stalin, and the remaining 20% are clueless dweebs who can be bought off by good teeth, a catchy message, or irrelevancies from their own experience.
One of the underappreciated facts about Reagan’s victory over Carter in 1980 is that Reagan was actually much better than Carter at the amusing sound-bite quip and approached Clinton in his feel-your-pain appeal to the feminine side. He wasn’t just elected by highly rational liberty-loving sick of taxes and despair conservatives and independents. The closest the GOP has now to either of those is Sarah Palin and Chris Christie. That’s why so many on the left have savaged them, particularly the first — they know who is a real threat. The fact that the same vicious covering fire hasn’t been laid down on Romney or Pawlenty should concern GOP operatives.
Yes, I can be bought off with good teeth! I want my employer dental insurance, and the only way you can take the freebie toothbrush and floss box I get from Lindsey-the-dental-hygenist is to pry it from my cold, dead fingers!
Has the president ever convinced the American people on anything with his endless speechifying, other than to elect him?
I suspect that at some point in his life, Obama was told that he was one of the “best and brightest” and he believed it. He was also proclaimed a great orator based on his ability to read a Telepropter. Unfortunately for everyone, he believed the hype.
I have a question for someone who knows about option markets.
Suppose we get a downgraded rating and and the interest on T-bills goes up. By the standard Black-Scholes formula, (call) option prices would go up. But US bonds would really no longer be considered “risk free” either. So I suppose an alternate choice of “risk-free” would be needed.
Is that alternate definition in use already? Does anyone expect a bump in option prices on August 2?
I love the variant where those terrified by the absurd press reports try to sound reasonable by taking the form of a hypothetical: but _what if_ this horror happens? Huh? Huh? C’mon tell us!
“risk-free”
Black-Scholes long ago became obsolete in the real world of derivatives. There has never been any such thing as a “risk-free” asset. It is a theoretical short-cut, like the friction-free surface of Physics 101. There is only the lowest-risk asset as judged by real interest rates. One can often compute a statistical distribution from interest rates and the corresponding credit default swap prices over a sampling of different kinds of bonds. From this statistical distribution can be calculated a _theoretical_ risk-free rate which will be lower than that of any actual bond.
“Does anyone expect a bump in option prices on August 2?”
No one who has done the budget arithmetic and is honest expects any major bump. Alas such simple commodities are rare in the Beltway echo-chamber where most of the mass media reports on this story originate.
FBW,
You must have watched really weird horror movies as a child. The prospect of an increasing (or decreasing) option market inspires precisely no terror in me.
It sounds like you have some idea how the interest price is calculates and from your summary (do you actually work in the option market?) and it sounds like the number used for “risk free” interest will go up if the US is downgraded (since US is probably used as part of an average). Is that right? Wouldn’t that mean an increase in the option prices? Are people taking steps now to potentially remove or deweight the US from that calculation which is undoubtedly done automagically by computer?
This strikes me as an opportunity for someone with the know-how and access (no – I”m not giving financial, advice and no – I’m not looking to invest). This is pure curiosity.
Note: This is not a political question and I realize I may be highjacking a thread with an off-topic comment but the question had occurred to me, I didn’t see much in a Google search (which I admit I didn’t too thoroughly) and I thought I’d ask in a related thread. I am unaware of media reports on this issue but if you have a media source (even a panicky one), I’d be interested.
Joe, at the end of the day the price is not set by a formula – it is set by investors. The best investors (the ones that make the most money) are the ones that get closest to the “true” values – by definition, using the only definition of “true” anyone cares about in finance.
That will not change by much (if at all) on Aug 2. Any change would have been slowly priced in already.
Joe, I trade Treasuries and options among other things on my own account, and I’m widely read in the Wall Street literature on such matters.
it sounds like the number used for “risk free” interest will go up if the US is downgraded
No. First of all, the most widely used options models don’t even use the idea of a “risk-free rate” at all. I was just describing of the ones that do one of the ways they have of deriving such a theoretical value. Second, leaving aside that S&P and Moody’s opinions have far less effect on Treasuries than most imagine, for the method I described if the real interest on an issue of bonds goes up, that generally means that the implied probability of default on its corresponding credit default swap (where such exist, as they do with Treasuries) also goes up. The theoretical risk-free rate is a functional combination of these factors. When both rise by functionally equivalent amounts that puts said bonds at a different (riskier) point on the distribution function, it doesn’t change the implied theoretical risk-free rate. Only if they change by functionally nonequivalent amounts is there some (usually very small) change in the implied risk-free rate. In short, if the default risk on some bond used in this methodology rises or falls, that doesn’t change the implied theoretical risk-free rate. Which is what you’d expect by the definition of “risk-free”. Such a rise in real interest rate due to rising default risk doesn’t change the implied or actual values of any options except those on those particular bonds.
