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Obama Hard-Line Debt Stance Rooted in Anger Over '11 Impasse

Oct. 9 (Bloomberg) -- Megan McClellan, head of U.S. fixed income at JPMorgan Private Bank, talks about the likely impact of a potential U.S. government default on bond markets. McClellan speaks with Erik Schatzker and Scarlet Fu on Bloomberg Television's “Market Makers.” (Source: Bloomberg)

Shortly before President Barack Obama was re-elected, he confided to John Podesta, an informal adviser, a vow he was making for his second term: He would never again bargain with Republicans to extend the U.S. debt limit.

The precedent, set in the agreement that ended a 2011 budget standoff, “sent a signal that this was fair game to blackmail over whether the country would default,” Podesta, a onetime chief of staff to President Bill Clinton and co-chairman of Obama’s 2008 presidential transition, said in an interview. “He feels like he has to end it and end it forever.”

The stand Obama has taken on the latest fight over the government shutdown and borrowing limit -- refusing to tie policy conditions to raising the debt ceiling -- is an attempt to repair some of the damage that he and his aides believe he sustained by making concessions to Republicans to avert a default two years ago, according to former top administration officials and advisers.

The resolution of the showdown with House Republicans will be critical to maintaining Obama’s capacity to wield his clout in Washington during the three years left in his presidency and protect the political initiatives of his first term, they say.

Photographer: Chip Somodevilla/Getty Images

President Barack Obama host Congressional leaders Minority Leader Nancy Pelosi (D-CA), Speaker of the House John Boehner (R-OH), Senate Majority Leader Harry Reid (D-NV) and Senate Minority Leader Mitch McConnell (R-KY) for a meeting in the Cabinet Room at the White House on July 14, 2011. Close

President Barack Obama host Congressional leaders Minority Leader Nancy Pelosi (D-CA),... Read More

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Photographer: Chip Somodevilla/Getty Images

President Barack Obama host Congressional leaders Minority Leader Nancy Pelosi (D-CA), Speaker of the House John Boehner (R-OH), Senate Majority Leader Harry Reid (D-NV) and Senate Minority Leader Mitch McConnell (R-KY) for a meeting in the Cabinet Room at the White House on July 14, 2011.

The outcome will probably help determine his leverage to press for new priorities such as a revamp of immigration law, expanded access to pre-kindergarten education and infrastructure funding. It may also stave off attacks on his health-care law and the Consumer Financial Protection Bureau.

Avoiding Blackmail

If Obama makes concessions again to House Republicans over raising the $16.7 trillion debt limit, “he’ll be viewed as a guy who you can hold up,” said Podesta, chairman of the Center for American Progress, a Washington research group with close ties to the administration.

Obama is surrounded by a core group of aides who are mostly veterans of the 2011 debt negotiations, which were followed by the first downgrade of U.S. government debt.

Center of the Storm: What Is the Ceiling?

They include senior advisers Dan Pfeiffer and Valerie Jarrett, National Economic Council Director Gene Sperling, Treasury Secretary Jack Lew, Chairman of the Council of Economic Advisers Jason Furman and White House deputy chief of staff Rob Nabors. Denis McDonough, now White House chief of staff, also was a witness to the prior fiscal crisis, though at the time he was on the National Security Council staff.

‘Reach Consensus’

Republicans have portrayed the administration’s refusal to negotiate as a rigid position that’s bringing the country closer to a crisis. House Majority Leader Eric Cantor of Virginia criticized Obama’s stance as “one party simply refusing to negotiate” in an essay published in the Washington Post.

“Mr. President, let’s sit down and talk,” Cantor wrote yesterday. “Let’s reach consensus and end the ‘my way or the highway’ attitude once and for all.”

A group of House Republicans, led by Speaker John Boehner of Ohio and Cantor, is scheduled to meet today with the president. House Republican and Senate Democratic leaders are open to a short-term increase in the debt limit, according to congressional aides of both parties who spoke on condition of anonymity to discuss strategy.

Boehner’s spokesman, Michael Steel, said the Republican leaders propose to increase the debt limit through Nov. 22 and engage in budget negotiations without ending the partial government shutdown.

Stocks Rise

The benchmark Standard & Poor’s 500 stock index surged 1.6 percent, the most since June, at 12:05 p.m. in New York on news of the Republican leaders plan.

Obama’s allies have been heartened by polls showing that the public places more of the blame for the government shutdown on Republicans. A Pew Research Center poll taken Oct. 3-6 found 38 percent of Americans say Republican leaders in Congress are more to blame compared with 30 percent who cite Obama.

