The Rise of Elizabeth Warren

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As the months passed, it became increasingly clear that Elizabeth Warren would never pass through a Senate nomination process. Her polarizing testimony in front on Congress, coupled with her “hero status” among liberals and the President all but assured that she would never be able to head the agency she spent so many years of her life working for.

Warren was brought on to the Obama Administration in a position that did not require confirmation, her main goal being to get a fledgling new agency, the Consumer Financial Protection Bureau, up and running.

Progressives knew that Warren would never be confirmed through a staunchly conservative Senate, a Senate that does not even recognize the existence of the Consumer Financial Protection Bureau. According to Politico,

When Obama authorized Warren to get the bureau up and running a year ago, “I asked Elizabeth to find the best possible choice to lead the bureau,” he said in a brief Rose Garden statement, flanked by Warren, Cordray and Treasury Secretary Timothy Geithner. “And that’s what we’ve found in Richard Cordray.”

So, just three days before the CFPB is set to open its doors, President Obama nominated Richard Corday to head the agency. The president said Cordray, currently serving as the CFPB’s director of enforcement, has been a staunch consumer advocate in Ohio, helping to step up enforcement of the state’s consumer fraud laws and identifying what eventually became the national mortgage foreclosure crisis. “He took this job, which meant being away from his wife and 12-year-old twins in Ohio, because he believed so deeply in the mission of the bureau,” Obama said.

Despite his solidly liberal status, and his work as the director of enforcement at the CFPB, liberals saw the nomination as a major let-down: It had championed Warren — a plain-spoken Harvard Law professor and a folk hero to the left — to head the bureau that she had built up from nothing.

Who is Elizabeth Warren?

Supporters of Warren will often tout her as a 62-year-old Grandmother from Oklahoma. This is technically true, but it’s also what many might call “posturing.” Warren is a Harvard professor and one of the country’s foremost experts on bankruptcy law. Over the past four years, Warren has stoked an intense, largely partisan debate over the government’s role in protecting its citizens from overly zealous lenders, banks, and financial institutions. While doing this, she also strategically positioned herself to oversee the new federal agency that she dreamed of creating in hopes of rewriting the rules of lending. Businessweek provides perhaps the best analogy, saying that

“Warren is a grandma from Oklahoma the same way Ralph Nader is a pensioner with a thing about cars.”

She has also become an extremely polarizing figure in the political arena. Warren has a way of always putting herself smack dab in the middle of polarizing arguments. She has testified in front of Congress more than half a dozen times (her testimony always riddled with sarcastic retorts to overly aggressive questions with congressman) and has come to be revered by progressives and despised by conservatives.

Warren has often said that she had a precise moment of clarity in which she realized that changing the way the banks lend was going to require a new federal bureaucracy – and that it was solely on her shoulder to build support, create, and establish the rules with which it worked. That agency became known as the Consumer Financial Protection Bureau, or CFPB, and it was finally created as a part of the Dodd-Frank financial reform bill that passed in the wake of the 2008 financial crisis.

What is the CFPB?

According to the organization’s website,

The Bureau of Consumer Financial Protection (CFPB) is a new federal regulator created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (PL 111-203) that President Obama signed into law on July 21st, 2010. It is an independent Bureau housed in the Federal Reserve (the Fed) that will be charged with regulating consumer financial products. In large part, the authorities granted to existing federal regulators to regulate consumer financial products will be transferred (although not necessarily consolidated) to the CFPB.

Essentially, Warren argues that the agency is created to be a watchdog against banks and other financial institutions that have regularly promoted predatory lending in the past. Warren has long said that predatory lending was the main cause of the economic crisis in 2008 (in fact, it is what caused the housing crisis). So, Warren wanted to create an agency that had the power to reign in those types of overly greedy bankers. Republicans have argued that this type of "burdensome" regulation would put a strain on small businesses and kill thousands of jobs in the process. You be the judge on that one.

Google Images: Progressives are lining up to "draft" Elizabeth Warren to run against Scott Brown in 2012. 

Analysis: Warren For Senate? 

While Warren has been leading the fledgling CFPB, a number of political commentators have insinuated that Warren herself knew that she had very little chance of being nominated to head the agency. Thus, many have speculated that Warren has been exploring option B, which would be to run against Senator Scott Brown in her home state of Massachusetts (she is being urged to run by a number of high-profile Democratic officials).

The prospect of a Warren run terrifies Republicans, who have, at least in public, carefully attempted to tone down their cushy relationship with Wall Street in a calculated move to reassure independents that Republicans are working for Middle America. But Warren has taken to calling out Republicans every chance she gets, saying that they are figureheads controlled by powerful Wall Street billionaires. Robert Kuttner at the American Prospect explains,

Warren has been a particular bete noir for the right, because she has been so effective in reminding the public that Republicans, despite their posturing, are shills for the financial industry that caused the collapse. For this, she gets termed in news coverage as a “polarizer.” Presumably, anybody who wants to rein in the excesses that caused the collapse and cost consumers trillions of dollars is a polarizer. Score one for the right’s capture of media language. 

