Here are three things that didn't happen yesterday: Chris Christie didn't enter the presidential campaign. Apple didn't release the iPhone 5. Republicans didn't score an upset in West Virginia.

Here are two things that did happen: Moody's sharply downgraded Italy's debt. France and Belgium had to rush to save European lender Dexia. And they point to two things that could happen over the next year that would crack the American recovery and reshape the 2012 election: Some European countries could default on their debt and the European debt crisis could undermine the continent's financial system and lock credit, much as happened here after the fall of Lehman.

On Monday night, Goldman Sachs sent out a research note that sounded less like an analysis and more like a warning. Their European arm, they said, "now expect the Euro area to fall into recession beginning in the fourth quarter, with full-year 2012 growth at only 0.1%." Ouch. But they tried to be as clear as possible: this is our problem, too. "The European crisis threatens US economic growth via tighter financial conditions, reduced credit availability, and weaker growth of US exports to the region. This impact is likely to slow the US economy to the edge of recession by early 2012," they continued.

The fact that it's our problem doesn't mean we have much say in the solution. Talk to government officials and they'll tell you that the United States has three points of leverage over the Europeans: 1) They are what we think. 2) They need the International Monetary Fund's assistance, and we have a major voice in that organization. 3) They want the Federal Reserve to continue providing liquidity and support to the global financial system in ways that work with their rescue plans. Put together, that's more than enough to make us heard. It's not nearly enough to make us decisive.

This is, for Americans, frustrating. Why can't Europe simply do what needs to be done? As John Quiggin and Henry Farrell write in the Daily Beast, if Europe would simply treat this "as an economic problem, the solution would simple." But they won't. And who are we to talk? Yesterday, our Federal Reserve Chairman went to Congress and fairly begged them to put politics aside and proceed with the mixture of short-term support and long-term deficit reduction and tax reform that most every economist understands to be the appropriate path forward for our economy. Chances they'll listen to him? Approximately zero. Everybody else's problems always look easier to solve.

Top Stories

1) Moody's downgrades Italy's government bond ratings to A2 with a negative outlook from Aa2: "The main drivers that prompted the rating downgrade are: (1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis. (2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook. (3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties...Moody's notes that the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens."

2) France and Belgium are rescuing a faltering bank, report Anthony Faiola and Howard Schneider: "European officials moved to shore up confidence in the region’s banks on Tuesday, moving to stem panic over the state of Belgian lender Dexia and starting talks about a possible effort to strengthen the financial system by pumping in billions of dollars in new capital. The sudden concern over Dexia, which is heavily invested in European government bonds whose value is now in doubt, highlighted the threat that euro-zone bank failures could trip up the world economy...With Dexia’s stock price plummeting, European finance ministers in Luxembourg indicated that they may finally embark on a course urged for months by the United States and officials at the International Monetary Fund. This could involve a broad effort to bolster capital levels among Europe’s major banks."

3) Ben Bernanke wants Congress to stop the brinkmanship, report Neil Irwin and Lori Montgomery: "Ben S. Bernanke went to Congress on Tuesday with a message: Cut out the brinkmanship over tax and spending policy and slash budget deficits more than planned -- but don’t do it so fast that it undermines economic growth. In making this unusually explicit push, the Federal Reserve chairman told lawmakers that the increasingly likely scenario -- that they do nothing to put the nation’s finances on a sound footing and let the nation lurch from crisis to crisis -- is not an acceptable option. Bernanke’s remarks came as Congress and the Obama administration are facing a stalemate over how to handle the government purse...Bernanke warned that the recovery is 'close to faltering,' and he said the central bank has adjusted its forecasts downward since they were last released publicly in June."

4) Mitch McConnell tried to engineer an immediate vote on Obama's jobs bill, reports Brian Beutler: "Mitch McConnell just pulled a made-for-headlines trick on the Senate floor, challenging Senate Majority Leader Harry Reid (D-NV) to allow an immediate vote on President Obama's jobs bill -- not as a stand-alone measure, but as an amendment to the China currency legislation the Senate is currently debating...Reid's plan is to set the jobs bill up for a test vote later in October...It will likely run headlong into a GOP-led filibuster. If it does, Dems will be able to claim Republicans won't even allow debate on the jobs package, and try to win the battle for public perception. McConnell tried to short circuit that plan Tuesday by offering the Senate a chance to tack Obama's jobs bill, unamended, on to the China currency legislation -- a bill that already enjoys broad bipartisan support. As McConnell predicted, Reid objected. And he got his headlines."

