Will Geithner prioritize debt repayment?

By Felix Salmon
June 8, 2011

Now that I’ve given Tim Geithner grief for looking at the world from a predominantly Wall Street, Treasury, fiscal and monetary policy point of view, I’m going to do just that myself when it comes to a potential debt default.

I was confused this morning when I read this Reuters article saying that Republicans are flirting with the idea of the US defaulting, and quoting Paul Ryan as saying that holders of government debt would be willing to miss payments “for a day or two or three or four.”

This of course is a very dangerous idea indeed, but that’s not what puzzled me. Rather, it was this:

Republican Senator Pat Toomey has even introduced legislation directing the Treasury to prioritize debt service over other payments if the debt limit is not raised. It has 22 Republican co-sponsors in the Senate and 98 in the House of Representatives, although no members of the Republican leadership have backed it.

Isn’t this a good idea, which would ensure that the US did not default? I didn’t understand, until I found this Brian Beutler article from January which explains just how crazy the bill is considered to be in Washington. Here’s Beutler’s headline:

‘Pay China First’ — Republicans’ Wild Plan To Avoid U.S. Debt Default

Beutler quotes Treasury’s Neal Wolin reiterating his silly and dangerous notion that bond investors would somehow penalize Treasury for prioritizing debt repayments, as oppose to reward it for making it clear that they’re sacrosanct.

And as Beutler’s headline suggests, the politics of such a policy are poisonous indeed:

One would think that the government’s top priority would be ensuring that citizens owed money by the Treasury would take precedence over, say, foreign governments…

“I think it is a dreadful idea,” Sen. Kent Conrad (D-ND) told National Journal. “Basically what they are saying is, pay China first. Are we going to forget about the American public and the things that they need? Somehow they are secondary? And paying the Chinese and the Japanese is the first priority of this country? I don’t even know how to describe that idea; it’s just a very, very bad one.”

His House Democratic counterpart, Rep. Chris Van Hollen (D-MD), added “What they are saying essentially is that the full faith and credit of the American government extends to a lot of foreign countries, but it doesn’t extend to the American people themselves.”

This, then, is the point at which I start devoutly wishing that Geithner will stay true to his Wall Street and IFI roots, quietly making sure that all US bonded debt is repaid even after August 2 and beyond. There’s no chance, politically, that Congress will force him to prioritize payments in that manner. But he has the right and the discretion to do so — and making payments on US debt in full and on time is a no-brainer for any Treasury secretary, especially one who, like Geithner, has a lot of personal experience with the consequences of sovereign default.

On the other hand, we live in a democracy, and it’s overwhelmingly clear that the will of the people is not to prioritize debt repayments in that manner. Would Geithner open himself and Obama up to charges of paying the Chinese before American pensioners and servicemen? (And, of course, Congress, too.) I hope he would, but there’s a real chance he wouldn’t. Which is very worrying indeed.

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