Both political parties in Congress have now made a calculation regarding the 2012 election. The calculation goes like this:
Republicans: If we sign onto the Obama "grand compromise" which makes nearly 4 trillion in cuts and raises a little tax money, then we will lose in three ways. First, the TEA party will reject us for raising taxes. Second, Independent voters will reject us because the sharp concerns about mounting deficits will be soothed. Third, Obama will get some credit, and that would be the worst thing of all. Banging into the debt ceiling may be bad for the USA, but it works for us in the election, so no deal.
Democrats: Gee, we would like to be loyal to the President, but not if it costs us anything. We want to campaign in 2012 AGAINST Republican efforts to cripple social security and medicare. We can't do that if the President signs legislation to reduce future spending on those two things. Besides, the Republicans said NO first, which gives us some political cover to claim that the failure of the budget negotiations is not our fault. Banging into the debt ceiling may be bad for the USA, but it works for us in the election, so no deal.
Many have argued that we are worrying about the debt ceiling for no reason because a last minute compromise will be hammered out. This is a fundamental misread of the situation. Even if we get a last minute compromise, it will be a toothless one which will consist of cuts that will be inadequate to satisfy the bond rating agencies and the international credit market because both parties desire to preserve the issue for 2012.
The real problem with the debt ceiling situation is not poor leadership by Obama. Yeah, he waited a bit too long in addressing the topic, but when the topic came up, he responded with unexpected zeal and a surprising willingness to choose the middle course between the two "reefs" (entrenched positions of the two political parties). The real problem is that the crew jumped ship.
We will revisit this topic a few weeks after the credit crisis begins.