“Dealing With Default”: Let’s Hope We Don’t Find Out What Will Happen If We Hit The Debt Ceiling
So Republicans may have decided to raise the debt ceiling without conditions attached — the details still aren’t clear. Maybe that’s the end of that particular extortion tactic, but maybe not, because, at best, we’re only looking at a very short-term extension. The threat of hitting the ceiling remains, especially if the politics of the shutdown continue to go against the G.O.P.
So what are the choices if we do hit the ceiling? As you might guess, they’re all bad, so the question is which bad choice would do the least harm.
Now, the administration insists that there are no choices, that if we hit the debt limit the U.S. government will go into general default. Many people, even those sympathetic to the administration, suspect that this is simply what officials have to say at this point, that they can’t give Republicans any excuse to downplay the seriousness of what they’re doing. But suppose that it’s true. What would a general default look like?
A report last year from the Treasury Department suggested that hitting the debt ceiling would lead to a “delayed payment regime”: bills, including bills for interest due on federal debt, would be paid in the order received, as cash became available. Since the bills coming in each day would exceed cash receipts, this would mean falling further and further behind. And this could create an immediate financial crisis, because U.S. debt — heretofore considered the ultimate safe asset — would be reclassified as an asset in default, possibly forcing financial institutions to sell off their U.S. bonds and seek other forms of collateral.
That’s a scary prospect. So many people — especially, but not only, Republican-leaning economists — have suggested that the Treasury Department could instead “prioritize”: It could pay off bonds in full, so that the whole burden of the cash shortage fell on other things. And by “other things,” we largely mean Social Security, Medicare, and Medicaid, which account for the majority of federal spending other than defense and interest.
Some advocates of prioritization seem to believe that everything will be O.K. as long as we keep making our interest payments. Let me give four reasons they’re wrong.
First, the U.S. government would still be going into default, failing to meet its legal obligations to pay. You may say that things like Social Security checks aren’t the same as interest due on bonds because Congress can’t repudiate debt, but it can, if it chooses, pass a law reducing benefits. But Congress hasn’t passed such a law, and until or unless it does, Social Security benefits have the same inviolable legal status as payments to investors.
Second, prioritizing interest payments would reinforce the terrible precedent we set after the 2008 crisis, when Wall Street was bailed out but distressed workers and homeowners got little or nothing. We would, once again, be signaling that the financial industry gets special treatment because it can threaten to shut down the economy if it doesn’t.
Third, the spending cuts would create great hardship if they go on for any length of time. Think Medicare recipients turned away from hospitals because the government isn’t paying claims.
Finally, while prioritizing might avoid an immediate financial crisis, it would still have devastating economic effects. We’d be looking at an immediate spending cut roughly comparable to the plunge in housing investment after the bubble burst, a plunge that was the most important cause of the Great Recession of 2007-9. That by itself would surely be enough to push us into recession.
And it wouldn’t end there. As the U.S. economy went into recession, tax receipts would fall sharply, and the government, unable to borrow, would be forced into a second round of spending cuts, worsening the economic downturn, reducing receipts even more, and so on. So even if we avoid a Lehman Brothers-style financial meltdown, we could still be looking at a slump worse than the Great Recession.
So are there any other choices? Many legal experts think there is another option: One way or another, the president could simply choose to defy Congress and ignore the debt ceiling.
Wouldn’t this be breaking the law? Maybe, maybe not — opinions differ. But not making good on federal obligations is also breaking the law. And if House Republicans are pushing the president into a situation where he must break the law no matter what he does, why not choose the version that hurts America least?
There would, of course, be an uproar, and probably many legal challenges — although if I were a Republican, I’d worry about, in effect, filing suit to stop the government from paying seniors’ hospital bills. Still, as I said, there are no good choices here.
So what will happen if and when we hit the debt ceiling? Let’s hope we don’t find out.
By: Paul Krugman, Op-Ed Columnist, the New York Times, October 10, 2013
“Driving Through Red Lights”: Extreme Chaos Being Caused By The Unrivaled Republican Gang Of 40
In the 1970s, in its days of hard-line Communist isolation, China was ruled by the extremist “Gang of Four.” Drivers then were sometimes encouraged to proceed at red lights because red was the revolutionary color signifying advance — resulting in a chaos that was emblematic of the times.