5) Congressional Democrats are considering a millionaires' surtax to pay for the jobs bill, reports James Politi: "Democrats in the Senate have discussed a new tax on US millionaires to pay for at least part of $447bn in fresh economic stimulus measures pushed by the White House. According to a Democratic congressional aide, no final decisions were made on Tuesday on whether to present a new tax on the wealthiest citizens, and there were no estimates on how much money it was intended to raise. President Barack Obama last month suggested limiting tax deductions on US households earning more than $250,000...On Tuesday, Democratic senators met behind closed doors to debate different ways to pay for the bill and ensure party unity. Higher taxes on millionaires are likely to be more palatable for lawmakers than higher taxes on earners of at least $250,000 which would affect a greater chunk of the electorate as well as some successful small businesses."

6) A supercommittee "big deal" is still possible, reports David Rogers: "If Republicans believe that tax reform will lead to higher revenues, now is the time to lay away a down payment for that future. If Democrats are committed to a long-term fix for Medicare physician payments, then layaway savings could pay for it later. For the beleaguered 12-member deficit panel, charged with coming up with answers in just seven weeks, the combination of these two could offer a path out of the woods toward meeting its Nov. 23 deadline. Failure to act will trigger devastating defense cuts in 2013, setting up a yearlong fight over budget priorities and rich fodder for the 2012 presidential campaign. There’s a surprising nonchalance at the White House, but business interests are increasingly agitated. And with Europe in turmoil, what seems like good politics can be dangerous economics."

Top Op-eds

1) The economics of savings Europe isn't the hard part, write John Quiggin and Henry Farrell: "If this was just an economic problem, the solution would simple. In the short-term, Europe needs to shore up investor confidence, and the European Central Bank could do that by announcing that its top priority is preserving the euro, not price stability. This would allow the ECB to increase the money supply and ease the strain on struggling economies such as Greece and Portugal. In the meantime, the wealthier nations could put together a once-off restructuring of, say, Greek debt, and a recapitalization of the country’s national banks. These two steps would dilute or even wipe out shareholder equity in many banks, and impose heavy losses on debtors. Those losses are unfortunate, but they are essential to recovery. The reality is that all lenders bore some responsibility for creating the economic bubble and all must pay their fair share to resolve the crisis."

2) Enthusiasm about "Occupy Wall Street" is rooted in the left's Tea Party envy, writes Mark Schmitt: "If OWS looks sort of like a younger, dreadlocked version of the Tea Party, then maybe it’s the thing that will evolve into a similar force, the mobilization from the left that Dionne was hoping for. This assumption continues a near-obsession on the left with the Tea Party, as if it were the only political movement that’s ever been effective...As is so often the case, the left is so obsessed with the right that it overlooks its own achievements. The Tea Party is a fascinating phenomenon, especially in that it remained effective after being absorbed into the Republican Party establishment...But it’s hardly the only model for social change. The Civil Rights Movement, feminism, LGBT activism, the liberal Netroots of the 2004-2008 era--all had very different trajectories."

3) A pro-rental housing policy could speed the recovery, writes Peter Orszag: "One thing the Obama administration could do now -- probably with Republican support -- would be to attack the oversupply of housing stock by allowing a tax write-off for investors who buy empty properties and rent them out. To understand why this would help, consider that the problems in the residential real-estate sector have two dimensions. First, we have an excess supply of owner- occupied housing, which puts downward pressure on prices. Second, millions of American households now have negative equity in their homes. Dealing with excess inventory by shifting vacant properties into the rental market would help to stabilize prices and thereby mitigate, to some degree, the negative-equity issue -- although additional action would also be warranted to attack such 'underwater' situations."

Canadian rock interlude: Handsome Furs play "What We Had" live.

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

Still to come: John Boehner opposes the Senate-supported China currency bill; why the Supreme Court might not want to take a health care reform case; a stopgap spending bill has passed; several inside advisors warned the administration about Solyndra; and a football team's only female player kicks a game-winning field goal.

Economy

John Boehner opposes the Senate-backed China currency bill, reports Felicia Sonmez: "House Speaker John Boehner (R-Ohio) on Tuesday came out in opposition to a Senate measure that would put greater pressure on China and other countries to allow their currency to appreciate. The remarks by Boehner decrease the likelihood that the currency bill, which was moved forward in the Senate late Monday with overwhelming bipartisan support, will receive a vote in the Republican-led House...'But I think it’s pretty dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency,' he said...House Democrats have been working to round up support for a 'discharge petition' that would require GOP leaders to bring the currency measure to the floor if it passes the Senate as expected later this week. So far, though, they remain short of the 218 signatures necessary to force a vote."

