This ain't over yet: Ending the debt ceiling/government shutdown crisis will require 3-way negotiations

10/11/2013 6:08 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

“But at least now we're talking, and it's time to move forward. It's best for the American people,” California Republican House member Howard McKeon said on MSNBC.

And the financial markets seem to agree. They staged a big rally yesterday and are up again today because, finally, House Republican leaders and President Barack Obama are talking about how to end the debt ceiling crisis and the government shutdown.

I’m heartened myself that House leaders and the White House are talking. But I’m worried by developments today that suggest the toughest negotiations remain those between House leaders and a core of extremely conservative House Republicans.

After last night’s meeting at the White House and negotiations at the staff levels, Republican leaders came back with a new proposal for ending the crisis—and it’s actually kind of surprising.

In the new proposal the House would raise the debt ceiling through November 20 in a bill that could come up for a vote as early as today. The House would also vote to reopen the government—in a second bill—that would replace some of the deep budget cuts imposed by sequester with cuts to entitlement programs such as Medicare. After the government reopens, House Republicans and President Obama would begin negotiations over a longer-term debt ceiling increase that would address, according to House Speaker John Boehner, the government programs that drive spending including entitlement programs such as Medicare and the Affordable Care Act or Obamacare.

Today’s proposal is curious since it seems a step backwards and away from a solution. President Obama has said that he will not agree to any proposal that links an increase in the debt ceiling or the reopening of the government to negotiations over policy changes to Obamacare or entitlement programs or government spending. Pass a clean increase to the debt ceiling and reopen the government and then we can negotiate has been the clear White House position.

Last night’s Republican proposal to raise the debt ceiling until November 20 seemed to deliver the kind of clear solution that the President has identified as his line in the sand.

Today’s Republican proposal seems to go back to the kind of linkage the President has rejected and that yesterday’s proposal seemed to have abandoned.

I think what’s going on is that the House Republican leadership is negotiating on two fronts, first with the President and then with their own members. The tougher negotiation, actually, is with other Republicans in the House.

Yesterday, President Obama said that the Republican proposal didn’t go far enough since it only addressed raising the debt ceiling and didn’t reopen the government. From what I can glean, House Speaker John Boehner has been attempting to sell his most conservative members on a plan that would delink a vote on raising the debt ceiling from a vote on ending the government shutdown. The strategy he had proposed argued for raising the debt ceiling to remove the possibility that Republicans would get blamed for any big sell-off in the financial markets, while preserving the shutdown so Republicans can keep pushing for defunding Obamacare and for other spending cuts.

But if that kind of split in the debt ceiling and reopening the government won’t fly with the White House, Speaker Boehner faces the challenge of figuring out how to sell a linked deal to his members. Today’s proposal, in my opinion, is his attempt at figuring out how to do that.

I think today’s proposal isn’t likely to work with either the White House or the most conservative House Republicans. That would mean financial markets are looking at a weekend of competing proposals and swings between optimism and pessimism. I think the Senate will finally advance its own bill and put pressure on the House—but only after tough procedural votes to close off filibuster attempts. I think Speaker Boehner will twist and turn, trying to find a formula that works for both the White House and House Republicans. And he may still find that he has to rely on Democratic votes to pass a bill (or bills.)

So yes, the fact that the two sides are finally talking is a good sign. But I’d still expect more days of high volatility in the markets over the next week or so before we have a resolution—before October 17, I hope.

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