[Update, 7 a.m.: The Post reports that Fitch Ratings threatened on Wednesday to downgrade U.S. securities to junk bond status if scheduled payments are missed. An event it described as an “extremely unlikely event.” I hope that’s not just wishful thinking.]
Before “Weinergate” took over part of the national conversation, we were engaged in a debate over the potential default of the United States for the first time in its history. There are those like me who are shouting from the rooftops that the legal limit must be raised on how much the nation can borrow to meet the obligations it has already incurred. There are those who are willing to play chicken with the full faith and credit of the United States. And then there are those such as presidential candidate and former Minnesota governor Tim Pawlenty, who think a short-term default wouldn’t be so bad.
My friend Cliff Barr, who “was a Reagan Democrat once upon a time,” sent me an unsolicited and tart response to the latter group in an e-mail this morning.
Repbulicans lately have been talking about letting the US default on it’s debt. They say it won’t be a problem. What happens when YOU don’t pay your credit card on time? The banks JACK up your Rates to 29.99%. It’s called a penalty rate.
Apologizing for the tartness of Barr’s remark, I sent it to my “Debt Council” — Jim Horney, Maya MacGuineas and Ryan McConaghy — for their thoughts. “No apologies needed,” said McConaghy, director of the economic program at the think tank Third Way. “I can be pretty tart myself, particularly when willful ignorance is involved. You probably won’t be surprised that I agree with your friend’s assessment.” He went on to say,
For months Republicans have been using “uncertainty” as a cudgel to attack President Obama’s economic policies as squelching job creation. Yet, somehow we’re asked to believe that the markets would just slough off the uncertainty caused by compromising the full faith and credit of the U.S. Which is it? The fact is that by threatening to take action on the U.S. Credit outlook S&P and Moody’s are already telling us that Congress won’t get a political theater pass if they don’t act. In fact, it’s likely that if progress towards a deal isn’t seen we’ll start to feel turbulents [sic] as the markets get increasingly anxious before the August 2nd drop dead date. The fringe of the GOP has moved on from “birthers” to “debters” and the latter strain of denialism poses a much bigger threat to us all.
Jim Horney, vice president for federal fiscal policy at the Center on Budget and Policy Priorities also agreed with Barr’s tartness. “It is hard [to] describe the claim that it is no big deal to throw away more than 200 years spent building up a good credit rating without being tart,” Horney said via e-mail. “And it is not just higher interest rates — it is also higher prices for computers, cars, fighter jets, etc. because we will not [get] as big a discount for the certainty that vendors will be paid on time and in full.”
MacGuiness, president of the Committee for a Responsible Federal Budget, also agreed with Barr. “Yes, considering default is risky and irresponsible,” she said. But she also said, “…so too is failing to make major changes to the budget.” She pointed me to an interesting interview in the Wall Street Journal with legendary investor Stanley Druckenmiller, who was the onetime fund manager for George Soros. In short, Druckenmiller argues that a technical default is worth it if folks know that it would result in serious budget-spending reforms.
I get the argument. My friend Cliff isn’t buying it. He zeroed in on this quote from Druckenmiller. “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days,” he told the Wall Street Journal. “They’re going to wonder whether we got our house in order.” Barr retorted, “People are going to wonder why am I hungry? Why is life so miserable? Why can’t I find a job?”
Let’s hope we don’t get to that point. But the drop-dead default deadline is Aug. 2. And yet at this late date, Democrats are saying “Hands off my Medicare!” And Republicans are saying, “No new taxes!” Sure, these may be negotiating positions. The Gang of Five or the Biden budget group may come up with the deal that cuts spending and institutes needed fiscal reforms that would allow the debt ceiling to be raised. Until any of that comes to pass, we will be forced to watch a very risky game of chicken with the full faith and credit of the United States.