(Pablo Martinez Monsivais/AP)

House Majority Leader Eric Cantor launched into a stemwinder before the teams had even had time to look at the options papers the staffs had developed. On three separate occasions, Cantor pushed for the sort of short-term increase the administration has explicitly ruled out. Cantor's final effort to push the new plan came as the meeting was breaking up and the president was giving instruction to staff on how to prepare for the next set of talks. "Eric, don't call my bluff," the president said. "I'm going to the American people on this." Then, as the story goes, he walked out.

The breakup of the meeting, while dramatic, seems a bit less so if you know that Obama also said "I'll see you all tomorrow" before leaving the room. But, as if confirming Obama's accusation that this was all "posturing," Cantor immediately rushed to reporters to inform them of the president's dramatic exit. Nevertheless, one goal of the talks is now fulfilled. In his initial remarks announcing the White House negotiations, Obama said one goal was that "the parties will at least know where each other’s bottom lines are." Now they do.

Last night, Obama was clear with Cantor: either Republicans have to give on revenues or they have to give on their demand to match each dollar in debt-ceiling increases with a dollar in spending cuts. But there's no $2.5 trillion package -- which is the size of the debt-ceiling increase needed to get us through the next election -- that's all spending cuts.

The Republican Party, meanwhile, doesn't have a bottom line so much as it has bottom lines, some of which conflict. No revenue, of course. That demand has come through. But Senate Minority Leader Mitch McConnell's debt plan has throw the dollar-for-dollar condition into question. "McConnell seems to define the necessary size of the deal closer to zero than $2.5 trillion," one Democrat with knowledge of the talks told me. You're increasingly hearing about the possibility of a split Boehner/McConnell deal, in which Boehner gets less than $2 trillion in spending cuts, which is not quite as many as he wanted, and the McConnell process is used to raise the debt ceiling beyond where the spending cuts have gone. That would, in other words, be the GOP giving on its dollar-for-dollar demand, which seems likelier to everyone involved than the party making an agreement on taxes.

Five in the morning

1) Republicans are split on how to tackle the debt ceiling and President Obama walked out on Eric Cantor, report Paul Kane and Lori Montgomery: "Senate Minority Leader Mitch McConnell (Ky.), who offered a proposal this week that would allow President Obama to raise the federal debt limit without guaranteed spending cuts, warned that the Republican Party could 'destroy' its brand with voters if Congress allows the government to default...House Majority Leader Eric Cantor (Va.) rejected McConnell’s plan for resolving the debt stalemate, instead vowing to press ahead with the campaign to roll back government spending...Both parties resumed afternoon negotiations at the White House. Those talks ended on an angry note when Obama and Cantor disagreed over the length of the proposed debt-ceiling increase...'The president told me, 'Eric, don’t call my bluff. You know I’m going to take this to the American people,'' Cantor said. 'He then walked out.'"

2) Moody's is set to downgrade the credit rating for US debt if the debt ceiling isn't increased, reports Neil Irwin: "Moody’s Investors Service said Wednesday it has put the U.S. government’s top-notch credit rating on review for a possible downgrade because of the risk that Washington will not raise the federal debt ceiling in time to avoid a default. The firm added that even a brief failure of the government to pay its bills would mean that the United States’s Aaa rating “would likely no longer be appropriate.” The announcement comes after Standard & Poor’s, another of the major credit rating agencies, has said that it would dramatically downgrade the U.S. government’s credit rating if payments were missed. The U.S. has long been able to borrow money cheaply because global investors believe the government can be counted on to repay its debts."

3) If the debt ceiling is reached, Obama would have to pick and choose programs to fund, reports Zachary Goldfarb: "What happens if President Obama and Congress don’t strike a debt deal? On Aug. 3, the nation would find out, with Obama forced to make a set of extraordinarily difficult choices about what to pay or not pay. By then, the government’s savings account would be nearly empty and the president would be relying on daily tax revenue to pay the nation’s bills. There wouldn’t be enough -- in fact, there would be a $134 billion shortfall in August alone. As Obama decided what to pay, he would choose among Social Security checks, salaries for members of the military and veterans, unemployment benefits, student loans, and many other government programs, according to administration officials and an independent analysis by a former senior Treasury Department official [for] George H.W. Bush."

