Lift the ceiling or sink America

Republican threats not to raise the US debt limit are monumentally insane and could have extreme and unprecedented consequences in financial markets around the world. And it's not just Democrats who think so.

Salon.com

Bruce Bartlett is a historian whose rsum includes stints as a domestic policy advisor during the Reagan administration and a Treasury official under George H W Bush. He is also the author of the 2006 blockbuster Impostor: How George W Bush Bankrupted America and Betrayed the Reagan Legacy. For years, Bartlett has been passionately calling attention to Republican fiscal irresponsibility, and now that the fight over whether to raise the debt ceiling – and prevent the US government from defaulting on its debts – is promising to be one of 2011's major political dramas, Salon decided he was the perfect person to bring some clarity to a confusing issue. He spoke with Salon by phone on Wednesday morning.

Let's start with something simple. What is the debt ceiling?

Throughout most of American history, whenever the Treasury wanted to borrow money, it had to get congressional permission for each specific bond issue, both the total amount of borrowing and the terms: the maturity, interest rate, everything. But during World War I, the government had to borrow enormous sums, so Congress just gave it blanket authority to borrow on whatever terms it felt best, subject to an overall cap on the amount of Treasury securities that could be issued. That cap is the debt ceiling.

Ever since, from time to time, Congress has had to increase the debt ceiling to accommodate the increase in the national debt. We're in a situation right now in which the debt limit was last increased in early 2009, to $US14.3 trillion – and we're getting very very close to that. Sometime in the next two months or so, it is expected that we'll hit the cap and the Treasury will lose the legal authority to issue any new bonds.

No other major countries have a debt ceiling that operates independently of congressional decisions on taxes and spending. What's the rationale for keeping it in place?

Well, we do it primarily, I suppose, from historical practice. But it is also convenient for demagoguing. And, believe me, this is absolutely bipartisan. For example, in 2006, when the debt limit was increased, both Joe Biden and Barack Obama, both members of the Senate at that time, opposed the increase with the usual demagoguery – "How dare we pass these debts on to our children" – but of course now the shoe is on the other foot. The basic thing is that the debt ceiling simply allows members of Congress to avoid responsibility for their own actions. They can increase spending and cut taxes and in the process increase the deficit and then express outrage when the logical consequences of their actions require the Treasury to borrow more. It gives them a free vote; they can go back to their constituents and say I voted to control the debt by not increasing the debt limit. And some people are foolish enough to buy this stuff.

So what happens if we get to early March, US borrowing hits the limit, and House Republicans refuse to raise it? What would be the immediate consequence?

Well, first of all, the Treasury has certain ways that they can get around the limit for a little while. They have some legal authority to move things around. For example, a large part of federal employee retirement funds are covered by special securities issued by the Treasury and the Treasury is permitted to not make regular contributions to the fund on a temporary basis, as long as it makes up the difference later on. And there are other tricks of this sort. There are even some economists who believe that the Treasury has an unlimited bag of tricks to do this. Personally, I don't think so.

I think there really is a hard limit, but when we would hit that limit I don't know. But assuming we do, what would then happen is that the Treasury would lack the cash flow to be able to pay its bills. Every single day the Treasury has bills to pay, Social Security benefits, interest on the national debt ... But if the debt ceiling is not raised, the only cash it would have to pay those bills would come from the tax revenues that come in on a day-to-day basis – from the payroll tax or from income tax withholding. But that would not be enough to pay the bills that are due that day, so somebody at the Treasury is going to have to decide – as individuals do when their pay doesn't cover their credit cards and other debts – who gets paid this month and who doesn't. And, of course, there is a problem with this, because not everybody can be put be off. By law, Social Security benefits have to go out on the first of the month. But the Treasury literally would not have the cash in its account to cover those benefits, or to pay interest on the debt – at which point you have a default. Any time the precise terms of a bond are not adhered to – if you don't receive exactly the amount of money you were promised, on exactly the day it was promised – you have a default, and that is what would happen under this circumstance.

But we've never let that happen before.

It's never happened before. And I think many people in financial markets, and perhaps even in Washington, just assume away the possibility. They cannot conceive of the insanity of allowing the debt to default. But what I keep trying to explain to people is that these Tea Party people really are that crazy. And I'm just tying to get people to believe me.

But isn't there a limit to how irresponsibly politicians can act? When the House Republicans rejected the first TARP authorisation vote, the reaction in financial markets swiftly changed their minds. Wouldn't the same thing be likely to happen this time around?