China isn't too fond of the bill either, reports Rick Gladstone: "China expressed strong objections on Tuesday to a bill in the United States Senate that would threaten higher tariffs on some Chinese goods in response to what the bill’s sponsors call China’s policy of keeping its currency artificially depressed to give its exports a price advantage. The Chinese objections came as the Senate began debate on the bill, which would require the Treasury Department to determine whether China is manipulating its currency and then order the Commerce Department to impose tariffs on certain Chinese goods. Ma Zhaoxu, a spokesman for the Chinese Foreign Ministry, said the bill 'seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties.'...The statement did not specify what steps, if any, China might take if the legislation were to pass."

Some in Congress are proposing a financial transactions tax, reports Josh Boak: "Brace yourselves Wall Street: Rep. Peter DeFazio is angling to tax the trading of stocks, bonds and derivatives. The Oregon Democrat has teamed up with Sen. Tom Harkin (D-Iowa) to introduce the measure -- a sequel to their 2009 bill -- before the November G-20 meeting in Cannes, France. Declaring Wall Street a 'gambling casino,' DeFazio said the new tax would 'both raise needed revenue for the Treasury and rein in speculation on Wall Street.' Already, the business community is mounting a counteroffensive. With the congressional supercommittee looking to trim at least $1.2 trillion in projected debt over 10 years, the tax could look tantalizing, despite public opposition from many Republicans and Treasury Secretary Timothy Geithner."

Congress should expand the earned income tax credit, writes Lane Kenworthy: "To get household incomes rising sooner, I suggest expanding the Earned Income Tax Credit to make it a full-blown middle-class earnings supplement. In its current form, the EITC rises with household earnings up to about $13,000 (for a family with two children), then stays at a flat level, and then begins to decrease, reaching zero at earnings of about $40,000. The maximum EITC benefit amount is around $5,000. It's a very good program, boosting the incomes of households with low earnings while encouraging employment. It could be revised to better help working Americans without children and to reach households further up the income distribution. Tying the benefit level to average earnings would ensure that it rises over time in inflation-adjusted terms, helping to narrow the gap between growth of the economy and growth of household incomes."

Adorable animals sleeping interlude: This dog's sleeping posture does not look comfortable.

Health Care

A health care ruling could hurt the Supreme Court's standing, reports Lester Feder: "If the Supreme Court rules on the constitutionality of health care reform next year, its decision will have a huge impact on the entire country -- but it could also have a lasting impact on the reputation of the court itself. Justices may be weighing this when they decide whether to rule on the law at the height of an election year, court experts say. They're now under intense pressure from all sides to take one of the health reform cases and decide it quickly. But concerns about the impact it would have on Supreme Court as an institution could steer them away from an election-year ruling. 'You could see every reason why the court would not want itself caught up with a legal issue that could be intimately related to the election,' said New York University law professor Barry Friedman, author of 'The Will of the People,' a book about how public opinion shapes the high court."

The question of which health care is "essential" will be determined by regulators soon, reports Sarah Kliff: "This Friday, the Institute of Medicine will take a first stab at answering one of health reform’s most important unknowns: What counts as an 'essential health benefit'?...Under the health reform law, every insurance plan will be required to cover a set of 'essential health benefits.' The Affordable Care Act defines 10 broad categories that must be included, such as 'professional services of physicians and other health professionals' and 'hospitalizations.' What fits within those categories is up to the Obama administration. On Friday, the Institute of Medicine will make recommendations on how to determine what’s 'essential.' And by the end of the year, Health and Human Services will use those recommendations to put out regulation. It’s hard to overstate what a big deal this will be for health industries. Any plan that wants to sell on the new insurance marketplace will have to cover the benefits."

Domestic Policy

A stopgap spending bill passed the House without incident, reports Rosalind Helderman: "A strong bipartisan majority in the House has approved a short-term funding measure that will keep the government operating through mid-November, part of a deal reached last week to keep agencies operating with the conclusion of the fiscal year last week. The House passed the bill by a vote of 352 to 66, which will allow the federal government to begin to spend at a rate of $1.043 trillion for the year that lasts through Sept. 30, 2012...The passage had been widely anticipated as the the anti-climatic conclusion of a stalemate over disaster relief funding that had tripped up what leaders in both parties had once predicted would be a fairly routine agreement over temporary appropriations. The compromise was approved by the Senate last week and had been embraced by leaders of both parties in the House."

Such stopgaps are quite costly, reports Suzy Khimm: "In a 2009, the Government Accountability Office found exactly how stopgap budgets muck up the basic functions of government: CRs have frequently forced agencies to put off hiring, reduplicate contracts and delay such things as food oversight and Social Security payments to disabled Americans. In 2009, the GAO says, the Veterans Health Administration estimated that a one-month CR 'results in over $1 million in lost productivity at VA medical facilities and over $140,000 in additional work for the agency’s central contracting office.' What’s more, short-term stopgaps typically prohibit any new programs from being started and can wreak havoc on long-term planning for agencies. 'This is not the way to run a railroad, much less a government,' says Stan Collender, a former Democratic congressional budget staffer. 'It’s like a month-to-month lease.'"

