Liam Dann 's Opinion

Liam Dann is the business editor of the NZ Herald

Liam Dann: Political fanatics risk financial meltdown

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Like its football, America's politics is a weird and wonderful mix of spectacle and tedium.

Yesterday there finally promised to be something of a showdown between the Republicans and Democrats over the nation's debt-default crisis.

A bill to lift the allowable debt ceiling (now US$14.3 trillion) and stave off default was supposed to go to the vote.

Okay, it was the Republican version of a solution to this unnecessary crisis. Right from the outset there was little chance of it resolving the political stand-off that has been spooking markets and distorting currency values for the past month.

The Republicans - who control Congress - were promising to push through a fix which involves greater spending cuts and a smaller borrowing increase than President Barrack Obama is prepared to accept. It has been called a short-term solution that might still see the US credit rating downgraded and would leave Congress having to lift the debt ceiling again in a few months.

Not surprisingly, Obama doesn't want to have to go through all this again next year with presidential elections looming. Neither does he want to embark on an austerity programme that would slow economic growth in an election year.

If the Republican bill had passed yesterday the Democrat-controlled Senate (the Upper House) was ready to kill it before it got as far as the President. So this wasn't going to solve the crisis but it was going to move things forward in some tangential manner.

"The office of House Majority Whip Kevin McCarthy (Republican, California) just had 19 boxes of pizza delivered," the Wall Street Journal's live blog dutifully reported. Things briefly looked all set for rolled-up sleeves, loosened ties and heated negotiations into the night.

But no, they didn't even get that far. Republican House Speaker John Boehner had to postpone the introduction of the bill because he didn't have enough support on the hard right of his own party. Tea Party-backed politicians think this bill - already well short of a compromise - is too much of a compromise.

Talk about political posturing. Now it is not just party politics threatening the global economy, but internal party politics.

If we are to believe that August 2 is a real deadline for default (which the US Treasury says it is) then this is not just farce, it is tragedy.

The stakes are very high. Nobody really knows what happens if the US defaults but it is unlikely to be good. It would send the cost of borrowing up around the world. The US could head back into recession and the fragile global recovery could stall.

As we have seen since the banking crisis of 2008, that kind of thing costs jobs, ruins lives and forces Governments to make choices that hurt their people.

How on earth has US politics become so partisan that it can come to this?

One problem is that many Tea Party politicians aren't afraid of the worst that the Book of Revelations has to offer. They are ready for the End of Days and are hardly likely to be swayed by the threat of mere financial apocalypse.

On the up side, yesterday's Republican meltdown has highlighted the fact that moderates in that party aren't really so far from a compromise with Obama.

In the Senate Republicans such as former presidential candidate John McCain are supporting Obama and calling for common sense to prevail.

But that doesn't solve the stand-off. Unless there is an outright split in the ranks of Republicans in Congress, it is hard to see how this can be resolved.

Something needs to give before Wednesday morning (NZT) or the world's economy will once again be off into uncharted waters.

Investors in global stockmarkets - which for the past week have been surprisingly free of wanton panic - must surely be losing patience.

In US football terms we are nearing the last "down" in the last minutes of the final quarter. These are the moments the American sport is made for. Let's hope that somehow their politicians can also pull a magic play out of the bag.

twitter.com/liamdann

- NZ Herald

Liam Dann

Liam Dann is the business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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