President Obama may be dealing with a lunatic driver in a game of Chicken, the 14th Amendment may be the only option.
So hear me out. Right now there is absolutely no negotiating space between the crazy caucus in the House and the White House and Senate. The Tea Party wants a pound of flesh on the Affordable Care Act. More than that, they'll stop at nothing to do whatever they can to throw a wrench in the system. In their worldview, whatever is bad for the President is good for them, not matter the consequences. They've convinced themselves that Obamacare will be such an apocalyptic failure (or success? Never can tell) that a debt default is a superior option.
In the 1960s, Thomas Schelling wrote "The Strategy of Conflict" for which he eventually won a Nobel Prize in economics. Schelling basically wrote the book on game theory, which is used in fields from international relations to business and law. One of the insights of his book is the "rationality of irrationality." Basically, in a game of Chicken, if you can convince your opponent that you are crazy enough to actually kill the both of you, they have no alternative but to blink and you win. His metaphor is someone who removes the steering wheel and throws it out the window during the chicken game, taking away their option to swerve. Its crazy and irrational, but if the other player is rational, he must swerve, so crazy wins. It's a no win situation.
However, what if there was a way to set a trap in the middle of the strip, a big hole with punji sticks. Then, when the rational player swerves, the irrational player thinks he's won, but in reality he's fallen into a well laid trap. This is the only way to bet a crazy chicken game player.
The country will default on its obligations in mid-October if a deal is not reached to raise the debt ceiling. If this came to pass, it would permanently raise borrowing costs and put the US Dollar's status as global reserve currency at risk. Americans would learn what it feels like to be a country that cannot get unlimited infusions of capital from abroad to finance its debts (ask anyone in Latin America or Africa about this, it isn't fun). However, the markets tend to assume that this is all crazy Washington bluster and some kind of deal will get done to prevent such an irrational outcome. The American people, by and large don't know what is going on or what the debt ceiling even means and the markets are cool, so they don't pay attention.
The markets would eventually reach an inflection point if there is no progress on a deal where most actors would start to think that the impossible is possible, and financial panic would start to ensue in the days leading up the default. So here's what Obama should do.
1) Stick to the non-negotiation stance. Don't take Boehner's calls, no dinners with Eric Cantor, not emissaries from Joe Biden. When asked about the debt ceiling simply say that you expect Congress to do its job and raise it. We won't negotiate with economic terrorists. It only emboldens them further. No talks, period.
2) Once the markets start to panic on the eve of default. Call a special address to all of the TV networks and address the American people. Explain that House Republicans have taken the unprecedented step of calling into question the obligations of the American government. Say you believe that according to the plain language 14th Amendment of the United State Constitution, the debt ceiling itself is unconstitutional. Say that you've instructed Treasury Secretary Lew to automatically raise the debt ceiling. Without this action, the US economy will surely crash.
3) Republicans go ballistic, say the president doesn't have the authority to do this blah blah blah. But really, what are their options here. 1) They could challenge the president's actions in the courts. 2) They could do nothing. If they chose option 1 and they win an injunction or a ruling from the courts that says the debt ceiling is constitutional and Congress must raise it, the government will immediately default and the economy will suffer. I repeat, the REPUBLICAN court challenge would be the immediate cause of the economy's collapse.
(Maybe Obama drops the mic then? One can dream.)