The Market Shrugged: Why House Republicans are confident they have the upper hand in the debt-ceiling negotiations.

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July 25 2011 7:48 PM

The Crash That Didn't Happen

Why House Republicans are confident they have the upper hand in the debt-ceiling negotiations.

John Boehner. Click image to expand.
House Speaker John Boehner

The world didn't end Sunday. That was good news for everyone who isn't currently leading a rapture-ready cult, and it was especially good news for Republicans in Congress. They'd said for weeks that the July 22 debt-limit deadline floated by the White House was meaningless, and they'd been warned that when Asian markets opened on Sunday night local time, they'd careen out of control.

David Weigel David Weigel

David Weigel is a Slate political reporter. 

That didn't happen. The initial declines were modest—0.63 percent in Tokyo and Hong Kong, 0.73 percent in Shanghai. When American stock exchanges opened, the declines in the S&P and Dow Jones were similarly modest. The price of gold rose, but not by too much. Republicans exhaled. They emerged from Monday afternoon's crucial caucus meeting, where they were sold on the latest, newest version of a debt deal, with cool heads.

"I was just checking the markets," said Rep. Patrick McHenry, R-N.C., pointing to his trusty iPad. (It's the first-generation model. He's a conservative.) "We're down 63 today, which could be a factor of anything. I think it's encouraging that the markets aren't overreacting."

Had the markets tumbled, the GOP might have found itself repeating September 2008, panicking and taking blame when the markets expected TARP to pass, and it failed. "It is operationally very different than the last debacle," said McHenry.

At least we can agree that it's a debacle. The House and Senate returned from the weekend in order to be sold on two competing plans, which had been hinted at on Sunday in order to calm investors. The newest Democratic plan came from Harry Reid, who elucidated $2.7 trillion in cuts over 10 years in order to pass a $2.4 trillion debt-limit hike. The newest Republican plan, sold to his caucus by Boehner, would raise the limit by just as much, in two stages, with immediate cuts and an eventual vote on a balanced-budget amendment.

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Boehner had the harder sell, and the relative calm in the markets was a big reason. At every step of the debt-limit fight, Republicans—especially House Republicans—have doubted the wisdom of the experts. They don't trust Treasury Secretary Timothy Geithner. They don't trust the bond-rating agencies. They certainly don't trust President Obama. The fact that there wasn't a sell-off over the weekend, and that the cities were not overrun with bikers stealing peoples' gold fillings, was proof that they were right.

"Those of us who were actually paying attention to the issue didn't expect it be apocalyptic," said Rep. Mick Mulvaney, R-S.C. "To think that how we're going to vote today is going to affect markets, I think, is absurd. We're not going to default. We're going to pay our debts. Certainly, Mr. Geithner could come out and assure everyone if he wanted to. He could do that tonight. My guess is he probably wants a little instability in the markets, so he can get some leverage in this negotiation."

That was the mindset that House Speaker John Boehner confronted as he sold his plan. And for the most part, he won over the skeptics. Sure, there were exceptions. Conservative activists—backers of the "Cut, Cap, and Balance" plan that has as much chance of passing the Senate as a law mandating abortions—released a statement attacking Boehner's plan even before the caucus meeting was over. As they left the meeting room, some members talked to reporters. Some of them gritted their teeth. Rep. Jean Schmidt, R-Ohio, literally waved off interview requests, flicking her wrist. Rep. Rodney Alexander, R-La., responded to one request with a dismissive, low-register mumble.

But according to others who were in the room, the plan went over well. Most members held off on supporting the plan until the details would be released, later tonight. The details they did get seemed to max out the GOP's current leverage with the sort of long-term cuts Rep. Paul Ryan's budget had called for. There would be caps on future spending, something a few Democrats in the Senate already supported. The debt-limit increase would be automatic—insulating members somewhat from a tough vote—and would only last through February. The next rounds of cuts were contingent on the creation of a 12-member joint congressional committee (something derisively referred to elsewhere as the "Super Congress") that would be charged with coming up with a deficit plan that Congress could only vote up or down, not amend.

The Boehner plan would make it easier to cut spending than anything Republicans could have gotten without the pressure of the debt limit. The Reid plan, introduced at the very same time, had spending cuts of about the size that conservatives wanted, and no tax increases. So much for the White House's leverage, and so much for Geithner's threats. When I told Rep. Sean Duffy, R-Wis., that Sen. Charles Schumer * was selling the plan as something the House Republicans "can't refuse," he scoffed.

If the Boehner plan passes the House, Duffy said, "it's a deal they can't refuse." (Like other freshmen, he reserved his full support for the plan until he saw its language tonight.) "Do we have any belief that they can pass anything out of the Senate? If something gets done, it'll be on our side."

Republicans were getting closer and closer to the "something." For now, all they needed to do was get behind Boehner. "We'd be undercutting ourselves not to give him the votes he needs for the negotiations," said Rep. Tom Cole, R-Okla.

If they do that and Congress defines the terms of the deal, they get a Democratic president to agree to some package of spending cuts, and some sort of commission that could cut entitlements, right at the start of his re-election campaign. The president seemed to fear what would happen if he walked away from a deal. They didn't. Just look at the markets.

Correction, July 25, 2011: The article originally attributed this quote to Sen. Harry Reid. In fact, it was Sen. Charles Schumer who said the plan was something House Republicans "can't refuse." (Return to the corrected sentence.)