In the United States, we always do things in a grand way, so it’s a tribute to American exceptionalism that we have far outperformed China in the field of extremist ideologues. We don’t have some pathetic little foursome, but an unrivaled “Gang of 40.”
That’s my name for the 40 hard-line Republican House members who have forced the shutdown of the federal government and are now flirting with a debt default that could spin the world into recession. In their purported effort to save America money, they’re costing us taxpayers billions of dollars.
Obviously, there are differences — our Gang of 40 disdain Mao suits — but there is a similar sense in which an entire nation is held hostage by a small group of unrepresentative figures who don’t have much of a clue about economics or about where they’re taking the country.
The Gang of 40’s government shutdown has been bad enough, cutting off death benefits to families of service members and ending federal support for rape crisis centers. It’s doubly painful that all this is happening while the House and Senate gyms remain open.
(Bravo to the Washington restaurant that is offering a 10 percent discount to some federal workers, while posting a 10 percent surcharge to members of Congress. Maybe members of the Gang of 40 should also be compelled to wash dishes?)
What’s most troubling about the mess is the way the extremists downplay the risks of running into the debt limit. Astonishingly, Representative Ted Yoho, a Florida veterinarian, says that missing the debt ceiling deadline “would bring stability to world markets.”
Or there’s Senator Rand Paul, who said that not raising the debt limit could be reframed as “a pretty reasonable idea.” Even Senator Tom Coburn says it wouldn’t be so bad to miss the debt-limit deadline and face a “managed catastrophe.”
There’s now a right-wing echo chamber, shaped by Fox News Channel and Web sites like RedState, that repeats such nonsense until it acquires a patina of plausibility — and thus makes a catastrophe more difficult to avoid. A Pew Research Center poll this month found that 54 percent of Republicans believe that the United States can miss the debt-limit deadline without major problems.
What makes our trajectory dangerous is that the hard-liners are getting positive feedback. The most reliable Republican voters are about twice as likely to say that Congressional Republicans have compromised too much as to say that they haven’t compromised enough.
Hang on to your hat. We may be in for a wild ride.
I’ve often been curious about the wretched political leadership in America in the 1840s and 1850s in the run-up to the Civil War: How could American politicians have been so stubborn as they inched toward cataclysm? Watching today’s obstreperousness, I’m gaining a better insight.
Two features strike me about this moment — and both are echoes of the mistakes in the run-up to the Civil War. One is the obliviousness of central players, especially the Gang of 40, to the risks ahead.
The second is the way politicians seek leverage by brazenly threatening deliberate harm to the nation unless they get their way. The House Republican hard-liners lost their battle against Obamacare in the democratic process, just as President Obama lost his battle for an assault-weapons ban. But instead of accepting their loss as Obama did, members of the Gang of 40 took hostages. Unless Obamacare is defunded, they’ll cause billions of dollars in damage to the American economy.
The G.O.P. claims to be the party particularly concerned by budget deficits. Yet its tantrum caused a government shutdown that cost the country $1.6 billion last week alone.
As for the debt limit, the costs of missing that deadline could be infinitely greater. Already, interest rates are spiking for one-month Treasury bills to their highest levels since the 2008 financial crisis.
The Bipartisan Policy Center, a think tank, calculates that the 2011 debt-ceiling confrontation will, over a decade, cost American taxpayers an extra $18.9 billion.
And that was the price tag for a crisis in which the debt-limit deadline was eventually met. If this deadline is missed, the costs in higher interest rates in the years ahead will be billions more.
Members of the Gang of 40 are unwilling to pay for early childhood education, but they’re O.K. with paying untold billions for a government shutdown and debt-limit crisis? That’s not governance, but extremism.
By: Nicholas D. Kristof, Op-Ed Columnist, The New York Times, October 9, 2013
“The Double Play Game”: Do Republicans Believe In Their Own Crisis?
You would think Republicans would be the ones trying to scare the country about the imminent expiration of the Treasury’s borrowing authority. After all, they’re the ones trying to use the debt ceiling (and the government shutdown) as leverage to get their way on policies that would be laughed out of Washington at any other moment.
The leverage only works if the country is really worried about the potential economic catastrophe that would result from a failure to lift the ceiling. In the Republican fantasy, that would pressure Democrats to end health care reform, cut spending on entitlements and say farewell to all their liberal dreams.
