Timothy Geithner does not want the market to smell his fear. “I want to make one thing perfectly clear,” he said Sunday. “Congress will raise the debt ceiling.” But if there was truly so little doubt, Geithner wouldn’t have been peppered with questions about it on the Sunday shows.
Raising the debt ceiling may be economically necessary, but it’s politically lethal. Only 16 percent of Americans want the debt ceiling raised, according to an NBC/Wall Street Journal poll. Sen. Marco Rubio said he wouldn’t vote for an increase unless it included “a plan for fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment, and reforms to save Social Security, Medicare and Medicaid” — everything on the conservative agenda, basically.
Ezra Klein is the editor of Wonkblog and a columnist at the Washington Post, as well as a contributor to MSNBC and Bloomberg. His work focuses on domestic and economic policymaking, as well as the political system that’s constantly screwing it up. He really likes graphs, and is on Twitter, Google+ and Facebook. E-mail him here.
A look at the national debt and the debt ceiling for the past 30 years.
April 18 (Bloomberg) -- Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, talks about market reaction to Standard & Poor's putting a "negative" outlook on the long-term AAA credit rating of the U.S. and expects Congress to agree on raising the debt ceiling.
And this is where things get dangerous. Republicans and Democrats both bear substantial blame for the country’s rising deficits. The Bush tax cuts and the Medicare Prescription Drug Benefit and our various wars — none of which have been paid for, and all of which are ongoing — are major contributors to our mounting debt, and all were passed by Republican majorities. The debt ceiling had to be raised seven times during the Bush years, and the policies that helped drive those increases — not to mention the financial crisis that followed them — have not been undone under Obama.
But the GOP wants to pin the debt on the Democrats, and it wants major concessions in return for its vote. Democrats, however, aren’t going to agree to the GOP’s plan to deny partial responsibility for the country’s debt and hold the country’s credit rating hostage in order to reshape the government along more conservative lines. Fear over exactly this sort of political gridlock is what led Standard & Poor’s to downgrade the nation’s credit outlook to “negative” Monday.
To understand the danger posed by the debt ceiling, it helps to understand the financial crisis. A lot of banks and investors held assets based on mortgages they thought were safe. They weren’t. That meant that no one knew how much money they really had, or how much money anyone else really had. So the market did what woodland creatures do when they get confused and scared: It froze. And so, too, did the economy. As the unemployment rate shows, we’re still not completely thawed out.
If Congress fails to lift the debt ceiling beyond its current limit of $14.29 trillion — or even waits too long — the chain of events will be similar, but the asset under question will be America itself, not some newfangled Frankenstein bond made out of mortgages from the Reno suburbs. Which would mean the aftermath would be much, much worse.
“The cornerstone of the global financial system is that the United States will make good on its debt payments,” says Mark Zandi, chief economist at Moody’s Analytics. “If we don’t, we’ve just knocked out the cornerstone, and the system will collapse into turmoil.”
Throughout the financial crisis, America’s great advantage was its status as the single safest investment in the world. That makes it easier for us to borrow money to ease a downturn. It makes it easier for our central bank to buy bonds to keep interest rates low. It gives us tools and flexibility that, say, Greece simply doesn’t have. But all of that is based on the market’s perception that our debt is, indeed, a safe investment, that we will pay it back, that we won’t inflate our way out of the fiscal holes we dig, that our political system will make tough decisions when necessary.