Mark Patterson: More worried. I think each time we faced one of these the folks who are making demands seem to be willing to tiptoe closer and closer to the edge of the abyss. And sometimes when you do that you fall in.
EK: Why do you think Wall Street is so calm then?
MP: I think up until the shutdown began Wall Street was pretty convinced that this was going to be solved at the last minute like so many of our other Washington crises have been. I think the shutdown and the apparent lack of progress is causing people to reevaluate on that. Two days before the shutdown Alec Phillips at Goldman, who’s one of the smarter guys out there, was still predicting no shutdown. So Wall Street is getting more concerned but still doesn’t know what to make of all this.
EK: There’s a view that says that if we breach the debt ceiling for a limited amount of time it wouldn’t be that big of a deal. Your team had to do more thinking on how this would technically work than anyone else, so where do you come down on that?
MP: Nobody knows for sure because we’ve always been smart enough as a country to avoid that fate. But I agree with the people who think it would be pretty severe. We have this unbelievably unique and privileged position to have always had the world’s trust that our treasury securities are the safest and most secure investment in the world. We have always paid all our bills on time and in full. For 200 years we’ve built that reputation. It’s worth an awful lot. I think that if we squandered it suddenly the potential is there for the whole world to reevaluate if that trust was misplaced. And once you lose somebody’s trust it’s pretty hard to get it back. So I tend to think the more bleak scenarios are more likely to materialize.
EK: There’s an argument out there that says that there’s nowhere else for the world’s money to go. Europe doesn’t look better than we do. China isn’t a safe, secure and liquid bond market. So we could breach the debt ceiling and even if investors were unhappy they don’t much choice but to stick with us.
MP: That’s a respectable view. You saw some elements of it in 2011 after the downgrade. People did not flee from our debt. But why do you want to risk that? We know what we have now is a privileged, unique position. It’s the envy of the whole world. Why risk losing that by doing something foolish? I think the weight of economic opinion is that it would be potentially catastrophic, returning us to a recession or worse, if something like this happened.
EK: Another idea is that in the aftermath of a breach we could simply pay our bonds but choose to reduce payments to domestic priorities like Social Security. That might be bad, but so long as investors get their money, they won’t care. Do you agree with that?
MP: Again, that’s another case where there’s no way to know. But it can’t be a good sign to markets for the U.S. to be in domestic chaos, which is what you’d unleash if you stopped paying your domestic bills. A third of Social Security beneficiaries in this country exist solely on their Social Security benefit. So if the government came to them and said we won’t pay you, or we’ll dramatically cut the payments, that means not paying the rent, not paying for food, not paying for medicine. And if you think about that kind of thing all across the economy, it’s chaos. Investors would have to look at that and wonder whether we’re a country that’s as reliable as we’ve been in the past. They would be very likely to begin reevaluating their investment strategies.
EK: What about the technical difficulties here. Treasury isn’t writing hundreds of millions of checks by hand. It’s all automated. In the event of a breach, how flexible are those systems? How likely is it that we could choose what to pay without a lot of errors?
MP: That’s an underappreciated complication with any prioritization scheme. The U.S. government’s payment system is sprawling. It involves multiple agencies. It involves multiple interacting computer systems. And all of them are designed for only one thing: To pay all bills on time. The technological challenge of trying to adapt that to some other system would be very daunting and I suspect that if we were forced into a mode like that the results would be riddled with all kinds of errors.
EK: If you’re this worried and the consequences are this bad, why not do something like declaring the debt ceiling unconstitutional under the 14th amendment or minting the coin?
MP: It’s been my view and the view of pretty much everyone in Treasury and everyone in the administration that if there was a viable legal strategy that could take the threat of default off the table we would eagerly embrace it. It’s not as though people in the administration were or are closed to cool, interesting, viable possibilities. But the things we’ve been presented haven’t withstood that scrutiny.
The coin is a clever, nifty idea but it has problems. The one that gets overlooked the most is it wouldn’t actually make everything normal after it was invoked. It would be subjected to all kinds of challenges and litigation. As a straightforward matter the Federal Reserve wouldn’t give Treasury a trillion dollars for that coin. We looked carefully at it, but for both practical and legal reasons, the legal reason being the law obviously wasn’t meant for anything like this and the practical reason being that the Federal Reserve would need to cooperate and wouldn’t, it wouldn’t work.
The 14th Amendment shares similar problems in which you would invoke a constitutional crisis of sorts. One side would say the president broke the law and should be impeached. That would occupy all the oxygen in Washington. That’s not a reason not to do it if it’s the right thing to do. But if the objective is keeping our status as the safest and best investment in the world you’ve created all kinds of doubts about us. I don’t think proponents have thought enough about what would happen after you did it.
EK: What do you think of the White House’s approach here? If you were still at Treasury, what would you be telling them to do?
MP: I’d be telling them to do exactly what they are doing. I don’t think there’s any other option. Someone wrote up an analogy saying imagine the situation was reversed and a Democratic House said to a Republican president that we want to double the minimum wage or enact a sweeping gun control law or we throw the country into default. The underlying tactics being used here is totally irresponsible and can’t be accepted by any president. The only way it ends is that House Republicans decide it’s in their interest to be for a borrowing extension or they don’t decide that and the speaker gets there using Democratic votes.
EK: Well, there’s another way it could end: With default.
MP: Yeah I was focusing on options to get out of it successfully rather than calamitously. But yes, I do think that’s a possibility. I think the failure to resolve the government funding bill and the tendency to merge the two into one big problem makes the difficulty of the whole undertaking that much higher. We don’t seem to be that good at solving difficult problems in this moment in our history.