Back to previous page


Ronald Reagan: Defaulting on the debt ‘would be unthinkable’

By Ezra Klein,

In 1987, Ronald Reagan’s secretary of the Treasury, James Baker, warned of “unprecedented and catastrophic repercussions” if Congress failed to lift the debt ceiling. His boss agreed. “This country cannot be allowed to default on its financial obligations for the first time in history,” Reagan warned. “This would be unthinkable.”

And it wasn’t just Reagan. Robert Rubin, Treasury secretary under Bill Clinton, said default “is not something we should ever contemplate.” John Snow, who served as Treasury Secretary under George W. Bush, cautioned that failure to raise the debt ceiling could “seriously undermine the full faith and credit of the United States.”

But what Reagan called unthinkable is being thought. “By defaulting on the debt, in the short and long term, it could benefit us to go through a period of crisis that forces politicians to make decisions,” said Rep. Devin Nunes. Paul Ryan assured CNBC that the market would accept a default “for a day or two or three or four.” Republicans have glommed onto comments from hedge-fund manager Stanley Druckenmiller, who said that “technical default would be horrible, but I don't think it's going to be the end of the world,” though as Business Insider notes, Druckenmiller is “standing apart from basically everyone else” on this one.

In other words, Republicans are trying to convince themselves and their base out of fearing the consequences of a default. And that is very, very scary.

This country has a proud and bipartisan tradition of risk aversion when it comes to the country’s credit rating. Democratic administrations don’t default on our debt. Republican administrations don’t default on our debt. We don’t default on our debt. We don’t default strategically, as a way of detonating a fiscal bomb in the hope that the ensuing chaos will create an opening for policy measures that wouldn’t pass in normal times, and we don’t default temporarily, for a day or two or three or four. We simply don’t default. That was Reagan’s position and Clinton’s position and George W. Bush’s position and it’s now Barack Obama’s position. But it’s a position the Republican Party is coming dangerously close to abandoning.

And that’s what will scare the markets. The real danger of the debt ceiling is not that a temporary default will make our bondholders poor. It’s that by doing something that the American political system has previously regarded as unthinkable, the market will cease to believe the stories it tells itself about the safety, security and predictability of the American political system. And we won't get a mulligan on that if Paul Ryan and Devin Nunes and Stanley Duckenmiller turn out to be wrong. They won’t stop worrying just because we pass an emergency bill to raise the debt ceiling after the Dow drops by 2,000 points. As Robert Rubin told me, “once you’ve catalyzed that change in the market’s psychology, it’s not at all clear that raising the debt ceiling would change the course of that psychology.”

In 2006, the market thought it knew that housing prices never go down all at once and that bonds that Moody’s rated AAA were safe and that Lehman Brothers would be around forever. In 2007 and 2008, it found out that it was wrong. We’re still recovering. Defaulting on the debt will be like that, but much, much worse, because the market is much more invested in the belief that the American political system works than it was in the belief that the housing market in Fresno would never dip at the same time as the housing market in Reno. Reagan called the consequences of this "unthinkable." Republicans should listen to him.

© The Washington Post Company