An Oct. 3-6 Gallup Poll found that 28 percent of Americans have a favorable view of the Republican Party -- the lowest for a major party since Gallup began asking in 1992 and down from 38 percent a month earlier. Forty-three percent held a favorable view of Democrats, compared with 47 percent a month earlier.

On Obama

At the same time, a political breakdown that leads to a debt default carries greater risk over the long run for Obama than for the Republicans. An economic crisis that might tip the country back into recession would tarnish his presidency and the durability of his initiatives such as expanding health care to millions of uninsured Americans and pushing through the most sweeping changes in financial-market rules in seven decades.

“There’s a hell of a lot more at stake for the president of the United States,” said Leon Panetta, Obama’s former defense secretary and Central Intelligence Agency director. “Nobody remembers who was speaker of the House when we went into the Depression; everybody remembers who the president was.”

He added: “Presidents who are successful are ultimately presidents who are able to get it done, get beyond this crisis. We cannot be a country that is constantly facing crisis.”

The economy already is showing signs of stress from the showdown between Obama and the House Republicans, similar to the damage sustained during the 2011 debt crisis.

The Gallup Poll’s weekly economic-confidence index plummeted 12 points in the week ending Oct. 6, the deepest plunge since the September 2008 collapse of Lehman Brothers Holdings Inc.

Stalemate Concern

The S&P 500 stock index has dropped 4 percent through yesterday since hitting a high on Sept. 18 amid concern about the political stalemate in Washington.

During the 2011 debt talks, the S&P 500 stock index fell 16.8 percent between July 22, when negotiations on a broad budget deal collapsed, and Aug. 8, the first trading day after the government’s AAA debt was downgraded. The index didn’t recover to its July 22 level until February 2012.

In 2011, Obama avoided a default with an agreement to cut federal spending by $917 billion over a decade and eventually put in place another $1.2 trillion in automatic, across-the-board spending cuts.

After those debt talks, growth slowed, though it regained enough strength by 2012 that Obama won re-election in a campaign partly based on his role shepherding a recovery from the 2007-2009 recession.

‘Fear Gauge’

Among the real-time monitors the administration paid close attention to during the 2011 budget battle was the Chicago Board Options Exchange Volatility Index, said William Daley, who was then the White House chief of staff.

The VIX, sometimes nicknamed the market’s “fear gauge,” rises when investors anticipate more stock market volatility in the future.

It surged from 13.16 on Sept. 19 to 19.6 yesterday, before dropping this morning to 17 as of 12:07 p.m. That’s less than half the VIX’s peak of 48 reached during the 2011 debt crisis.

Along with the VIX and broad market measures, the administration is also currently closely watching near-term Treasury yields and credit default swaps on U.S. Treasury debt.

Credit-default swaps on U.S. Treasuries fell from a seven-month high, dropping three basis point to 37 basis points, according to data compiled by Bloomberg. That compares with 21 basis points last month and about 65 basis points in 2011, the last time Congress played brinkmanship over the debt limit.

Rates on Treasury bills due Oct. 24 dropped to 0.28 percent as of 10:57 a.m. They were zero on Sept. 17.

Presidential Power

Obama has made the preservation of presidential power a centerpiece of his argument against meeting Republican conditions for renewal of the debt limit or a short-term extension of government funding needed to end the shutdown.

“You don’t pay a ransom; you don’t provide concessions for Congress doing its job and America paying its bills,” he said in an Oct. 8 news conference. He continued to use rhetoric belittling Republican resistance. “You don’t get a chance to call your bank and say, ‘I’m not going to pay my mortgage this month unless you throw in a new car and an Xbox,’” he said.

Obama and his aides in 2011 frustrated many Senate Democrats who saw them either as naïve or too focused on the 2012 campaign, said Jim Manley, a senior director at QGA Public Affairs and a former top aide to Senate Majority Leader Harry Reid.

Then-chief of staff Daley and adviser David Plouffe were so intent on gaining support from independent voters, Manley said, that they “spent months trying to cut a deal with Speaker Boehner, when everyone else knew there was no deal to be had.”

“They’ve learned the lesson,” Manley said. “They’ve adjusted their tactics and taken a much harder line this time around, refusing to get into negotiations just for the sake of negotiations or optics.”

Obama also doesn’t have to run for election again.

Even so, Manley said, “It doesn’t mean everyone on the Hill isn’t going to be nervously watching how this thing plays out.”

To contact the reporters on this story: Mike Dorning in Washington at mdorning@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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