Also David is quite right, there are a wide variety of humans and models trading Treasuries and options. I have only described one particular methodology, and any particular methodology that gets used too much has any substantial inefficient effects arbitraged away. Just as important is David’s second observation: the world’s Treasury investors have been watching federal budget and debt negotiations very closely. They always watch them closely — that’s what they do for a living. Any expectations from this extensive research about potential future downgrades or defaults are already incorp
Joe, I trade Treasuries and options among other things on my own account, and I’m widely read in the Wall Street literature on such matters.
it sounds like the number used for “risk free” interest will go up if the US is downgraded
No. First of all, the most widely used options models don’t even use the idea of a “risk-free rate” at all. I was just describing of the ones that do one of the ways they have of deriving such a theoretical value. Second, leaving aside that S&P and Moody’s opinions have far less effect on Treasuries than most imagine, for the method I described if the real interest on an issue of bonds goes up, that generally means that the implied probability of default on its corresponding credit default swap (where such exist, as they do with Treasuries) also goes up. The theoretical risk-free rate is a functional combination of these factors. When both rise by functionally equivalent amounts that puts said bonds at a different (riskier) point on the distribution function, it doesn’t change the implied theoretical risk-free rate. Only if they change by functionally nonequivalent amounts is there some (usually very small) change in the implied risk-free rate. In short, if the default risk on some bond used in this methodology rises or falls, that doesn’t change the implied theoretical risk-free rate. Which is what you’d expect by the definition of “risk-free”. Such a rise in real interest rate due to rising default risk doesn’t change the implied or actual values of any options except those on those particular bonds.
Also David is quite right, there are a wide variety of humans and models trading Treasuries and options. I have only described one particular methodology, and any particular methodology that gets used too much has any substantial inefficient effects arbitraged away.
Just as important is David’s second observation: the world’s Treasury investors have been watching federal budget and debt negotiations very closely. They’ve always watched them closely — that’s what they do for a living. Any expectations from this extensive research about potential future downgrades or defaults are already incorporated in today’s prices. (And today investors are charging the feds a perfectly normal rate of 2.95% for the 10 year Treasury note).
As the old saw goes, “money talks and b*llsh*t walks”.
(My apologies for the duplicate, the first version can be deleted).
Is the White House press corps finally catching on to Bluffy?
Wait a minute…you mean Hope (and Change!) is not a Plan? Oh, man, bummer. You learn something new every darn day…
😉
Oh geez. I realize this is a bit lame, but here’s go. I spent last evening visiting with some friends and doing business networking. Things one does to try and create jobs. There was a show I wanted to see, so I set the DVR. All I have now is “the adult” trying to lecture me about how I should give him more money.
Here’s the deal, I’ve read plenty online without the President giving me a video blog. And whatever he said about compromise and working together was apparently a lie, because today he was promising a veto. So “the adult” wasted my time just like he’s wasted my taxdollars bailing out his friends on Wall Street and purchasing car companies for union bosses. He hasn’t created one net job with the excessive spending over the last 2 years. And nobody I talked to last night was interested in hiring anybody until after “the adult” quits playing games and signs a bill he receives from Congress.
It is perfectly reasonable for Obama to have a plan in his head out of reach from prying eyes. We should just trust him that it is really up there bouncing around between his ears.
All those proclaiming we MUST make a deal to raise the debt limit have it backwards. If the debt limit stays firm it will be painful, especially for some of those dependent on government checks. But the Dollar will survive, unless we then turn to the Wiemar Republic / Zimbabwe plan. We may even see a halt to inflation.
On the other hand, if a deal is made we’ll see a continued decline in the Dollar. Trying to make up the difference by raising taxes is utterly futile.
I’m hoping the deal, if any, is a proper balanced budget, no new taxes.
Black-Scholes long ago became obsolete in the real world of derivatives. There has never been any such thing as a “risk-free” asset. It is a theoretical short-cut, like a friction-free surface.
My apologies for the edit, but that is really well said.
David and FBW. Thank you both. Those were informative comments.
“Bluffy the Job Slayer”
If only this were a Joss Whedon fantasy… and firefly went on for more episodes.
Mr. Obama, the smartest President we’ve ever had and if you don’t buy that just ask Chris Matthews, is just hoping the Illegal Immigrants figure out a way to vote without getting caught before next November.