In Massachusetts, the Democratic field right now is stunningly weak, and Warren is the one candidate who can galvanize voters and take back the seat formerly held by Ted Kennedy. The two most visible contenders in the race, Seti Warren, mayor of suburban Newton, and Alan Khazei, a good-government reformer associated with City Year, who finished a distant third in the Democratic primary pack last time. Neither would stand a prayer against Scott Brown.

Warren also has the political strategy on her side. A large group of wealthy progressives have held back from endorsing anyone thus far in the campaign. Many have said that they are waiting to see if Warren will declare; if she does, it seems extremely like that she would have their strong support. Even more important, a number of the state’s most experienced and strong campaign operatives have not yet committed to any campaign, and in all likelihood would back Warren. Warren definitely has the resources on her side – she is sure to raise hundreds of thousands of dollars from donors all across America (her cult status among progressives will help with fundraising and name recognition) and a number of top political strategists have held out waiting for her.

Warren is also the only viable candidate at this point to beat Scott Brown. Brown, surprisingly popular in a state that was once home to the original progressive icon, Ted Kennedy, has become an extremely powerful member of the Senate, being courted by both the left and the right on decisive and key legislation. But Democrats think that, with the right candidate, they have a really positive chance to beat him in 2012. 

While many liberals are extremely excited about the prospects of Warren running for elected office, progressives need to be realistic in their assessment: Warren has not decided to run yet, and while many signs point towards go, if Warren decides not to run, this could spell disaster for Democrats in Massachusetts from the very start. Hear me out: The Senate seat in Massachusetts, a seat that Democrats believe that they have fairly good prospects of winning, is vital to Democrats maintaining and possibly extending their slim advantage in the Senate. With key political strategists watching from the sidelines, if Warren does not run, any future candidate who will ultimately run against Brown will be severely handicapped from the beginning, with a core group of lackluster donors and an unloyal group of strategists. If Warren decides not to run for the Senate seat, victory for Scott Brown is all but guaranteed.

But hey, here’s to hoping!

The Question No One Wants to Ask: What Would Happen if the US Government Defaults on Its Debts?

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Remember this headline?

Dow falls 777 points, biggest one-day drop ever

With debt ceiling talks completely stalled and neither side wanting to give up political ground, the United States faces a true possibility of default for the first time ever. And the news coming out of Washington is less than stellar. In fact, its downright scary.

Stan Collender, budget expert at Qorvis, spoke to Ezra Klein in Sunday’s Washington Post. He ominously explained,

 “[There is] less than 50-50 [chance of a deal before Aug. 2]..." 

And David Cote, chairman and CEO of Honeywell, on the “Meet the Press” roundtable commented,

 “[I]t's like both parties have a grip on each other's throat and they're more focused on simultaneous asphyxiation than they are on actually resolving the problem.”  

Finally, The New Yorker’s George Packer:

“Obama and Congress are engaged in high-drama brinksmanship, like members of an ordnance-disposal unit arguing about how to defuse a huge ticking bomb.” 

Hearing these types of words form high-level officials and commentators this late into the debt ceiling discussions is extremely disheartening and worrisome for the economic fate of the nation. Remember, while the Obama Administration has said that we will begin the process of defaulting on our obligations August 2nd, it takes time for a bill to be drafted, debated, and passed in both the House and the Senate. If we are going to reach a deal before the deadline, it will have to come this week.

Google Images: On September 29, 2008, the Dow Jones Industrial fell 777 points, the largest single-day drop in history. Analysts are speculating that if a deal is not reached by August 2nd, we could see something comparable, if not worse, to the economic collapse of 2008.

The Current Situation 
Let's face some unfortunate facts:

• The President of the United States and high level treasury officials say that we have until August 2nd at the latest to increase the debt ceiling
• Republicans in Congress are refusing to accept any form of tax hike on any person or corporation (this includes eliminating loopholes for big oil, timber, and corporate jet owners)
• Democrats in Congress are refusing to vote for any debt increase if the deal includes cuts to medicare and/or social security
• To make matters worse, Republican have made a far-right turn, pushing a radically partisan "cut, cap, and balance" plan instead of compromising just two weeks away from a possible default. 
• Debt talks have stalled, with neither side ceding any ground; in fact, both sides have apparently dug in

Politicians in Washington are certainly playing with fire when it comes to the debt ceiling. But the American public is not making it any better. Still, despite all the dire warnings, a plurality of Americans believe that the debt should not be raised. As I have previously said, Republicans see a political victory out of this, attempting to come down on the side of the people since they know that strict opposition to the debt ceiling increase could score them political points now and mean campaign contribution for their 2012 war chest. But maybe, just maybe, if I can explain what would happen if we did default, I can begin to change some minds.

What Is A Default?

Default is a relatively simple concept: It occurs when a debtor (in this case the United States) has not met its legal obligations according to a debt contract. This may mean not making a scheduled payment, violating some condition of the contract, or being unable to pay back the loaned money. Default occurs if the debtor is unwilling or unable to pay their debt.