Perhaps. But do we really want to pay that price? Do we really want to introduce an element of doubt into the financial markets, that a security that is primarily bought because there is assumed to be risk zero risk of default is no longer safe? There is no other security on earth that has that reputation, not even German government bonds. The US Treasury is the gold standard and we have benefited enormously from this fact. Every time there is some disruption in the world financial markets, people flee to quality by buying Treasuries. As a result, we have benefited by not having to pay for the consequences of our own profligacy. Foreign central banks hold trillions of dollars of Treasuries as the backing for their own securities. The minute we introduce an element of doubt into their own minds about whether these debts will be paid, suddenly other alternative investments may start to look better to them, and we will lose market share, which will greatly increase the costs of borrowing over the long term. It's the most monumental insanity that I can even imagine.

I really don't think it makes a lot of sense to shoot ourselves in the foot, just to make an idiotic point about the debt being too large. If people really believe that, they should vote to increase taxes and cut spending, and thereby reduce the Treasury's need to borrow.

But don't the most likely scenarios stop short of actual default? Surely our government wouldn't actually push things past the breaking point?

Not necessarily. I'm hypothesising a literal actual default. I think that we may in fact reach a point – I don't know when, maybe not until the summer – where a day comes and the Treasury has to pay out X billion in dollars to Treasury bond and bill and note holders, and it has less than X dollars literally in its account to pay that interest. I'm hypothesising that as a possibility because I really think that this is a game of chicken and I think that the Tea Party people are willing to go over the cliff to prove their point, to prove that they are not chicken.

But the Obama administration certainly isn't willing to do that. Won't the White House cut some sort of a deal?

Of course they're not. I don't think John Boehner is either. The problem is that the Tea Partyers are nuts. That is my point. They are irrational, they are ignorant, they don't know anything about financial markets and they think that they are standing up for God and the balanced budget.

I have no doubt that there are enough rational people in the Republican Party together with enough Democrats to have the votes to increase the debt limit. The problem is that as we've seen in this last election, the Tea Party people have shown us that they don't give a crap. Look, for example, at the defeat of Sen. Robert Bennett in Utah. He was one of the most conservative members of the Senate, and he was defeated primarily because he merely co-sponsored a bill with the Democrat Ron Wyden that put out an alternative approach to healthcare reform. This was deemed to be beyond the pale. He was defeated in the Republican primary, and I think this is the concern that every Republican has – of having someone run against them in the primary who says, "This senator or congressman s.o.b. voted to increase the debt limit." They voted to give Obama more money to destroy our country with.

I don't think there are very many Republicans that are going to take the risk of allowing that to happen.

What about the theory that the Republicans intend merely the threat of default to get big spending cuts?

That's a possibility. This is all being sorted out and negotiated right this minute. The problem is, I'm just not sure, and I hope I'm wrong, I'm just not sure that there is anything that these people can be given, that will be a sufficient sop, to allow a debt limit increase to occur. I'm just not sure that there is anything.

You have written that we don't know what happens when a country with good credit defaults.

It is widely believed, even among good economists, that a default such as the one that we have been discussing is analogous to the sort of sovereign defaults that we have previously seen in history. But every single one of those cases is extremely different. In every one of those cases default occurred because government couldn't sell its bonds because the market didn't want them. There was no demand, because the market was saturated or the rates would have to be prohibitively high or they wouldn't sell the foreign exchange necessary, to pay the debt when it is denominated in a foreign currency. Things of that sort. Those are cases in which the default is market driven.

This is completely different. There is plenty of demand for Treasury securities. The fact that interest rates are so extraordinarily low is evidence that the market wants more, not fewer, securities. This is not a traditional market-driven default situation such as we've seen recently in Greece. This is an entirely self-imposed matter, where the Treasury is unable to sell its bonds not because the market won't buy them but because it lacks the legal authority to sell them. This is an absolutely unprecedented situation. We have no guidance from history as to what may happen under these circumstances.

Let me just add one other thing. There are a lot of people who think the situation that we are talking about is the same thing as a government shutdown. It's not. It has nothing to do with shutting down the government. That has to do with appropriations. And that's a separate problem. The continuing resolution that authorises appropriations for fiscal year 2011 runs out on March 4, or something like that. So that's another crisis to watch out for, because if appropriations run out, the government also loses the legal authority to spend, and government agencies have to shut down.

So you're saying that we could lose the legal authority to spend and to borrow in the same time frame?

I don't know what's going to happen. It may be that these things will get wrapped up together. Maybe it will end up with a whimper instead of a bang, and Congress will pass some kind of face-saving gesture like cutting the budget by a $100 billion and this will be enough of a fig leaf to allow enough people to vote for both another continuing resolution and increase the debt limit. I fear the worst, because this is extraordinarily dangerous, but if things turn out better, I will be the first one to clap and say hurrah.

(For those interested, Bartlett has compiled a handy list of links to resources on the debt ceiling here.)

This article first appeared on Salon.com. Republished with permission.

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