Olson: We Need Leadership on Debt Ceiling


The battle over spending cuts and "meaningful" deficit cutting will continue now that the House rejected President Obama's measure to increase the $14.3 trillion debt limit without conditions. Even some Democrats who originally supported Obama's position voted against it.

As one DC insider told me on the phone, August second is a "million miles away" and " there is no urgency in getting it passed." But some contacts of mine say that doesn't mean a measure will not passed because "Obama does not want to be the first President to default.

He'll eventually need to sign a Republican bill that has cost cutting measures in it."

So, instead of the dog days of summer, it'll be a season of infighting and bickering. We have been hearing story after story on the consequences of a default. I caught up with Former Federal Reserve Governor and Treliant Co-Chairman Mark Olson on the debt season and the official end of QE2.

LL: Tomorrow is June & the Fed is wrapping up purchase operations of treasuries. Do you think it could have an important impact on the markets?

MO: My guess is the market has already priced in the expectation for QE2 to have reached the end of the purchase period. Absent a major economic disturbance, I see no likelihood of continued purchases.

LL: What matters more to you- flows going into riskier assets like equities or will we see more stock activity?

MO: At this point I think incremental flows will be to maintain the current mix which we be largely governments focused. The Fed is committed to replenish all of the flow from upcoming maturities to avoid the appearance of passive tightening. But I do not expect the mix of instruments to change.

LL: What's your outlook on treasury supply?

MO: Given the ongoing need to borrow, I foresee no concerns about adequate supply. I am sure the Fed will monitor the markets in a manner that will avoid unintended shortages in specific maturities.

LL: One of my contacts, Roger Altman od Evercore told me we are seeing the first signs of edginess on the debt ceiling in the CDS market with the spreads widening. Are you concerned?

MO: Very concerned. In my judgment, Congress is playing "Chicken"

with our nation's credit rating. Increasing the debt ceiling is the wrong place for Congress to try to achieve agreements on spending or taxes. The debt ceiling needs to be adjusted to accommodate fiscal decisions already made or determined by Congress. The discussions on budget, spending and taxes should be conducted independent of the debt ceiling issue.

LL: Do you think the President should be taking more of a leadership role in this whole debt ceiling debate?

MO: Secretary Geithner, and Fed Chairman Bernanke have been very strong on this point. It is now time for the President to be more strongly involved.

A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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