Google Images: Rioting in Greece

If the United States Defaults...

widespread panic would ensue. No country the size of the United States has ever defaulted on its debt. Think about this: The financial markets lost tremendous amounts of value when Greece was seen as a major threat to default in 2010. Greece has a GDP of $329.9 billion. The United States? Our GDP is almost 43 times bigger than that, valued at an astounding $14.12. A number of economists believed that the world economy was in danger of collapsing had Greece defaulted. Now, can you possibly imagine what would happen if the United States defaulted on its debt? 

One thing that is important to remember is that the debt is not just simply a bunch of numbers; it is real money that has been lent to us by foreign countries with the actual expectation that we return that payment plus interest. The debt is owed to foreign countries, multinational banks, and many Americans through the buying of treasury bonds (which are rated as AAA, the safest type of investment money can buy). If, for example, I overspend and am forced to default on my debts that I owe, that money that I owed does not just magically vanish into thin air. The bank is forced to take the loss. The same can be said for the United States of America. If the US was to default on its debt, the rest of the world would suddenly be left with $14 trillion of unpaid liabilities. One can only imagine the catastrophic collapse that would ensue. While we do not know exactly what would happen (since we have never actually been through and never should have to go through it), it is fairly easy to make some well-supported assumptions:

skiddish and more worried. However, if previous experience serves as a guide, we will not see any type of collapse until August 2nd if a deal had not been reached. That being said, if wall street spent months expecting a late-term deal and no deal ultimately gets done, the markets reaction will be uncharacteristically harsh and never-before-seen. Collender explains it best:

[R]emember the general idea on Wall Street right now is that there will be a deal because there’s always a deal. But Wall Street works off of expectations. So if the market realizes they got this wrong, the reaction could be larger than expected. 

The only positive to a market collapse would be that it would most likely force lawmakers to pass a debt increase as quickly as possible. The AP speculates,

The widespread selloff that might trigger could have one benefit, Briggs and others say. Panic-selling might force Washington to quickly agree to raise the debt limit. Think back to September 2008 for some historical perspective. After the House of Representatives voted down the bailout bill to create the Troubled Asset Relief Program on Sept. 29, the Dow Jones industrial average nosedived 777 points. Congress made an about face and four days later passed the TARP bill. President George W. Bush quickly signed it into law.

But even then, one day past August 2nd is one day too many. A deal is easily reachable if both sides share the sacrifice. In the end, no one will be happy with the deal that is reached. Ultimately it is about making sure that both sides feel equally bad about the bill that they end up passing.

2. Many of the world's largest banks, who have still not fully recovered from the 2008 financial meltdown, would be forced to go bankrupt to their exposure to United States debt. Subsequently, credit for necessary things like homes, cars, etc., would become almost completely unavailable. Additionally, since many large corporations rely on short-term credit to pay their employees and that credit would all but disappear, many workers would be unable to collect their paychecks. 

Moreover, the credit rating agencies like Moody's and S&P have threatened to downgrade treasury bonds from their AAA rating if a deal is not reached. This would mean that treasury bonds would no longer be considered as safe an investment as they once were and countries like China (who are the biggest buyer of US treasury bonds) would pull out its money and look for a safer investment. This could not only cause short-term economic pain, but have grave, long-term consequences for the United States and the rest of the world.

3. To go along with that point, businesses would begin laying off more workers since they have no access to credit and no way to advance their own growth. With no access to capital, companies would start shedding workers at an alarming rate. This would of course only make matters worse, resulting in at  best a deep recession and at worst another Great Depression. 

4. The dollar would also likely become almost worthless since the "full faith and credit" of the United States is the only real thing holding up the value of the dollar. When that disappears as access to credit vanishes, it is hard to imagine the dollar being able to retain any of its value.

5. The government would also be potentially unable to send out checks for medicare and social security, leaving hundreds of thousands of seniors who rely on medicare for their medications and prescriptions paying extremely high prices.

**There are a whole lot of other things that I could list off, like rising oil prices and subsequently, skyrocketing gas prices. But I think that the above four are the most significant and vital to understand. 

Google Images: Unemployment Could Skyrocket to Numbers Not Seen Since the Great Depression

Conclusion
So will the United States default on August 2nd? Most likely not. While the Treasury has said that August 2 is the drop-dead date for default, economists are saying that if lawmakers were to shut down a large percentage of government agencies and shuffle some money around, a full out default could likely be avoided for a few weeks. Regardless, the prospect of living with 20+% unemployment, no access to credit, a withering stock and mutual fund portfolio, and a global meltdown, is something that no person wants to see.

There is something that every American needs to realize: At this moment, the United States can still easily meet its debt obligations. Ignore the hype, those who say that America is broke and/or out of money are lying to you. 

If the United States goes into default, it will most certainly not be because of the economics. If the US defaults on its own debt obligations, it will be solely due to the politics behind the issue. The unintended consequences of political pandering to pick up votes in 2012 would have such grave economic repercussions that America would be left reeling for years to come.