4) The Fed is open to launching a new round of stimulus, reports Neil Irwin: "The Federal Reserve is prepared to take new action if the recovery falters, Chairman Ben S. Bernanke said Wednesday, raising the possibility of resuming un or tho dox methods of trying to pump money into the economy. Bernanke expects that the economy will strengthen over the remainder of the year as temporary drags such as higher fuel prices dissipate, according to his testimony before the House Financial Services Committee. But he also acknowledged that there is no way to be certain, and he said that the Fed would act if its outlook proves overly optimistic. His list of possible responses included a new round of Treasury bond purchases by the Fed. Only two weeks ago, the central bank completed a $600 billion effort to support the economy along those lines."

5) Congressional Democrats back McConnell's debt limit plan, reports Felicia Sonmez: "Democratic leaders in the House and Senate responded positively Wednesday to a 'back-up plan' proposed by Senate Minority Leader Mitch McConnell (R-Ky.) that would allow the debt ceiling to be raised, but would make President Obama and congressional Democrats bear the brunt of the political fallout. 'What Leader McConnell has put on the table recognizes that we must lift the debt ceiling; that we must do that,' House Minority Leader Nancy Pelosi (D-Calif.) told reporters...The top House Democrat’s remarks came shortly after Senate Majority Leader Harry Reid (D-Nev.) said that McConnell’s proposal, 'combined with ideas he and I have been discussing to force a vote on deficit reduction proposals, could go a long way toward resolving the impasse in which we find ourselves.'"

Summer james interlude: Best Coast plays "Summer Mood" live.

Got tips, additions, or comments? E-mail me.

Still to come: The budget deficit has fallen from last year's; a CBO study suggest delivery system reforms won't cut health spending that much; seniors' groups are gearing up to oppose Social Security and Medicaid cuts; the House wants to limit the EPA's authority to regulate water quality; and a 3D printer makes a solid, working wrench.


The budget deficit is shrinking, reports Jeff Bater: "The U.S. budget deficit for the first nine months of fiscal 2011 was $970.52 billion, a figure that is smaller than the $1.29 trillion deficit for the same period in the prior fiscal year. The U.S. Treasury Department, in a monthly budget statement released Wednesday, said the budget deficit for June 2011 came in at $43.08 billion, less than June 2010, which was $68.42 billion. Despite the smaller deficit figures, the federal government still faces an Aug. 2 deadline to raise its borrowing limit and a budget deficit that is expected to top $1 trillion by Sept. 30, when the fiscal year ends. The Treasury report said revenue in the first nine months of fiscal 2011 totaled $1.734 trillion, while spending was $2.705 trillion."

House Democrats are whipping against a balanced budget amendment, reports Mike Lillis: "Rep. Steny Hoyer (Md.), the Democratic whip, announced Wednesday that he'll marshal Democratic votes against the Republicans' balanced budget amendment when GOP leaders bring it to the floor next week. The announcement is bad news for Republican supporters of the bill, who will need at least 48 Democratic supporters to reach the two-thirds majority in the House required to pass the measure...Sponsored by GOP Reps. Bob Goodlatte (Va.) and Joe Walsh (Ill.), the balanced budget proposal would require Congress to pass a balanced budget each fiscal year while capping federal spending at 18 percent of the GDP. Additionally, the bill would require two-thirds of Congress to hike taxes, and a three-fifths majority to increase the debt limit."

The board responsible for determining "too big to fail" institutions is delaying its first rule, report Deborah Solomon and Victoria McGrane: "Federal regulators will not complete guidance detailing how the U.S. will determine which large firms could pose a risk to the financial system in time for a Monday meeting, according to people familiar with the matter. The Financial Stability Oversight Council, a new federal body created by the Dodd-Frank financial-overhaul law, had planned to issue the guidance Monday but it likely will be several weeks before it is complete, these people said...The designation process, which is mandated by the 2010 Dodd-Frank law, will require firms designated as systemically important to hold additional capital and be subject to heightened regulatory scrutiny."

A default would increase interest payments considerably, writes Bill Gross: "An actual default -- or even the threat of one -- might set off a chain reaction that would raise Treasury bond yields by 25 basis points (a quarter of a percentage point) or more, pushing up the cost of debt throughout American financial markets...If an extra 25 basis points becomes the new benchmark, federal interest expenses might increase by $30 billion to $40 billion annually over the ensuing years as $1.5 trillion of new debt is issued each fiscal year, complicating efforts to narrow budget deficits...A ratings downgrade or an actual default could reduce the willingness of these countries to do business in dollars, jeopardizing trade receivables and overnight letters of credit in the process."