I’m hoping someone asks WHY he’s against a balanced budget amendment. He says it’s a bad idea, now let him explain his stance.
Hands up anyone who has recently found out that most people seem to have no idea what the word “default” means. For some reason they seem to think that even if the Fed pays the mandatory repayments on its loans but then doesn’t pay out entitlements because it was unable to borrow more money, that is still a default. No wonder it is impossible to have a logical conversation about the debt ceiling.
Ya’d think the media were be clear about the definition of default.
I mean, how hard is it to explain that default means not paying the interest on our debt [first] which we have more than enough income to do? Or that playing that interest is a given? (Assuming a sane admin. that follows the law.)
Hmmm… it means the media are either stupid or evil. Well, possibly both.
Playing rather than paying h/t Freud.
Ya’d think the media were be clear about the definition of default.
Their purpose on this story is to generate hysteria (for ratings reasons on top of their Beltway bias), and being clear would ruin that.
P.S. Besides self-interest there’s also psychological projection at work. The Beltway forms a unique community. Government employees, contractors, lobbyists, press, professors and other pundits attend the same parties, date and marry each other, send their kids to the same (private) schools, and given the way this community as a whole earns its living form a set of very unique beliefs about their powers, privileges, and purposes in the world. They are on a mission to change the world by growing their political power. It would not be a major exaggeration to describe this Beltway culture as a cult. In terms of political parties, while the Virginian side is partly Republican (due to the Pentagon), the District itself and nearby Maryland is overwhelmingly Democrat.
With the debt ceiling “crisis”, Beltway bureaucrats see their jobs at risk in a Minnesota-style government shutdown and future major reductions in spending — an apocalypse for them personally — and project that into an Apocalypse for the world. Much like the Rev. Camping projected the growing imminence of his own death into Judgment Day for us all.
The federal employees’ cries of “default is coming!” spread to the bureaucrats’ friends and neighbors in the Beltway press, who (for the aforesaid ratings and political bias reasons as well as to maintain their status in the community) spread it to their friends and co-workers in New York City (Wall Street and the major media companies) and the public at large.
Along with the spreading of this mythology goes tabooization. If you actually bother to check the budget arithmetic yourself (something the busy reporters rarely do), and dare to point out that default really isn’t a risk, you are a “child”, “nuts”, etc. for disagreeing with the “experts” who have maliciously or (more often) mindlessly parroted this hysterical mythology. So the experts themselves can only agree if they want to maintain their media and community access. To avoid blatantly lying they will often talk in weasel words so that they can later plausibly deny having told such whoppers about a debt default, but they then get quoted out of context in the media as if that is exactly what they were saying.
The idea of press as investigative reporters is largely a myth. The vast majority of stories written in newspapers or read off the teleprompter are uncritically edited press releases from their government employee sources. If you want to keep going to the parties and maintain your access to these sources you don’t dare disagree. Conservative and libertarian politicians often find it easier in the environment to try to turn the mythology back on the Democrats (e.g. agree we are at risk of default but try to pin it on the Democrats) rather than debunk the cult beliefs with the facts or thoughtful arguments that don’t work well on TV or radio, and induce vicious ridicule by their interlocutors.
Fortunately, the Tea Party has had too little time and too sharp disagreements with this cult to be so easily swayed by their taboos, and we have some media that have become somewhat skeptical of and resistant to them (esp. Fox Business, talk radio, and some Internet) so we do get to see many of the freshmen (e.g. Rand Paul) more straightforwardly debunking the mythology.
If only this were a Joss Whedon fantasy… and firefly went on for more episodes.
At the next Tea party protest, someone wearing a brown coat should carry a sign reading “We Aim To Misbehave.”
With the debt ceiling “crisis”, Beltway bureaucrats see their jobs at risk in a Minnesota-style government shutdown and future major reductions in spending — an apocalypse for them personally — and project that into an Apocalypse for the world. Much like the Rev. Camping projected the growing imminence of his own death into Judgment Day for us all.
Que Mel Brooks in “Blazing Saddles”: “Gentlemen, we’ve got to save our phoney-baloney jobs!”
Media spin: “We Aim To Misbehave.” = Terrorists.
Comedy: The source of truth when truth goes into hiding.
I take CBO scoring very lightly as they only consider a static system, and are legislatively required to cogitate the numbers while pretending to believe congress’s BS. If the %*!(ing budget is based on smoke and unicorn phartes when the CBO scores it exactly how much is said ‘scoring’ worth?