20 House Reps. always vote for catastrophe, reports David Fahrenthold: "On Capitol Hill, they are the apocalypse caucus. Twenty lawmakers, from both parties, who calculate that the best way to fix government is to act as if you wouldn’t mind if it burned down. In April, the House needed to pass two budgets to prevent a government shutdown. They voted no and no. In August, the House needed to pass a debt-ceiling agreement to prevent a national default. No again. Then, this fall, the House voted three times on bills to keep the government going until Nov. 18. No. No. No. The group now includes 12 Republicans and eight Democrats...This unofficial caucus believes that power goes to those who seem least afraid of catastrophe. If you think that way, compromise -- the very thing Congress was built to do -- seems like admitting you were bluffing."

The Supreme Court is ruling on copyright law, reports Robert Barnes: "Golan and his colleagues are asking the justices to overturn a decision by Congress giving copyright protection to millions of works by foreign artists that once were in the public domain. Films by Alfred Hitchcock, paintings by Picasso and the symphonies of the great 20th-century Russian composers are among the works that are no longer available to be freely quoted, copied, played, shared or republished without paying royalties or seeking permission...Those on Golan’s side -- the ACLU, Google and the American Library Association, among others -- say Congress’s action violated First Amendment rights, complicated efforts to digitize the world’s great libraries and obscured the original intent of the Constitution’s copyright clause: 'to promote the progress of science and useful arts.'"

More unemployment insurance extensions are no sure thing, reports Josh Boak: "The September jobs report Friday will very likely confirm the one certainty dogging the economy: High unemployment is here to stay. And what began as a jobs problem could soon morph into an unemployment benefits problem that could muzzle economic growth. Renewal of the 99-week benefits package has become a bargaining chip between congressional Republicans and Democrats trying to cut the deficit. President Barack Obama wants to extend the benefits, while beefing up job-training programs as part of his $447 billion jobs package that seems dead on arrival in the Republican-controlled House. This could also be a major dividing line for 2012, as Republican presidential contender Mitt Romney has taken a hard line against maintaining the current benefit program."

The Supreme Court should rule for the plaintiffs in the copyright case, writes Peter Decherney: "For Hollywood and every other American cultural industry, access to a stable and growing public domain has been essential to innovation. Unfortunately, even representatives of the American film industry don’t always recognize this truth...The M.P.A.A. contends that the expansion of copyright is good for its industry. But history tells a different story. Filmmakers have consistently used public domain works to anchor artistic and technological innovation. In the 1930s, when Walt Disney decided to make one of the first feature-length animated films, he turned to the Brothers Grimm’s version of the tale of Snow White...He understood that 'Snow White' was a trusted property, and because he knew that at least the story and characters would be familiar to audiences, he could take an artistic risk with the form.

Special teams interlude: Brianna Amat, Pinckney High School's only female football player, scores a game-winning field goal.

Energy

DOE received multiple internal warnings about Solyndra, reports Carol Leonnig: "Both career White House officials and savvy private investors worried last year that the Energy Department’s strategy for investing in clean energy companies was dangerously flawed -- and likely to backfire, according to partial e-mails released Monday. 'Bad days are coming,' one White House budget analyst wrote of the companies the Energy Department chose to back in the Obama administration’s signature effort to spur clean technologies and create jobs. Another wrote that top Energy officials seemed 'completely oblivious' to mounting risks in their first project: a $535 million government-backed loan to a now-shuttered solar panel-manufacturer, Solyndra...The e-mails, covering from late 2009 until May 2010, were released by the Democratic minority on the House Energy and Commerce Committee."

Fossil fuel subsidies are growing, reports Ben Geman: "Global fossil fuel consumption subsidies rose in 2010 despite a pledge by G-20 nations to take steps to reduce them in coming years, according to a new analysis. The International Energy Agency (IEA) estimated Tuesday that subsidies that artificially lower fuel prices reached $409 billion in 2010, an increase of almost $110 billion above 2009 levels. The changes 'closely tracked the sharp rise in international fuel prices,' according to the IEA. The IEA’s top economist told reporters in Paris that subsidies could reach $660 billion in 2020 absent better reforms, according to Reuters...Total subsidies for production and consumption of fossil fuels were about a half-trillion dollars in 2010, the groups said. The IEA and OECD have created a nifty website that tracks fossil fuel subsidies by country."

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

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