But instead, the reverse is happening. It’s Democrats who are warning the country about the unimaginable consequences of default, and many Republicans who are minimizing it.
This phenomenon could be seen last week at the beginning of the shutdown, when right-wing lawmakers started pooh-poohing the effects of a closed government. Fox News called it a “slimdown,” and several House members said less government might be good for the country. Now, 10 days before (a potential) Default Day, several House members are deriding the notion that it would be a very big deal.
Senator Tom Coburn, flatly contradicting the clear explanation from the Treasury, said the country would continue to pay its interest and redeem bonds, so why worry? Mick Mulvaney, a congressman from South Carolina, repeated the well-known canard that the Treasury could prioritize its payments and that there would be no default.
And Ted Yoho of Florida, who is quickly replacing Steve King and Louie Gohmert as the congressman to whom reporters flock for the jaw-dropping quotes so beloved by Twitter, said that not raising the debt ceiling would actually be beneficial.
“I think we need to have that moment where we realize [we’re] going broke,” Mr. Yoho told the Washington Post. “I think, personally, it would bring stability to the world markets.”
If you think that remark is not only detached from reality but also utterly aberrant, take a look at the Pew Research poll that came out today. It shows that 54 percent of all Republicans (and 64 percent of Tea Partiers) believe the country can go past the debt-limit deadline without causing major problems. In that sense, Mr. Yoho better represents his party than Speaker John Boehner, who claims to believe that default would be terrible, but is nonetheless demanding concessions in exchange for preventing it.
That the very people who are causing the crisis are dismissing it shows the double game that’s being played here. Republicans don’t want the country to understand how big a threat they are posing to its well-being. A growing number of Americans already blame them for the whole mess, as the same poll shows. If people truly understood how bad a default would be — if they understood credit markets and interest rates, and how they would be affected by the global loss of faith in Treasury bonds — the anger would be much greater, and Republican control of the House would be threatened.
In the cynical game of spin and messaging that this crisis has become, the goal is to scare Washington Democrats while keeping ordinary people calm. It’s not working, though — Democrats have correctly refused to be intimidated, while businesses and average Americans are growing increasingly nervous. As they should be.
By: David Firestone, Op-Ed Columnist, The New York Times, October 7, 2013
“Defining Default Down”: Conservatives Have An Eccentric Definition Of What Constitutes A “Default”
An important detail to keep in mind when one is trying to reconcile Republicans claims that they won’t allow a debt default but also won’t allow a vote on increasing the debt limit unless Democrats make concessions is this: conservatives tend to have a rather eccentric definition of what constitutes a “default.” National Journal‘s Tim Alberta and Michael Catalini offered a reminder yesterday:
Not only do some conservatives say Oct. 17 is an artificial deadline—”Nobody thinks we’re going to default on Oct. 17th,” said Rep. Tim Huelskamp, R-Kan.—but they also are attempting to narrowly define what would constitute default.
In interviews with more than a dozen GOP lawmakers, the Republicans rejected the notion that Washington could default on its debt unless a borrowing increase is approved before Oct. 17. For the United States to actually default, these Republicans argue, the Treasury Department would have to stop paying interest on its debts—something GOP lawmakers claim is inconceivable….
If this sounds familiar, it’s because it has been Republicans’ line of attack since their debt-ceiling battle with Obama in the summer of 2011.
Then, as now, the GOP argues it’s not the debt limit that would cause default, it’s Obama. The country would have the funds to pay its creditors if the administration would just delay payments to certain agencies.
This “prioritization” argument, of course, rests on a distinction without a difference in the real world.
“I don’t know any serious person who doesn’t think this will be cataclysmic,” said Steve Bell, a former Republican staff director of the Senate Budget Committee and now senior director with the Bipartisan Policy Center.
The assumption that the U.S. will honor all of its debts—and honor them on time—is the foundation for much of the global financial system, Bell argues. So the fundamental problem with the Republican position is that Treasury makes between 3 million and 5 million financial transactions a day, and if the federal government starts to pick and choose which it will honor, it will land the economy in chaos.
In any event, journalists reporting all these “We won’t allow a default” assurances from John Boehner and others need to go to the trouble of insisting on a definition of terms. If the reference is to a narrow, “technical” default along the lines that Republicans often use, the assurances are virtually worthless.