A long, hard slog of a recovery could endanger debt reduction efforts, writes Peter Orszag: "Consider the other advanced economies that have experienced financial implosions similar to the one we had: Spain in 1977, Norway in 1987, Finland in 1991, Sweden in 1991 and Japan in 1992. The economists Carmen and Vincent Reinhart found that in all five of these countries the unemployment rate has still not fallen back to pre-crisis levels, even today. The peak was reached from three to 10 years after the meltdown...If an extended period of slow growth is more likely than the official projections suggest, we’re in for a much nastier mix of high unemployment in the near term and large budget gaps over the medium term. This is only more evidence that the right policy response is a combination of more aggressive action to bolster the job market now and much more deficit reduction enacted now to take effect in a few years."

My Bloomberg column: We've learned a lot about the White HOuse in these talks: "Take taxes. The prevailing theory has been that the Obama administration would seek the largest tax increases it could plausibly pass. Liberals are now dismayed to learn that that notion is false. Instead, the Obama administration wants to take the tax issue off the table as soon as possible; the president is willing to take much less in revenue in exchange for spending less time arguing about taxes."

Humanless factory interlude: A 3D printer produces a working wrench.

Health Care

A new CBO study suggests many potential routes to Medicare savings won't save much, reports Merrill Goozner: "A forthcoming report from the Congressional Budget Office shows that more than two dozen demonstrations projects launched by Medicare and Medicaid over the past decade have failed to stop the upward march of health care costs, CBO director Doug Elmendorf said Tuesday...Elmendorf defended CBO's projections that delivery system reforms like the accountable care organizations allowed under reform would only save a few billion dollars in the coming decade...Robert Berenson, a health analyst at the Urban Institute, admits many of the demonstrations on delivery system reforms have had mixed results. But a careful analysis of the successful elements of those demonstrations could be replicated across the country and lead to significant savings."

IPAB is a prerequisite to affordable health care, writes Judith Feder: "The Affordable Care Act does far more than extend essential health insurance coverage to tens of millions of Americans. It helps reduce the federal deficit - using measures that can slow growth in both Medicare and overall health spending. The Independent Payment Advisory Board is one such measure...But IPAB also propels the needed transformation of the nation’s entire health care payment system -- moving it from reliance on mechanisms that reward the delivery of ever more and ever more expensive services, regardless of their contribution to health, to mechanisms that reward high quality care, efficiently provided. In short, the IPAB is the backstop to the Affordable Care Act’s commitment to assuring all Americans get quality care at lower cost."

Domestic Policy

Seniors' groups are pushing back hard against proposed Medicare/Social Security cuts, reports David Fahrenthold: "First, AARP tried to convey disappointment. In May, the group launched a TV ad warning that Congress might try to cut Social Security and Medicare benefits as part of a deal to raise the national debt ceiling. 'The country can do better,' it said. Then, in June, it tried ridicule. Another TV ad hit Congress for pondering those cuts while the government spent money on such things as pickle research and experiments in which shrimp ran on treadmills. That didn’t work either. So AARP’s new tactic is more direct: veiled threats. 'Maybe we seem like an easy target' for Congress, a grandfather says in a TV ad the group launched Wednesday. 'Until you realize there are 50 million of us.'"

Defense groups are gearing up to fight cuts, reports Nathan Hodge: "Arms manufacturers are trying to fend off a new round of defense-budget cuts they fear could result from deficit-reduction talks under way in Washington. The White House and congressional leaders are deep in negotiations over lifting the federal borrowing limit. Those talks, if successful, are likely to call for trillions of dollars in government spending cuts over the next decade. Against that background, the Aerospace Industries Association, the defense industry's main trade group, has launched a push on Capitol Hill to encourage lawmakers to avoid what it sees as potentially drastic cuts in military spending...Arms suppliers are already worried about the business impact of the wind-down of wars in Iraq and Afghanistan."

Adorable children and adorable birds hanging out interlude: 5-year-old Madison and her pet sun conure.


The House voted to limit the EPA's ability to regulate water quality, reports Robin Bravender: "The House on Wednesday approved legislation to smack down the Obama administration’s water pollution policies, despite a looming veto threat from the White House. The chamber voted 239-184 to adopt a bipartisan bill that seeks to limit EPA’s authority over state water quality decisions after recent agency actions have irked lawmakers, particularly in coal states and in Florida. Backers of the bill sent a loud message that they’re not pleased with recent EPA water policies, including a January veto of a West Virginia mining permit and new nutrient pollution standards in Florida...The bill is one of several recent House efforts to limit the Obama administration’s water pollution policies, including a series of riders attached to the fiscal 2012 Interior-EPA spending bill."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.