By: Ed Kilgore, Contributing Writer, Washington Monthly Political Animal, October 7, 2013
“The Debt Ceiling Matters”: House Republicans Are Threatening To Unambiguously Violate The Constitution
The word we keep hearing is “catastrophe.”
“A U.S. Default Seen as Catastrophe, Dwarfing Lehman’s Fall,” screams the headline in Bloomberg Businessweek. “A default would be unprecedented and has the potential to be catastrophic,” says a Treasury Department report issued on Thursday — two weeks before the government is expected to begin running out of cash.
But what does “catastrophic” actually mean in this context? In the summer of 2011, when Republicans refused to raise the debt ceiling unless President Obama caved to their extortionist demands, the same word was bandied about. It scared the political class enough that they kicked the can and avoided a default.
This time around, the need to raise the debt ceiling doesn’t seem to be generating nearly the same concern. Indeed, Tea Party Republicans seem to be almost rooting for the government to default, as if that would somehow bring about the smaller government they so yearn for.
But this is incredibly wrongheaded. A failure to raise the debt ceiling, should it come to that, would likely inflict a different kind of pain than sequestration or even a shutdown of the federal government. It won’t make the government smaller. But it does have the potential to diminish the value of one of America’s greatest assets — the backing of its debt — while throwing the world economy into chaos.
The first point worth making is that the 14th Amendment to the Constitution, which declares that “the validity of the public debt of the United States . . . shall not be questioned,” was added precisely to avoid what is happening now: a faction of Congress using the debt ceiling as a bargaining chip. That basic truth, as Fortune’s Roger Parloff noted in a recent blog post, “ought to weigh very heavily in the minds — and on the consciences — of the House Republican faction that is now unambiguously violating its letter and spirit.”
The second point worth making is that U.S. government debt is the only risk-free asset in the world. That debt undergirds the entire world financial system — precisely because the whole world has such faith in it. There is always demand for U.S. government debt. Almost every other asset you can think of is in some way measured against it. A default would destabilize the market for Treasuries. And that, in turn, would likely destabilize every other asset.
The stock market would fall. Interest rates would rise — meaning, for instance, mortgages would become more expensive just as the housing market is starting to revive. Treasuries themselves would likely have to pay higher interest to investors, which would create a rather sad irony: a default would exacerbate the country’s long-term debt (the very problem the Republicans claim to care about).
Let’s move to the havoc a destabilized Treasury debt would have on the banking system. “The plumbing of the global financial system depends on Treasuries,” says Karen Petrou, a banking expert at Federal Financial Analytics. Remember what happened to Lehman Brothers? As the market lost faith in the company’s ability to meet its obligations, Lehman lost access to the “repo” market, which is the way banks are funded on a short-term basis. Treasuries make up a great deal of the collateral in the repo market. If a default were to cause the repo market to freeze, the entire banking system would find itself in crisis. Meanwhile — more shades of Lehman Brothers — the ratings agencies would likely downgrade Treasuries, forcing money market funds to start dumping government debt.
Painful choices would have to be made. Right now, the Treasury Department says it does not have the authority to pick and choose which creditors to pay. But, in the event of a default, it is hard to imagine that the government wouldn’t make some tough decisions about who should get paid in the short term — and who would have to wait. And, though this would infuriate millions of Americans, bondholders in China would likely get their money ahead of, say, Social Security recipients.
“From a purely cost-benefit analysis,” says Mark Zandi of Moody’s Analytics, “not paying bondholders would wind up costing the U.S. much more than not paying Social Security recipients” — because if bondholders lost faith in Treasuries, it would cost the government billions more in interest payments each year.
During the 2011 debt-ceiling crisis, consumer confidence dropped by 22 percent. When consumer confidence falls, people are less willing to spend and businesses are less willing to hire. That’s how recessions — or depressions — begin, and that may be the most important consequence of all.
For as long as anyone can remember, the ability of the United States government to pay its bills on time has given the rest of world tremendous confidence. At the same time, to have the one asset everyone in the world trusts has given America great advantages.
Why on earth would we ever risk that? Why?
By: Joe Nocera, Op-Ed Columnist, The New York Times, October 8, 2013
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